Nepal’s public debt has been fast-ballooning over the past few years, reaching an alarming Rs 2.528 trillion as of mid-September of the current fiscal. Of this staggering amount of public debt, the Government of Nepal borrowed Rs 104 billion just in the past two months. There is no doubt that these figures amount to a clarion call for urgent action with the country confronting a grim reality and remaining in precarious balance. This indebtedness has grown through an unprecedented rise and reached 44.34 percent of the country’s gross domestic product (GDP), the highest in the past 18 years, with great risks to the economy and future generations.
The alarming trend our public debt has taken up may be attributed to various factors. However, the main factor at the very core of this issue pertains to the unrestrained borrowings of the government. Revenue collection has decreased due to the economic slowdown, and the government has resorted to excessive loans without caring for the paramount need of saving from unproductive expenses. As per the records maintained by the Public Debt Management Office, Nepal’s public debt increased by as much as Rs 104 billion just in the first two months of the current fiscal year, between mid-July and mid-September. Domestic borrowing accounted for Rs 90 billion of this increase. This is a highly worrying trend as it portends nothing but unsavory consequences for the sustainability of our fiscal policies.
Take prudent measures to curb public debt
This is in complete contradiction with the findings of the Nepal Rastra Bank, which estimated the ideal debt-to-GDP ratio at about 35.43 percent, while some studies by the country’s central bank even estimated an optimal threshold debt to GDP ratio of 33 percent. And now that it has crossed far over this mark, the implications are grave. The problem is that excessive debt crowds out essential public services and raises the tax rates that burden the taxpayer, dampening economic growth. This unsustainable path jeopardizes the position of future generations by forcing them to repay the debts incurred today.
The causes of this accumulation of debt are multifarious, but the aftermath of the 2015 devastating earthquake, followed by a series of economic mismanagement issues, has played a significant role in the emergence of the current situation. Our public debt has surged five-fold over the past decade, depicting a disturbingly typical scenario of financial irresponsibility. With the government's current target to borrow an additional Rs 330 billion domestically and Rs 217 billion externally this fiscal year, the trajectory certainly does not indicate abating any time soon.
The government, therefore, has to pursue the many aspects that reduce the public debt-to-GDP ratio in order to get out of this dangerous situation. First, there is an urgent need for an in-depth review of public expenditure; the government should attract productive spending, which accelerates economic growth, not finance projects with limited returns. The government can begin to find relief from this debt burden by reducing unnecessary expenses and investing in infrastructure and social services that trigger economic activities.
Besides that, revenue collection should be enhanced by efficient tax reforms. Streamlining tax administration, closing loopholes, and expanding the base are effective ways to give public finances a substantial boost. This makes certain that all sectors of the economy contribute their due share and the government depends less on debt to build resilience in the fiscal structure. Apart from that, the government should also conduct transparent negotiations with international lenders over the terms and conditions for its external borrowing. The government should not agree to those conditions which may lead it to fall into a debt trap in the long term by signing on dotted lines further aggravating the problem at hand.
The bottom line is immediate and bold steps must be taken to overcome the alarming level of public debt burden the Nepalese economy has plunged into. Fiscal responsibility after all will get the government on track by cutting unproductive expenditure, enhancing revenue collection, and negotiating transparently with lenders. Thus, the government can create conditions to make any economic future more sustainable. The failure to do so risks not only the current economic setup but also future prosperity. It is about time our leadership takes the lead, putting Nepal on a course of fiscal prudence and sustainable growth.
