Nepal’s outstanding external debt decreased slightly during the second quarter of the current fiscal year 2021-22 in domestic currency terms compared to the first quarter despite an increased flow of foreign loans during the quarter.

It is due to exchange rate gains made by the domestic currency due to the US dollar's depreciation, according to the Public Debt Management Office. According to the new quarterly report of the office released on Sunday, Nepal’s external debt decreased by 0.03 percent or by Rs248.39 million compared to the first quarter.

Total outstanding foreign loans of the country as of second quarter stand at Rs948.98 billion.

Though higher inflows of foreign debt compared to repayment amount should have resulted in increased debt, this didn’t happen, which according to officials at the Public Debt Management Office is due to exchange rate gains from the depreciation of the US dollar and other foreign currencies.

Nepal received external debt of Rs23.17 billion while principal repayment stood at Rs6.95 billion during the second quarter of this fiscal. “Fluctuation in exchange rates has resulted in an exchange gain of Rs16.47 billion for the current quarter resulting in a decrease in outstanding debt position,” the quarterly report states.

“The exchange gain for Nepal means the country paid less to its external creditors in domestic currency terms in the second quarter,” said Mukti Prasad Pandey, chief of the Public Debt Management Office. During the second quarter, Nepal made repayment of Rs8.74 billion including principal and interest payment to foreign creditors, according to the quarterly report.

According to the report, there has been an exchange rate gain of Rs2.2 because the exchange rate for 18 October 2021 was Rs120.72 per US dollar while the exchange rate for 14 January 2022 stood at Rs118.52 per US dollar. Corresponding effects on the exchange rate in other currencies on which loans have been provided to Nepal have also been observed, according to the report.

“The main reason behind the decline in external outstanding debts is Nepali currency’s gain against Special Drawing Rights (SDRs),” said Pandey, chief of the public debt office.

The SDR is an international reserve asset created by the International Monetary Fund (IMF) to supplement the official reserves of its member countries. The SDR is not a currency but it is a potential claim on the freely usable currencies of IMF members. A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.

Pandey said that multilateral donor agencies like the World Bank and Asian Development Bank calculate their loans to the countries usually in the SDR and these two are the largest two donors for Nepal. As of the last fiscal year 2020-21, Nepal’s 80.36 percent debt liability is in SDR, according to the public debt office.

“Nepal usually faces exchange rate losses due to Nepali currency’s depreciation against currencies like the US dollar which has dominance in the SDR,” said Pandey. But in the second quarter, domestic currency made gains.

In the last fiscal year 2020-21, Nepal had lost just over Rs9 billion due to depreciation of Nepali currency against foreign currencies in which the country should repay the loans, according to the public debt office.

In the earlier fiscal year 2019-20, the country had lost Rs72.16 billion in domestic currency terms due to the depreciation of Nepali currency.

“Usually, Nepal is facing exchange losses in external debt. But in the second quarter of this fiscal year, we made gains,” said Hira Neupane, information officer at the public debt office. “This means, the government spent less domestic currency during the second quarter in repaying loans.”

According to him, the central bank repays or services loans on the behalf of the government and the latter reimburses the money to the central bank based on the foreign exchange rate of the day of loan repayment.

Nepal has been receiving loans from the multilateral donor agencies such as the World Bank and Asian Development Bank and bilateral donors at low interest rates. So, the interest amount being paid by Nepal to international creditors has remained lower compared to domestic creditors.

During the second quarter, the government paid Rs11.40 billion to domestic creditors, almost all of which was interest along with a portion of commission paid to the Nepal Rastra Bank for its debt management task. The country repaid Rs8.74 billion to external creditors and of the amount just Rs1.15 billion was interest.

“Although we paid less to external creditors compared to domestic creditors this quarter, it is possible that we might have to pay more to external creditors if the Nepali currency depreciates especially against the US dollar,” said Neupane. “Whether the Nepali currency goes into a freefall depends on the economic performance of the country and that of the Indian currency with which Nepali currency is pegged.”