WB warns of alarming rise in debt to GDP ratio

April 19, 2018

The Kathmandu Post, 19 April 2018


The World Bank warned in its Nepal Development Update 2018 that the ratio of public borrowing to gross domestic product (GDP) would rise alarmingly with the government facing a high fiscal deficit due to the unmanaged annual budget and implementation of a federal system.


Nepal’s projected debt to GDP ratio will reach 30.7 percent by the end of 2018, up from 25.6 in 2015, the multilateral lending institution said.

With the federal government considering managing extra expenses to implement the federal system through foreign borrowing in the coming years too, the ratio is likely to swell to 34.4 percent in 2019 and 37.6 percent in 2020, the report said. 

The growth, according to the World Bank, is not a crisis currently, but the country is likely to face a severe financial problem in the future if the growth rate is not checked in time. “The ratio as of now does not post a dismal picture, however, the soaring rate should be a matter of concern,” said Damir Cosic, senior country economist at the World Bank.


Cosic said the government would have to rely more on borrowings from foreign sectors than domestic sources due to high interest rates in the domestic financial market. “With the soaring interest rate, the government will have to depend on foreign borrowing which is likely to worsen the situation further,” said Cosic, adding that the concessional loans that Nepal has been receiving from donor agencies have so far kept the country in a satisfactory position with respect to the debt to GDP ratio.


Apart from the expenses needed for a federal system, the World Bank blamed the situation mainly on the three previous annual budgets following the earthquake that hit the country on April 25, 2015. The lending institution has called the budgets of the last three years ‘unrealistic’ fiscal plans of the government.


In the past three years, the government’s recurrent expenditure has almost doubled due to increased spending on federalism, earthquake and flood related reconstruction, expanded social assistance programmes and civic services. As a result, the fiscal deficit will reach 5.9 percent of GDP in 2018 compared to just 1.1 percent in 2015. The deficit to GDP ratio is expected to widen further to 6.2 in 2019 and 2020.


Recurrent expenditure has surged of late due to the transfer of funds from the centre to the local governments. However, the local governments have not been able to spend the money, and Rs80-90 billion of it is expected to remain unspent at the end of the fiscal year.


The World Bank said an increase in the adverse fiscal balance and current account balance were the country’s key challenges. “Managing the ‘twin deficits’ will be the main challenge,” the report said.


The Nepal Development Update has also underscored the dismal agricultural output. Due to inadequate rainfall, winter crop yields will not be as high as expected. A widening trade deficit accompanied by slow increase in remittance and the vulnerability seen in the financial sector are also among the main problems that the lending institution has highlighted.


“Due to the poorly performing external sector, the pressure on bank credit has built up significantly compared to the slow rate of deposit collection. This has pushed up interest rates,” said Sudyumna Dahal, country economist at the World Bank. 


To get out of the economic quagmire, the lending institution has recommended imposing curbs on the government’s consolidated wage bill to control the widening fiscal deficit. It has also suggested immediate capacity building of the local and provincial governments for effective use of the fiscal transfers. “If these issues are not addressed adequately, the increased spending needs could lead to fiscal vulnerabilities in the future,” the report said.