Nepal’s debt stock rose by 7.33% in the third quarter of the current fiscal year in the wake of the continued devaluation of the rupee against the dollar and costly domestic debt amid growing borrowing from the government.
Although the country received external debt in only limited amounts during the first three quarters of the current fiscal year, the domestic currency debt liability surged due to the depreciation of the Nepalese rupee.
Since the end of the second quarter, the value of external debts has increased by 2.89% to reach 976.45 billion rupees while domestic debt has increased by 12.72% to reach 879.15 billion rupees, according to the report. latest third quarterly public debt report published by Public Debt. Management office.
The country’s overall debt stock reached 1.85 trillion rupees, or 38.25 percent of GDP, as of mid-April, according to the report.
“Although the debt size has increased in recent years, Nepal’s debt-to-GDP ratio is still sustainable,” said Prakash Kumar Shrestha, head of economic research department at Nepal Rastra Bank. “We can still absorb more debt. But in order to be able to repay the long-term loans, we have to invest the debt money in the productive sectors.
According to the International Monetary Fund, Nepal has seen a gradual decline in the debt-to-GDP ratio from 35% in FY 2011-12 to 25% in FY 2016-17, a sign of improving debt economic health. But after the country’s transition to fiscal federalism, Nepal’s public debt has increased over the past few years, with the ratio reaching 42.2% in the 2019-20 financial year.
The substantial increase in debt in the 2019-20 financial year is due to the impact of the Covid pandemic and the responses to it, according to the IMF.
“But, the country’s debt (principal and interest) is on the rise due to the devaluation of the national currency against the US dollar as well as rising interest rates on domestic debts,” Shrestha said.
In fact, if Nepal decides to write off all external debts now, it will have to pay an additional Rs 19.37 billion in local currency compared to the end of the second quarter of the current financial year due to the depreciation of the rupee, according to the Public Debt Management Office.
This exchange rate loss was calculated based on the exchange rate differences of the Nepalese currency against the US dollar on January 15 and April 13. On January 15, the exchange rate was 118.95 rupees per US dollar and it had risen to 122.12 rupees per US dollar. dollars on April 13.
Hira Neupane, information officer at the Office of Public Debt Management, said the country had to pay more for loan repayments due to the devaluation of the rupee.
“And Nepal will have to pay even more in the fourth quarter as the currency depreciation continues.”
The Nepalese rupee plunged to an all-time low of 125.16 rupees against the dollar on Tuesday, according to the Nepal Rastra Bank. Neupane, however, said that despite the rapid depreciation, the situation is still below dangerous levels.
“We are still in a comfortable position in terms of debt-to-GDP ratio, and the interest rates on our external borrowings, which are long-term, are also minimal,” he added. Experts say it would not be dangerous for a country like Nepal to increase the debt to GDP ratio up to 60%.
While the depreciation of the national currency has become a major concern for foreign debt, domestic debt is also on the rise as the country borrows more at home than from abroad.
Nepal borrowed a total of Rs 111.68 billion in debt between the start of the current fiscal year and the third quarter. Of this amount, only Rs 12.21 billion comes from external sources and the remaining Rs 99.47 billion comes from internal sources.
Between the end of the 2014-15 financial year and the last 2020-21 financial year, the domestic debt quadrupled to reach 802.94 billion rupees, according to the Office of Public Debt Management.
“External loans are relatively cheaper than domestic loans although there is always the risk of exchange rate fluctuations associated with foreign loans. But the interest liability to domestic debts is higher than to external debts due to higher interest rates,” Shrestha said.
For example, Nepal paid 1.39 billion rupees in interest to external creditors in the third quarter, while 6.14 billion rupees was paid to internal creditors, although the total value of domestic loans was lower than that external loans.
Interest rates on domestic loans have increased due to the shortage of loanable funds in banks and financial institutions, which are the main creditors of the government. Banks and financial institutions buy government securities in the form of treasury bills and bonds. In fact, Finance Minister Janaran Acharya himself has admitted that the government needs to increase the operating budget for the next fiscal year due to the need to repay more to domestic creditors in the next fiscal year.
For example, the government has allocated 59.79 billion rupees for principal repayment of development bonds maturing in the next fiscal year, up from the revised scheduled principal repayment of 17.1 billion rupees, according to the Ministry of Finance. According to the ministry, the government alone has allocated Rs 54.14 billion for loan interest payments for the next financial year.
The government has allocated 43.73 billion rupees and 10.41 billion rupees to pay interest on domestic and foreign loans respectively.
Responding to questions raised by lawmakers in parliament in early June, Minister Sharma said: “Compared to the current financial year, more funds will be required for the repayment of the principal of internal loans in the next financial year. Internal debts are due in the next fiscal year and the government is to pay up to Rs 50 billion in principal repayment.