Once the guideline is issued, international financial institutions with top credit ratings will be allowed to issue local currency bonds to mobilize capital in Nepal. The amount thus collected will then be extended in the form of loans to the private sector for long-term investment in sectors ranging from infrastructure and agriculture to tourism, among others.[break]
“We have set a target of preparing the final draft of the guideline within this fiscal year (which ends in mid-July),” Baikuntha Aryal, chief of the Economic Policy Analysis Division at the finance ministry, told Republica.
Following this, the draft will be tabled at the finance minister´s desk and then at the Cabinet for final approval.
Nepal´s development partners, like the Asian Development Bank and the International Finance Corporation, a private sector lending arm of the World Bank, have long been seeking permission to issue local currency bonds so that they can mobilize financial resources from the country and increase access of the private sector to long-term loans.
In this regard, high-ranking officials of both the agencies have met high-ranking government officials, who have agreed in principle to let them issue such bonds.
“Once the guideline is endorsed by the Cabinet, other development partners of Nepal will also be able to issue local currency bonds,” Aryal said.
There are, however, concerns that the practice of letting development partners raise money locally will lower the flow of foreign aid into the country and squeeze the country´s foreign exchange reserve.
But Aryal termed such concerns baseless.
“The money that development partners raise from the domestic market does not have any link to aid, as bonds are issued to finance long-term infrastructure projects or particular project that the private sector is planning to undertake… It is our belief that this practice will put the private sector in a better position to borrow huge sums for longer terms to finance big projects,” Aryal said, without disclosing whether international financial institutions will be allowed to mobilize domestic banks to issue the bonds.
But again in a country where excess liquidity hovers at Rs 50 billion will the bonds issued by international financial institutions be able to mop up enough capital to fund large projects is a big question.
However, the government believes better yields and guarantee that money invested in the bonds will be returned back will lure funds that have so far remained outside of the banking sector, which, according to estimates, stand at around Rs 20 billion.
“But to ensure funds mopped up by bond issuance do not put liquidity strains on the banking sector, the finance ministry will make it mandatory for international financial institutions to seek the government´s permission prior to issuing such bonds,” Aryal said. “The bond issuers will also have to discuss maturity period and yields of such bonds, and the bonds will have to be listed on the stock market.”
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