In May 2018, immediately after taking the oath for the seventh Prime Minister of Malaysia, Dr. Mahathir Mohamad had announced to take measures to control his country’s escalating public debt. Few days later, his government announced to reducing Ministers’ remuneration by ten percent, canceling the Kuala Lumpur – Singapore high-speed train and requesting citizens to voluntarily donate money; all targeted at helping government to deal with country’s public debt. At the same time, the Government of Uganda, which was enlisted as one of the thirty-nine heavily indebted poor countries by the World Bank in 2012, had amended the existing Excise Duty Bill to tax citizens for using major Social Media platforms and collect necessary resources to finance nation’s debt.
As per the International Monetary Fund (IMF) data, debt to gross domestic product (GDP) ratios for these two nations stand at different positions with the former having close to 51% and the latter 38%. Despite noticeable differences, the recent unusual steps taken by these economies must trigger countries like Nepal, where future government expenditures are predicted to escalate after the country recently adopting federalism, to develop better debt management practices.
Public Debt Simplified
The poor countries do not have financial resources enough to fund their large-scale projects. To afford such resource-gaps, countries borrow money by issuing treasury bills, government bonds and securities. In addition, countries like Nepal – who are considered to be the less creditworthy economies – also borrow money from credible international institutions like the World Bank and the ADB. Doing so, these countries owe creditors thus borrowed money, which in terms is known as the public debt. Furthermore, it is called either external or domestic debt depending upon the origin of the creditors.
The economists have different takes on the debt with some favoring and rest disapproving it. The proponents, often coming from the Keynesian school of thoughts, advocate that public debts allow governments to execute large-scale projects while also producing spillover effects. The opponents, often coming from the Classical school of thoughts, on contrary, view public debt as the unnecessary burden on the future generations. However, despite the given risks – market, rollover, liquidity, credit, settlement and operational, if managed well a considerable debt often results in desired economic and social outcomes. For example, debt has resulted in healthy economies for countries like Japan, Singapore, Belgium, United States and Bhutan while it has severely damaged economies of Greece, Italy, Spain and Venezuela.
Nepal in the Context
Nepal formally begun to take loans, domestic and external, since 1962 and 1963 respectively with the former USSR and United Kingdom being the first foreign creditors. Over the following years, the debt has been on rise except during fiscal years (FY) 1978/79, 1991/92, 1992/93, 1994/95, 1998/99, 2001/02, 2002/03, 2003/04, 2008/09, and 2014/15. As per a 2013 study published in the Economic Journal of Development Issues, Nepal’s public debt had increased at an annual rate of 18.86 percent between FY 1975/76 and 2010/11. It maintained minimal changes between 2011/12 and 2015/16 before increasing again afterwards.
In addition, external debt comprised major share of Nepal’s public debt, which has been falling in the recent decades. As per the recent Economic Survey, of the total outstanding debt of 8.43 billion Nepali Rupees, domestic and external debt comprised 46.1 percent and 53.9 percent respectively as compared to the 40.7 percent and 59.3 percent shares respectively for the past FY.
Urgency of public debt debates
The debt to GDP ratio is a good indicator to check whether an economy stands in a position to repay debts without incurring additional debts. As per the IMF’s 2017 Debt Sustainability Analysis report, Nepal, despite suffering from major earthquake in 2015 and subsequent Indian blockade, remains free from debt stress. As of fiscal year 2015/16, Nepal’s debt to GDP ratio was only 27.3 and country was less prone to shocks from the external debt thanks to nation’s improved debt management capacity in recent years.
However, this does not mean that Nepal can continue to employ past strategies to manage future debts. Though this ratio had been on decline over years – with the year 2001 witnessing record high 69.5 percent, it has been on rise again. And if the World Bank predictions are to be believed, this ratio will become 30.7 percent by 2018 end and 37.6 percent by 2020. With a federal system in place, government expenditure is sure to surge in coming years. To meet increased expenditure targets, the government will have no option but to borrow money from creditors thus putting the country at economic risk. As a result, it is high that the government and all other concerned stakeholders assess their prioritizes well before execution so as to avoid potential debt trap in the future.