Nepal mired in foreign debt

Nepal mired in foreign debt
Gopal Tiwari
The Himalaya Times, September 6, 2006

The outstanding foreign debt of Nepal as of July 16, 2006 has reached over Rs 234 billion which comes to over 40 per cent of the country’s total gross domestic product (GDP) that stands at Rs 583 billion, as per the preliminary figures of the Financial Comptroller General’s Office of the government.

However, in 2004-05, outstanding loans of Nepal was Rs 219 billion which stood at 43.18 per cent of the total GDP of Rs 533 billion. During 2001 and 2002, the percentage of foreign loan to the total GDP was over 50 per cent.

With this disappointing and alarming trend, Nepal seems to be moving into a ‘debt-trapped economy’ status as it has failed to increase its development expenditure in recent times. Alarmingly, recurrent expenditure has been going up in recent years.

Prof Bishwambher Pyakuryal, president of Nepal Economic Association (NEA), expressed serious concerns over the outstanding debt increase due to a lack of proper functional system in the conflict-hit economy.

Donors feel that external assistance is being siphoned off to non-development sectors which demands that the system of service delivery has to be re-thought.

Prof Pyakuryal is of the view that the government does not think seriously on conditions imposed by donors while inking agreements. It may ultimately push us towards a debt-trap.

Given such a dismal scenario, Nepal might have to enter into Highly Indebted Poor Countries (HIPC) initiative club as a ‘defaulter’, Pyakuryal feared.

Dr Rudra Suwal, economist at Central Bureau of Statistics (CBS) termed the increasing foreign loans ‘alarming’ at a time when development expenditure is also being squeezed. Even if we increase our debt servicing, it would be difficult for us to increase the capital expenditure, said Dr Suwal.

According to the ministry of finance (MoF), total debt serving in 2003-04 stood at about nine per cent of the total government expenditure. In 2004-05, debt servicing by the government came to be about eight per cent.

As per the international norms set by International Monetary Fund (IMF), debt servicing should not go beyond 10 per cent. It means that Nepal is moving towards an alarming situation.

Dr Suwal suggests that greater loans would also be a problem as it will generate a huge debt-servicing liability that means development would suffer more.

What is further troublesome is that development expenditure came to be only 26 per cent of the total expenditure in the year 2003-04. However, recurrent expenditure came to be 74 per cent. With this trend, it shows that foreign loans might have gone under ‘regular expenditure’.

During 1974-75, the situation was just the reverse. During that time, regular expenditure was 36 per cent of the total government expenditure while development expenditure was 64 per cent. During fiscal year 1994-95, regular expenditure and development expenditure were equal in terms of total expenditure.

In the context of foreign debt inflating, a dismal growth in productive investments seems apparent. With infrastructure getting extremely weak, capital expenditure would have to increase. But for the moment, it is just the reverse.

Every Nepali now owes a loan of Rs 13,000 as per the latest government figures.