After adding about 4 trillion rupees in the 10 months of the current fiscal year, the total public debt has exceeded 3.5 trillion rupees. As the government is under pressure to bring a large budget despite limited resources, there is a risk that the public debt will increase further in the coming fiscal year. 

There is pressure to bring a large budget to cover the government's new plans amid limited revenue collection, the inability to cut mandatory obligations including social security, and dwindling foreign aid and grants, say officials at the Ministry of Finance, who are busy with the final homework of budget preparation. They say that public debt will increase further next year as the revenue cannot even cover current expenses and additional loans will have to be taken to pay salaries and principal and interest on loans for employees. 

As of last Baisakh, Nepal's outstanding public debt has reached 2975 billion 400 million rupees. As of last Ashar, the outstanding government debt was 2674 billion 400 million rupees. The debt as of Baisakh is 45.08 percent of Nepal's gross domestic product (GDP). The government has set a target of maintaining the public debt outstanding as a percentage of GDP at 43 percent by the end of the current fiscal year.

The Public Debt Management Office's data for April shows that Rs 399 billion has been added to public debt in the last 10 months. However, not all of the additional amount was borrowed by the government. Due to the increase in the value of foreign currencies, including the US dollar, during this period, Nepal has started to face additional burden on its outstanding public debt. Of the outstanding debt, foreign debt accounts for 53.57 percent and domestic debt accounts for 46.43 percent.

Revenue mobilization has been lax in recent years. The average annual growth rate of revenue in the five fiscal years preceding the year most affected by Covid (fiscal year 2076/77) was 14.9 percent, but this growth rate has fallen to 8.7 percent in the subsequent five fiscal years. The ratio of federal revenue collection to gross domestic product was 21.5 percent in fiscal year 2077/78, but it has been limited to 19.3 percent in fiscal year 2081/82.

In the last 10 years, revenue mobilization has increased by an average of 12.3 percent annually. Till Jestha 5 of the current fiscal year, Rs 10 trillion in revenue has been collected. This is 67.82 percent of the annual target and an increase of only about 7 percent compared to last year. This year, the government has set a target of collecting Rs 1.48 trillion in revenue.

The National Resource Estimates Committee led by the Vice Chairman of the National Planning Commission has set the budget ceiling for the upcoming fiscal year 2083/84 at about Rs 1.89 trillion. The ceiling set by the 'National Resource Estimates and Expenditure Limit Determination Report 2081' submitted to the Ministry of Finance in the first week of last Falgun is about Rs 74 billion or about 4 percent less than the current fiscal year 2082/83. 

This year, the government had allocated a budget of Rs 1.964 trillion.11 billion in revenue has been allocated for this year. The target is to increase revenue by about 11 percent to raise resources in the budget allocated for the upcoming year. Accordingly, the target for revenue collection for the upcoming year will be about Rs 1.2 trillion. 

The commission has suggested increasing foreign aid. The committee has said that foreign grants should be increased by about 5 percent, foreign loans by 15 percent, and domestic loans by 14 percent for the upcoming budget. The commission argues that the budget ceiling has been set lower than last year to make the budget realistic since foreign grants and loans could not be received as expected. Although a budget of 1964 billion rupees was brought in the current fiscal year, the interim government has reduced it by about 3.5 trillion rupees to 1688 billion rupees.

Citizens have high expectations for the new government. Looking at the RSP's pledge, the government's 100-point agenda for governance reform, policies and programs, and the principles and priorities of the budget, there is no possibility of the government bringing the budget within the limits set by the Planning Commission. Sources claim that the Prime Minister's Office has already instructed the Ministry of Finance (Finance Minister Swarnim Wagle) to include plans worth more than 100 billion rupees in the budget. Finance Minister Wagle is an economist who can analyze the ins and outs of Nepal's economy along with the international community. He is against a large budget without resources. But now, despite limited resources, the Finance Minister is under pressure to integrate many plans to meet the expectations of the citizens, according to officials at the Ministry of Finance.

Finance Minister Wagle has commented that the size of the budget of the previous government has not been realistic. Wagle has mentioned in the ‘Financial Position Paper’ introduced last Baisakh that resources have not been managed as per the target and the size of the budget has been ambitious. ‘In the past decade, the allocated federal budget has averaged 33.7 percent of the gross domestic product (GDP) annually and the actual expenditure has averaged 26.8 percent annually,’ the position paper says. ‘The expansion of the budget deficit has increased dependence on public debt. Due to high current expenditure and low growth in revenue, the federal government’s budget deficit has averaged 7 percent of the gross domestic product (GDP) annually in the last 10 fiscal years.’

This trend has increased the government’s dependence on public debt and the risk of having to borrow to repay the debt, creating a risk to financial stability in the long term, the position paper states.

Public debt is increasing significantly every year due to low revenue. Accordingly, while public debt was 22.5 percent (544 billion) of GDP as of mid-Ashar 2072, such debt has reached 43.8 percent (2674 billion) by mid-Ashar 2082. Public debt, which has been increasing by an average of 17.6 percent annually during this period, has reached 29.75 billion by Baisakh 2082. Although this level of public debt is within the manageable range according to international standards, experts say that debt management will be difficult if it is not utilized in a way that increases the productivity of the economy. Gopikrishna Koirala, head of the Public Debt Management Office, said that an additional burden of about 167.75 billion rupees has been added to the public debt outstanding by the government due to the increase in the value of foreign currency from last Shrawan to Baisakh. 

‘The value of foreign currencies, including the US dollar, is increasing, while the Nepali currency is continuously weakening. The direct impact of this has been an additional liability on the outstanding debt of the government,' he said. 'Except for the losses caused by fluctuations in foreign exchange, Nepal's public debt situation is satisfactory.' Koirala said that although the total debt was about 45 percent of GDP by the end of Baisakh, efforts are being made to keep it within the target limit (about 43 percent of GDP) by the end of this fiscal year.

When taking a loan, no matter what the exchange rate of the foreign currency is, the repayment must be made at the rate at that time. In recent months, the exchange rate of foreign currencies, including the US dollar, has been continuously increasing. This is why Nepal is adding additional burden to its outstanding public debt every month. The loans taken by Nepal must be paid in foreign currencies (mainly in US dollars). 'We calculate the foreign currencies of all countries by converting them into US dollars. Even if the exchange rate of foreign currencies other than the dollar increases, we have to pay more amount accordingly,' Koirala said.

Nepal benefits when the exchange rate of the dollar decreases, while it loses when it increases. Due to the exchange rate change, there has been a loss in 4 of the last 7 fiscal years, while the rest have been in profit. This year too, Nepal has suffered losses in most months, according to the office's data.

The Nepali rupee has depreciated by 7.5 percent against the US dollar by last Chait compared to Asad 2082. The Nepali rupee had depreciated by 2.9 percent during the same period last year. In Chait mid-2082, the purchasing exchange rate of one US dollar reached 148.07 rupees. In mid-2082, the exchange rate was 137 rupees.

The National Statistics Office projects that GDP will reach 6.6 trillion rupees in the current fiscal year. Domestic debt is 20.93 percent or 1381 billion rupees compared to GDP and foreign debt is 24.15 percent or 1593 billion rupees. Economists argue that the continuously increasing public debt poses a risk. In the fiscal year 2080/81 and the last fiscal year, the allocation under the heading of financial management exceeded the size of capital expenditure. But this is not the case in the current fiscal year. However, experts say that this situation is the result of continuous growth in internal and external debt.

Economist Dilliraj Khanal comments that the gap between the level of capital expenditure and the budget for financial management is widening with the increasing debt repayment obligations. He says that this risks shrinking the government's ability to invest in the future. As a result, there is also a risk of fiscal imbalance, said economist Khanal. 'To solve this problem, the government should restructure the structure of capital expenditure along with cutting current expenditure and reduce expenditure in unproductive sectors and increase investment in productive sectors and projects that can be completed quickly at low cost,' Khanal said. 'The government should also allocate the budget by prioritizing immediate, medium and long-term plans in capital expenditure so that the budget is not insufficient for essential projects and the budget is not wasted on less important projects.' 

In the last 10 months, the government has collected Rs 365.16 billion in public debt. This is 61.30 percent of the annual target. The share of internal and external borrowing in this is 81.79 and 18.21 percent respectively. This year, the government had set a target of mobilizing public debt of 595 billion rupees.

Economist Kalpana Khanal argues that it should be improved since it was necessary to borrow again to pay the principal and interest on public debt. 'Rather than saying what percentage of public debt has reached the GDP ratio, we should look at where that debt was used? How much return was received from it,' she said. 'In the past, most of the debt taken was spent on current expenses, now it should be improved and the debt should be spent on projects that can be completed quickly at low cost and have high returns.' She says that the new government should improve the good governance of projects and work to complete the construction on time and get good returns from it.

'In the past, it was a practice to initially bring a large budget and then reduce it by a large number in the mid-term review. "I expect that trend will not repeat this time and a realistic budget will be presented from the beginning," she said. "The expectations of the citizens are not how big the budget is that the government brings. It is about how it distributes limited resources based on need and justification, and how the spending system becomes efficient and transparent." Therefore, to meet the expectations of the citizens, the government should bring a realistic budget instead of a big one, she said.