While the country’s debt burden has been increasing at an alarming rate, the government took additional public debt worth Rs 136.31 billion in the first three months of the current Fiscal Year (FY). According to the Public Debt Management Office (PDMO), the government’s liability of public debt stood at Rs 2.434 trillion as of the end of the fiscal year 2023/24. By the first quarter end of the current FY, the total public debt has soared to Rs 2.523 trillion, with the net increment of the outstanding loans of Rs 88.93 billion. Out of the received loans of Rs 136.31 billion, a total of Rs 115 billion was domestic borrowing while the remaining Rs 21.31 billion stood for external borrowing. As of mid-October this year, the ratio of public debt to the country’s gross domestic product (GDP) has reached 44.23 percent of Nepal’s current GDP of Rs 5.704 trillion. The rate at which the country’s public debt to GDP ratio is increasing is a matter of serious concerns, especially in view of the fact that domestic aggregate demand has lately fallen down significantly. It is high time the government must exercise restraint while taking public debt for the country’s financial health.
It is worth noting that the current ratio of public debt to GDP is the highest in the past 18 years. In FY 2005/06, this ratio was recorded at 49.52 percent. Although this was successively reduced to 22.28 percent in FY 2014/15, the amount of public debt again started to escalate following the devastating earthquakes that hit the country in 2015. In the past decade, the figure has surged five-folds. The country’s public debt to GDP ratio at present is way too high compared to the ideal figure suggested by a number of researches conducted by the central bank. A research conducted by Nepal Rastra Bank (NRB) in May 2024 states that the ideal ratio of public debt to GDP for Nepal is 35.43 percent. Another research published in the NRB Economic Review in 2020 has also estimated the optimum public debt to GDP ratio for the country at 33 percent. These researches have cautioned that excessive debt burden could lead to crowding out effects, increased tax rates and higher interest payment burden on the country along with exerting excessive pressure on future generations for repayments of loans. Debt accumulation should closely correspond with the country's aims for sustainable economic development, emphasizing not just debt repayment but also the promotion of the highest possible level of growth attainable.
Public debt exceeds Rs 2.434 trillion, increasing by over Rs 30...
A high GDP-to-public-debt ratio is not considered good for a country's economic health for several reasons. As a country accumulates more debt relative to its GDP, it must allocate a larger portion of its revenue for debt servicing, which can limit government spending on critical areas like infrastructure, healthcare and education. This can hinder the country’s long-term growth. Similarly, high public debt may lead the government to issue more bonds to finance the debt, which can increase interest rates. Higher interest rates in turn can discourage private sector investment and slow down economic growth. High GDP-public debt ratio also reduces both public and private sector spending, leading to slower economic growth over time. This can make it even harder for a country to reduce its debt in the future. Keeping in view of the negative impacts of the growing public debt to GDP ratio, the government must take prudent measures to bring the public debt to GDP ratio to desired level. This requires the government to avoid taking public debt to spend in unproductive sectors, discoursing populist programs that do not contribute to economic growth. The government should utilize public debt, if necessary, in productive sectors that will stimulate economic activity.
