Although Nepal’s stock of domestic debt is lower than external loans, the government spent more money to repay domestic debt than external debt in the last fiscal year 2020-21. This raised the question of whether the government should prioritize external borrowing over domestic debt.
According to the Public Debt Annual Report 2020-21 recently released by the Public Debt Management Bureau, Nepal’s domestic debt stands at Rs 802.94 billion while the external debt stands at Rs 934.14. billion rupees. The country’s total debt stock stands at Rs 1,737.08 billion.
But, in terms of annual debt repayment, for internal loans, the government repaid the principal of 36.9 billion rupees and the interest payment of 28.46 billion rupees in the last fiscal year. And on the external lending front, the principal repayment amount stood at 23.26 billion rupees and the interest payment was 6.17 billion rupees in the last fiscal year, according to the report.
This means that the amount of principal paid to domestic creditors was 58.59% higher than the amount paid to external creditors. Likewise, the amount of interest paid to domestic creditors was 361% higher than the amount paid to external creditors.
“This suggests that internal loans are more expensive than external loans,” the report says. But, in recent years, the government has consistently borrowed more from domestic and foreign lenders.
But, officials and experts say that despite domestic debt which seems more expensive than external debt, Nepal should maintain a balance between domestic and foreign lending.
“On paper, it seems that domestic debt is more expensive than external debt. This is because the majority of the loans Nepal has taken from foreign lenders are concessional, ”said Hira Neupane, information officer at the Bureau of Public Debt Management. “But, it remains to be seen whether the domestic debt is too expensive compared to the external debt. For this, we need to analyze the impact of the depreciation of the Nepalese currency against the US dollar.
He said that the repayment period of foreign loans is generally longer and that their overall cost could be expensive because they are linked to the exchange rate, which is unstable.
While the interest rates on foreign loans borrowed from major creditors like the World Bank and the Asian Development Bank are less than one percent per year, the interest rates on domestic loans are higher and fluctuate constantly according to the liquidity situation in the banking sector.
Nara Bahadur Thapa, former executive director of Nepal Rastra Bank, said the two main risks associated with foreign loans are their interest rate and the exchange rate, but in the case of Nepal, the interest rate risk is minimal as Nepal has so far taken only ready concessions.
“There are advantages to borrowing from abroad as there will be more financial resources available in the domestic banking system,” he said. “If the government borrows more from national banks, it will create a squeeze of funds and push up loan interest rates.”
Currently, the Nepalese banking sector is facing a shortage of loanable funds due to excessive lending by banks and financial institutions during the first quarter of the current fiscal year as well as the inability of the government to spend the budget. So the interest rates went up.
Until Friday, the government had spent only 17.11% of the annual budget while capital spending stood at 4.65% of target, according to the Office of the Comptroller General of Finance, the agency. responsible for keeping government revenue and expenditure records.
The main local government creditors are Nepalese banks and financial institutions, which buy government treasury bills and development bonds. The government mobilizes internal borrowing by issuing various instruments, including treasury bills and development bonds. Some of these vouchers include Citizen’s Savings Bonds, National Savings Bonds, and Foreign Employment Savings Bonds.
As the Covid-19 pandemic has severely affected the Nepalese economy, experts have suggested that the government minimize domestic borrowing.
Taking this suggestion into account, the new government reduced the domestic debt target from 11 billion rupees to 239 billion rupees in the revised budget presented in September through the replacement bill.
But, over the past five years, domestic debt has grown faster than external debt. In fiscal year 2016-17, the stock of domestic and external debt stood at Rs 283.71 billion and Rs 413.97 billion, respectively. The amount of domestic debt almost tripled (2.83 times) while external debt more than doubled during the period.
But, Thapa, a former central bank official, said the current composition of domestic and foreign debt has remained broadly balanced. “There is still no such risk of prioritizing external loans as long as we only take concession loans and use them in profitable projects,” he said.