Sunday, September 13, 2015

Structure of Nepal’s public debt

This is adapted from Box 1 of Macroeconomic Update, August 2015, Vol.3, No.2 (executive summary here, and FY2016 growth and inflation outlook here). It presents is the composition of Nepal’s outstanding internal and external debt. The Macroeconomic Update includes FY2015 update on real, fiscal, monetary and external sector, and growth and inflation outlook for FY2016. It provides a comprehensive macroeconomic assessment, including fiscal sustainability, after the April 25 earthquake.

Nepal’s public debt stock has been continuously decreasing, reaching 25.6% of GDP in FY2015 from a 51.9% of GDP in FY2005. In FY2015, internal and external debt stock amounted 9.5% and 16.1% of GDP, respectively. Much of Nepal’s external debt is on concessional terms. Hence, debt sustainability is not considered at risk.

Nepal’s outstanding public debt (% of GDP)

Source: FCGO

External debt

Nepal’s debt servicing has marginally increased, reaching 3.5% of GDP in FY2015 from 2.7% of GDP in FY2009. Total internal and external principal repayments were 2.2% and 0.8% of GDP, respectively, in FY2015. Similarly, total internal and external interest payments were 0.3% and 0.1% of GDP in FY2015.

Gross debt servicing (% of GDP)

Source: FCGO; NRM staff estimates

Of the total outstanding external debt (NRs343 billion), ADB’s and WB’s share is 41% and 45.3%, respectively. It translates into 6.6% and 7.3% of GDP, respectively, in FY2015. Total debt owed to multilateral and bilateral donors was equivalent to 14.5% and 1.6% of GDP, respectively, in FY2015. It was 19.2% and 3.8% of GDP, respectively, in FY2010. Among bilateral donors, the outstanding debt owed to Japan is 0.5% of GDP, 0.4% for PRC, and 0.3% of GDP for India and South Korea.

Gross outstanding external debt (% of GDP)

Source: FCGO; NRM staff estimates

Of the total loan commitment in FY2015, only 58.5% was disbursed (amounting to about 1.4% of GDP). ADB committed loan amounting to 0.8% of GDP, but only 0.4% of GDP was disbursed. Similarly World Bank (IDA window) committed loan amounting to 1.0% of GDP, but only 0.6% of GDP was disbursed in FY2015. Total disbursement has lagged behind total loan commitment, reflecting the government’s low capital expenditure absorption capacity.

Total loan commitment and disbursement (% of GDP)

Source: FCGO, MOF; ADB staff estimates

Internal debt

The outstanding internal debt increased to NRs201.7 billion in FY2015 (12.4% of GDP) from NRs122.8 billion in FY2009 (9.5% of GDP). Treasury bills accounted for 5.6% of GDP and development bonds 2.7% of GDP. Most of the internal debt is short-term treasury bills (60% of total internal debt) and such funds are used to fund long-term development projects. Ideally, increasing the share of long-term bonds in total internal debt to finance medium to long term investment is desirable. The medium to long term bonds are in the form of national savings certificate, development bonds, citizen saving bonds and foreign employment bonds.

Outstanding internal debt (% of GDP)

Source: FCGO; NRM staff estimates

The gap between internal borrowing target and actual borrowing is widening recently. For instance, in FY2003 the government had a target of borrowing 2.4% of GDP internally, but ended up borrowing 3.1% of GDP. However, in FY2014, the government had a target of 2.3% of GDP, but actual borrowing was just 1.0% of GDP. In FY2015, there was a slight improvement with actual borrowing of 2.0% of GDP against the target of 2.5% of GDP. It again indicates the low expenditure absorption capacity of the government despite having comfortable fiscal space, which could be utilized in financing critically needed physical and social infrastructure that would create the foundation for a high, employment-centric and sustainable inclusive growth, and strengthen economic fundamentals.

Internal target and actual borrowing (% of GDP)

Source: FCGO; NRM staff estimates