Public debt is one of the prominent sources from which a country fulfils its budget deficit. The idea of public borrowing is regarded to have begun in late medieval Europe where territorial monarchs took short-term loans with high interest. One of the instances includes Edward III borrowing from  Italian bankers during the Hundred Years’ War (1337-1443) which was short-term and had high interest rates. Only after the 1500’s territorial states were able to secure long-term loans. In modern times, the growth of global public debt to USD 97 trillion indicates a global shift towards government’s failure to fulfil their expenditures, and people’s needs. At the same time, it highlights the burden upon those governments that are inclined to borrow more debt, as they now face a tough decision between servicing their debt or catering to their citizens' needs. The significant burden of debt, coupled with substantial debt servicing, obstructs individual people’s rights, limits their basic necessities and occasionally leads to payment of interests of these public borrowings outpacing their growth progress in crucial sectors like health and education.

Global Context

As per the United Nations Conference on Trade and Development (UNCTAD), in 2023, the public debt of developing countries reached a staggering USD 29 trillion, marking a significant 26% increase compared to the figures from 2021. In the same year, the net interest payments on public debt for developing countries escalated to USD 847 billion. This financial situation has significant implications for social services like health and education. In fact, 48 developing countries spend more on interest payments than on either education or health. This means that an estimated 3.3 billion people live in countries where more money is spent on servicing debt than on essential services like education or health. This stark reality underscores the urgent need for sustainable economic policies and debt management strategies in these countries.

Public Debt in Nepal

The government of Nepal embarked on its budgeting journey in 1951. Nearly a decade later, in 1962, it began to accumulate public debt, initially through domestic loans. This marked a significant shift in the country's fiscal policy. The first foreign creditors to extend loans to Nepal were the former USSR and the UK, establishing the beginnings of Nepal's international financial relationships.

As of today, based on global context, UNCTAD reports that Nepal's external public debt as a percentage of GDP is 19.5%, which is significantly higher than the average of 10.01% for developed countries and 9% for developing countries. Similarly, the proportion of Nepal's public debt interest payments to revenues is 6.9%, which is lower than the average for developing countries at 8.4%, but higher than the average for developed countries at 5.3%. These figures suggest that Nepal may be gradually leaning towards borrowing more, potentially leading to a situation where revenues are used to pay interest, leaving the development of essential sectors such as health and education stagnant.  

Nepal’s debt to GDP ratio

Upon reviewing the data from 1980, as illustrated in Figure 1, it becomes evident that the GDP of Nepal experienced minimal growth during the 1990s, remaining below the threshold of USD 3 billion until 1993. However, a significant shift occurred post-1994, with the GDP demonstrating a consistent upward trajectory. This economic growth can largely be attributed to the liberalization of trade and the implementation of the Privatization Act in 1994. Another reason for the steady growth of GDP from 1994 till 2020 is due to the currency pegging of NPR to INR at 1 INR per 1.60 NPR since 1994.

Figure 1: Nepal GDP time series plot from 1978 to 2020.

Source: Research by Tara Prasad Upadhyaya, Tonik Pun on Public Debt and Economic Growth of Nepal

Figure 2: Nepal public debt time series plot from the year 1978 to 2020.

Source: Research by Tara Prasad Upadhyaya, Tonik Pun on Public Debt and Economic Growth of Nepal

Furthermore, as indicated in Figure 2, there has been a marked increase in Nepal’s public debt post-2015. This increase in debt is reflective of an expansion in the national budget. However, it also suggests that the government has been facing challenges in generating sufficient revenue to cover its expenditures. 

Recently, Nepal’s annual budget speech for FY 2024/25 (2081-82 B.S.) proposed a total budget of NPR 18 Kharba 60 Arba 30 Crore (~USD 13.76 Billion) for the fiscal year 2081/82 B.S. The government plans to cover the remaining deficit of NPR 5 Kharba 47 Arba 67 Crores through loans. From domestic burrowing, the government plans to raise NPR 330 Arba whereas from foreign loans, NPR 218 Arba will be raised. With this, Nepal’s total public debt as a percentage of GDP has increased by almost twofold from FY 2014/2015. 

Moreover, Figure 3 shows that Nepal’s total debt as a percentage of GDP (Debt to GDP ratio) in FY 2014/15 was 24.07% which grew exponentially over the years and as of the latest data stands at 41.57% in FY 2022/23. During this time, domestic debt saw exorbitant growth from 8.32% in FY 2014/15 to 20.97% in FY 2022/23.

Figure 3: Total Public Debt, Outstanding Domestic Debt and Outstanding Foreign Debt as a percentage of GDP

 

Source: Ministry of Finance

Nepal’s GDP in 2023 at the current price stands at NPR 53,81,34,00,00,000 (~USD 40.23 billion) from where the government’s total debt stands at a staggering NPR 24,00,34,36,00,000 (~USD 17.9 billion). The external debt is NPR 12,07,86,32,00,000 and the domestic debt is NPR 11,92,48,04,00,000. This overall situation critically underscores the urgent need for effective fiscal management and the need for sustainable revenue streams to support the country’s economic growth. 

Nepal’s external and internal creditors

The Public Debt Management Office (PDMO) has bifurcated Nepal’s external debt into two different headings viz. Bilateral and Multilateral Creditors. The total bilateral debts stand at 1,36,74,54,00,000 and multilateral debts are at 10,71,17,80,00,000 both totalling NPR 12,07,86,32,00,000 (~USD 9 billion).

Among Nepal’s largest bilateral creditors and multilateral creditors are the Japan International Cooperation Agency (JICA) and the International Development Association (IDA) where both these entities have provided a combined debt of NPR 6,30,65,85,90,000 (~USD 4.7 Billion) as shown in Figure 4.

Figure 4: Bilateral and Multilateral external creditors vs the outstanding balance up to June 2024 in (ten million) 

Source: PDMO

Apart from the International Development Association (IDA), the Asian Development Bank (ADB) holds a significant portion of Nepal's external debt, amounting to NPR 4,02,37,39,50,000, which represents 33.31% of the total share of external creditors, as shown in Table 1. Collectively, the IDA and ADB account for 81.29% of Nepal’s total external debt. In terms of bilateral external debt, the Japan International Cooperation Agency (JICA) alone holds 4.23%.

Table 1: External Debt Composition by Creditor until Mid-June 2024

Source: PDMO

With reference to Nepal's total external debt, the majority is composed of multilateral debt, which accounts for 88.68%, while bilateral debt constitutes a mere 11.32%.

Regarding Nepal’s internal debt, the total amount is NPR 11,92,48,04,00,000 (~USD 8.9 billion). A significant portion of this domestic debt arises from development bonds, amounting to NPR 7,64,94,70,00,000 (64.15% of the total domestic debt), followed by treasury bills at NPR 4,12,69,22,50,000 (34.61% of the total domestic debt), as illustrated in figure 4.

Figure 4: Status of domestic debt liability of the Government of Nepal

Source: Government Debt Statistics, PDMO 2024

Impact of Debt Repayment on Nepal’s Economy

With all the above numbers at hand, one question that remains is what is the price that Nepal’s economy pays as a result of the aforementioned debts? 

In the fiscal year 2080/81, a total of NPR 3,30,56,07,00,000 (3 Kharba, 30 Arba, 56 Crores, 7 Lakhs) was allocated to fiscal management which constituted 18.88% of the total annual budget. NPR 2,75,78,74,00,000 (2 Kharba, 74 Arba, 78 Crores, 74 Lakhs) was allocated for domestic debt repayment and NPR 54,77,33,00,000 (54 Arba 77 Crores 33 Lakhs) was allocated for external debt repayment. 

During the same year, total debt was at NPR 21,34,32,00,00,000 (21 Kharba 34 Arba 32 Crores). In the budget speech of the same year, the finance minister highlighted that he had allocated 73.10% of the total budget i.e. NPR 14,80,25,00,00,000 (Fourteen Kharba Eighty Arba and Twenty-five Crores) for salary, allowances, administrative expenses and other general expenses owing to increasing debt repayment obligations. The minister expressed concern over the limited resources available for developmental works, as a substantial part of the budget was earmarked for operational costs due to the mounting debt repayment obligations.

A similar pattern was again repeated in the annual budget of FY 2081/82 (2024/25) where 21.66% of the total budget of NPR 18 Kharba 60 Arba 30 Crore (~USD 13.76 Billion) was allocated for repayment of both external and internal debts. 

This allocation prompts questions about Nepal’s economic future. It also vividly shows that the country’s economy and revenue streams are critically directed towards payment of interest and cleaning debts, while less preference is given to budgets for the development of essential sectors. This situation largely stems from the debt-driven approach that the country adopted in the 1960s to meet its expenditure needs which gradually escalated leading to unprecedented amounts of debts that we are seeing today.

Identifying Nepal's challenges and proposing a way forward

It’s noteworthy to consider the economic scenarios of developed countries when it comes to public debt. For instance, the USA, despite having a debt-to-GDP ratio of 122.1%, maintains its position as the world’s largest economy. Similarly, China, with a debt-to-GDP ratio of 83.6%, continues to be one of the world’s second-largest economies based on GDP. Japan, despite a high debt-to-GDP ratio of 252.4%, remains the world’s fourth-largest economy. These examples highlight that high debt levels do not necessarily impede economic growth. However, Nepal, given its unstable government and weak financial management, has failed to make the most out of the debts that it has taken during all these years. The situation becomes more precarious when we realise that per capita debt or total debt calculated per individual currently stands at NPR 82,303 as of July 2024.  

As of recent, debts from domestic sectors have increased by nearly 10% since FY 2018/19 as shown in Figure 3. This does show that the country is putting greater reliance on taking debts from domestic sectors which can potentially increase internal participation. However, this strategy may not keep Nepal’s economy afloat in the long run as this may limit the availability of financial resources for the private sector leading to stifling private investment and hindering economic growth.               

In addition to this, while some studies have concluded that public debt has not triggered expected economic growth for Nepal, it also sheds light on the areas for improvement. The substantial allocation of the budget for debt servicing could pose a risk for a developing economy like Nepal, which needs to equally invest in infrastructure development. This situation could potentially steer the country towards another economic slump. Rather than depending heavily on debt, Nepal should focus on reforming its taxation policies to ensure efficient collection and utilization of tax revenues, thereby minimizing any potential leakages or corruption.

Above all, as Nepal is set to graduate from LDC to a developing nation by 2026, it will have a tougher time meeting new standards to get access to foreign grants and concessional loans. Thus, it is high time that the government and concerned stakeholders prioritize utilizing available grants and concessional loans to their full potential so as to reduce the burden on exorbitant debt servicing and leave more room for public spending in crucial areas such as infrastructure development, education, and healthcare. Only then can the country hope to leverage debt as a tool for development and economic growth.