Debt sustainability is a crucial issue, especially for low-income countries, because of their piled-up foreign debts even if they are of concessional types. It is a fact that almost all such countries have had to depend heavily on foreign loans due to their domestic resource constraints, which hardly suffice to meet the burgeoning recurrent type expenditure, and also for the sake of so-called development/capital expenditure. Moreover, the inflationary tendency, depreciated local currencies, low rate of savings vis-à-vis investment, low consumption and low income virtually minimise the possibility of economic growth. However, capital flows in the form of aid and concessional loans depend on the donors’ traditional strategy like enhancing military power, promoting commercial interests, supporting a friendly government and winning goodwill.

Starting from 1996, the International Monetary Fund (IMF) and the World Bank have jointly initiated the Highly Indebted Poor Countries (HIPC) programme to reduce the debt burden of poor countries through integrating poverty eradication and social policy. The IMF and the World Bank in their prescribed operational framework and policy implications for debt sustainability in low-income countries have made an in-depth analysis aiming at preventing excessive debt accumulation by linking a country’s borrowing potential to its current and prospective ability to service debt.

The basic criterion for the eligibility of HIPC group is that the country concerned should be eligible for IDA and PRGF loans respectively. Moreover, in receiving assistance under HIPC initiative, the country should have unsustainable loan burden, graduated on the reform policy, and prepared and entered into the poverty reduction strategy paper (PRSP). Out of 38 HIPC, 27 countries have already been enlisted in the decision point and till March 2005, $32 billion had been allocated for those countries as a package programme. Debt sustainability can be assessed through the indicators of debt servicing or debt stock as a per cent of GDP, exports of goods and services, etc., separately or in combination.

Debt sustainability, no doubt, is an essential condition for sustainable economic growth in low-income countries. The debt service obligations are financed by a country’s own resources, and/or additional foreign assistance and/or debt relief. In the case of domestic debt as a per cent of GDP, Nepal was far lower (15 per cent) than the trend of the selected 22 low-income countries. However, looking at the external debt as per cent of GDP, which stood at around 50 per cent with its quality rating of policies, Nepal is near the bracket of normal low-income countries. Nonetheless, based on the present value as a proximate indicator of the NPV, the time has come for Nepal to think seriously since almost all its indicators are either at par or quite lower than the prescribed indicators under HIPC.

The outstanding foreign debt and debt servicing may differ because of exchange rate fluctuations. For example, a loan of $100, which was equivalent to Rs 5,070 in 1995, has become Rs 7,200 as of today, a 42 per cent higher than the original rate. It is clear that debt obligation is related to the exchange rate movements. Looking at the depreciating trend of the exchange rate of the domestic currency, a country like Nepal will face increasing debt obligations and will also lack the benefit from the export trade due to low potentiality.

Nevertheless, Nepal has not been facing debt-servicing difficulties and distress at the moment even though the per capita debt burden has been increasing despite the higher population growth. Also, if the capital inflow continues without a strong feedback effect of economic growth, the so-called debt overhang may cause either distortion tax culture (if domestic resources service debt) or undermine the sound mac-roeconomic policy (if repayment is made from additional capital inflow). For obvious reasons, a larger debt service obligation will hit hard the allocation of resources to areas of socio-economic priority. The sustainable debt management framework is equally important for all stakeholders like creditors, donors and low-income borrowers.

Thus, Nepal should immediately initiate an in-depth homework keeping in mind export potentiality, remittance-led current account and conflict-prone tourism on the one hand, and also the pros and cons of implications of being a member of HIPC on the other. Since the HIPC programme’s target is to help achieve the Millennium Development Goals (MDGs), and so far Nepal is also committed to achieving the MDGs through implementation of PRSP — a medium-term framework — Nepal’s resource need assessment shows that the financial support from the donors has to be doubled from the present level. This clearly stresses the need for an immediate decision to explore external resources either by joining HIPC initiative or ignoring it to maintain the debt sustainability.

Dr Paudel is former advisor, NRB