Podcast: Nepal's burgeoning debt situation | Facts and Figures | Must know

Source:

IMF and IDA Joint Bank-Fund Debt Sustainability Analysis (June 21, 2024)
Nepal Public Debt Bulletin, Year 3, Volume 2 (Jan 15 - July 15, 2024), Public Debt Management Office (PDMO)

Key Findings:

Overall Debt Sustainability: Nepal's external and overall public debt are assessed at low risk of debt distress. This rating remains unchanged from the previous year.
Debt Level: Public debt reached 47% of GDP in FY2022/23, and is projected to peak at 50% in FY2025/26 before gradually declining.
Debt Composition: External debt is highly concessional (87% from multilateral creditors like IDA and ADB) and hasn't increased significantly since the pandemic. Domestic debt, however, has been rising faster, driven by increased reliance on treasury bills and development bonds.
Debt Management: The PDMO is actively managing public debt through measures like the Public Debt Management Act (PDMA), Medium-Term Debt Strategy (MTDS), and Debt Operation and Management System (DOMS).
Key Vulnerabilities: Export Shocks: The PV of external debt-to-exports and debt service-to-exports ratios breach thresholds under export shock scenarios, primarily due to Nepal's low export base and high volatility. However, this is mitigated by large remittance inflows.
Growth Shocks: A sustained growth slowdown could push debt-to-GDP and debt service-to-revenue ratios close to their respective thresholds.
Mitigating Factors: High Remittances: Nepal enjoys exceptionally high remittances (24% of GDP on average), which act as a buffer against external shocks.
Fiscal Consolidation: The government is committed to fiscal consolidation, as demonstrated through spending cuts in the FY2023/24 mid-year budget review.
Concessional Financing: Continued access to concessional external financing is crucial for supporting growth and maintaining debt sustainability.
Policy Recommendations: Boost Exports: Policy efforts are needed to diversify exports, improve productivity, and reduce the reliance on remittances over the long term.
Strengthen Debt Management: Continued improvements in debt management practices are crucial, including integrating cash flow forecasting, and shifting towards longer-maturity domestic debt.
Manage Contingent Liabilities: Rigorous analysis of risks from contingent liabilities (SOE debt, PPP projects, etc.) is needed.
Utilize Concessional Borrowing: Maximize the use of readily available concessional financing for closing infrastructure gaps.
Important Quotes:

"Both external and overall public debts in Nepal are assessed at low risk of debt distress, unchanged from the last year’s Debt Sustainability Analysis (DSA)." (IMF/IDA)
"Despite continuing macroeconomic headwinds, debt is projected to peak at 50 percent of GDP in FY2025/26 and to gradually subside afterwards." (IMF/IDA)
"The assessment, however, is contingent upon continued fiscal consolidation effort by the authorities... and continued utilization of external borrowing at concessional terms." (IMF/IDA)
"The Debt to GDP ratio of Nepal is 42.7% which is the lowest in the SAARC region. External debt service is less than 1% of GDP." (PDMO)
"Different studies have shown Nepal at low risk of debt stress. Nepal also has very good track record of debt repayment." (PDMO)
"Judgment is applied in interpreting the risk signal from stress tests on the PV of debt-to-exports and debt service-to-exports in light of the exceptionally high level of remittances and the resilience to shocks of all other debt burden metrics." (IMF/IDA)
"While debt remains sustainable in the medium term, several steps could be taken to mitigate any potential risks... stepping up investment in resilient and sustainable infrastructure... and sustained stronger domestic revenue mobilization." (IMF/IDA)