External debts : Factors Nepal should consider
A group of stakeholders were invited by the Ministry of Finance (MoF) on August 3 to discuss Nepal’s participation in the highly indebted poor countries (HIPC) initiatives. It must be one of the few occasions when general stakeholders were consulted on the nation’s debt management issue.
The MoF presented a position paper containing the findings made available by the World Bank and International Monetary Fund. It indicated that Nepal may qualify for HIPC initiatives on the basis of NPV of external debt to export ratio which exceeds to the level of 150 per cent. All other indicators do not exceed the threshold levels and the paper cited some of the observations made by other studies to indicate that Nepal’s debt situation is not that unsustainable though it should be watched more carefully and seriously.
Many participants indicated that Nepal perhaps does not need to enter into HIPC initiatives as the costs of getting into it in terms of different conditions will far exceed the benefits accrued. Moreover, it is believed that some bilateral donors may not extend concessionary assistance if Nepal gets into HIPC initiatives. Broad indications hint that Nepal may not need to get into these initiatives. However, some participants felt the need for more homework not because conclusions could have been different but because they will give the picture in complete and true perspective with different scenario analyses.
What could be the likely conditions that can attach to HIPC initiatives, level of existing concessionary foreign assistance that can be non-concessionary, what are the reform measures that need to be additionally implemented on top of reform measures being currently implemented, and what will be the debt situation before and after the HIPC initiatives? These are some of the questions needing analytical discussion. Since Nepal has accepted many conditions of loan assistance, it will be worth while to ponder over new conditions.
The MoF must have felt the need for such analysis. However, it is constrained by its limited analytical capacity both in terms of human resources and analytical tools. The existing institutional structure may not allow the kind of analytical work that is required. Likewise, the simple tool of debt recording will not allow the multifaceted analysis for which more powerful recording and management tools should be in operation. For the HIPC initiatives and for any other situation also, the country needs to have a close monitoring and analysis of the debt situation and to evaluate the loan proposals for their terms and conditions, including the repayment scheduling, which might be lumpy in certain periods. Besides, there is a critical need to make sustainability analysis in the macro perspectives.
It is not that the MoF does not have access to these requirements. There is a need to boost existing facilities and give priority to public debt management. By virtue of most of the external loans being concessionary and domestic debt being managed by the NRB, the Ministry has not accorded high priority to it. In the absence of such low priority given by the Ministry, it has not been able to i) evaluate new loan proposals, ii) inform the public and even the key decision-makers about various aspects of debt situation, iii) scheduling and planning the repayment in a more cost-effective manner, iv) evaluate the cost of slow utilisation of loans and delayed disbursement keeping the repayment schedule intact, and v) assess the contingent liabilities. So, without having the framework for effective public debt management, Nepal may not be institutionally prepared for HIPC initiatives. HIPC initiatives mean continuous assessment of the debt situation together with undertaking sustainability analysis.
The MoF is aware of this lacuna. With the support from the Asian Development Bank, it has prepared documents for reforming the legal and institutional framework, and developing analytical tools along with installation of powerful software for debt monitoring and management. It has foreseen the need for more integrated and comprehensive public debt law delineating the functions and jobs of all the concerned institutions. As the Ministry implements reforms, it should be in a more comfortable situation to bring out more analytical documents. Otherwise, there is always the risk of making judgmental remarks without having objective evidences. There was also a concern that getting into HIPC initiatives might jeopardise the country’s credit worthiness. It could be judgmental in so far as even without it Nepal’s credit worthiness is not high and there are many other considerations, for example, the policy stability that will shape the credit worthiness. Moreover, Nepal has very limited external private sector loans. So, HIPC initiatives can promote growth that might enhance the country’s credit worthiness. Hence, the measuring rod should be to what extent it can promote growth, and what risks are involved in materialising the potential growth?
Prof Bajracharya is an economist