Kathmandu: Amid shrinking revenue collection and increasing government expenditure, Nepal’s outstanding debt has been increasing every year as debt to gross domestic product (GDP) has increased by three times in the last five years.
Till the end of the Fiscal Year 2014/2015, the outstanding debt was only Rs 540 billion, which was only one-fourth of the total gross domestic product (GDP) of the country.
But in the last five years, the public debt of Nepal has increased threefold to staggering Rs 1,535 billion. This means, every Nepali citizen has been carrying a public debt burden of Rs 51,000.
According to the Nepal Rastra Bank (NRB), Nepal’s public debt to GDP has exceeded 37 percent as of last fiscal year. And, the public debt is constantly increasing.
As per the recently launched Nepal Development Update of the World Bank (WB), the public debt to GDP is projected to increase to 42 percent by the end of the current fiscal year, and to 48 percent by the end of the upcoming fiscal year.
Amid shrinking revenue collection and excessive expenditure, the government has been increasing domestic and external debts to tackle the fiscal deficit. In the current fiscal year, the government has borrowed to meet its expenditure as per its plan to take for Rs 524 billion outstanding loans.
According to Nara Bahadur Thapa, former executive director at the NRB, the level of public debt is safe to be below 50 percent of the total GDP.
“However, there should be a detailed analysis if borrowings are properly utilized by the government. If public debts keep on increasing at this rate, and the government fails to utilize the borrowings, the economy will suffer,” said Thapa.
As expenditure has increased excessively, the National Planning Commission (NPC) has predicted that Nepal’s outstanding loan would increase to Rs 1,721 billion in two years. This means, by the end of FY 2024/2025, Nepal’s outstanding loan is set to exceed more than Rs 3,000 billion.
The government borrowing is not a new thing in Nepal. During the end of the Panchayat era, when revenue sources were not strong enough and the government had to invest in infrastructural development, outstanding loans increased by a huge amount.
In the first fiscal year after the 1990’s democratic change, the public debt to GDP was recorded at 66.8 percent. As expenditure increased by a huge amount, there was no decline in outstanding loans despite an increase in government resources.
After the start of armed conflict, with the additional burden of buying weapons and increase in security budget, public debt to GDP was recorded at 60 percent.
But, as economic activities and revenue collection started to increase, the outstanding debt started to decline after the Fiscal Year 2002/2003, given the sharp rise in foreign aid. The government also started to lobby for loan waiver and get concessional loans for reducing public debt. In 2015, before the country was struck by massive earthquakes, the public debt declined to one-fourth of the total GDP.
After the country adopted the federal system, the government had no other options than borrowing for infrastructural development and for managing whopping expenditures. At the moment, the government also has the responsibility to combat and control the Covid-19 pandemic amid limited resources.
With rise in debt, the government needs to fork out a huge amount to pay principal and interest. In the last fiscal year, the government spent Rs 81 billion for the same, and the amount was 10 percent of the total revenue.
“The government should take loans for development of mega projects which increases production and generates employment.
So the government needs to be cautious while borrowing,” said Thapa.
The World Bank has estimated that Nepal needs to spend more than 100 billion rupees to pay principal and interest amount in the current fiscal year.
The Debt Burden
As expenditure is exceeding income, the budget deficit is widening in recent years. Of the total expenditure, the government borrowed almost 35 percent from domestic and external sources in the current fiscal year. Likewise, in the last fiscal year the government recorded a budget deficit of 32 percent.
Currently, almost two-thirds of the total budget is spent on recurrent expenditures. The revenue collected by the government is just enough to meet recurrent expenditures. In the last fiscal year, the government collected Rs 793 billion from revenues, while the recurrent expenditure was recorded at Rs 786 billion.
As revenue collection is just enough for recurrent expenditure, the government has to rely on outstanding debt for infrastructural development and to pay loans.
As public debt is increasing without investments in big infrastructure projects, there is a risk that the country will face an economic pressure in the near future. Although it is necessary for the government to borrow for economic expansion, the government has always been criticized for taking loans to spend for projects of political interest.
According to economists, public debt to GDP should not exceed more than 50 percent in developing nations like Nepal. “Researches show public debt should not be more than 50 percent for a country like Nepal. Otherwise, Nepal won’t be able to maintain debt servicing,” said Thapa.
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