The preliminary figures prepared by the Financial Comptroller General’s Office clearly show that Nepal is in danger of entering into a ‘debt trapped economy’ soon. As of July 2006, Nepal’s outstanding foreign debt stands at more than Rs. 234 billion that comes to over 40 per cent of the country’s GDP. The disappointing fact remains that while Nepal’s foreign loans are increasing constantly, its development expenditure is shrinking at a notably rapid rate. This goes to prove that foreign loans are being ‘siphoned off’ to non-development or unproductive sectors due to the weak service delivery mechanism of the conflict-hit economy.

As high debt servicing rate renders foreign funds meaningless, Nepal’s growing debt servicing rate is bound to hamper the development sector. As per the IMF norms, debt servicing should not exceed 10 per cent of the government’s expenditure. But the existing 8 per cent debt servicing rate pushes Nepal towards a debt trap. The donors are right in demanding a rethink over the atrocious service delivery system. The establishment is also expected to hone its negotiation skills and take a tougher but logical stance on those donor conditionalities that are incompatible to Nepal’s economic realities. With the begging bowl syndrome each Nepali carries on his head a debt of Rs. 13,000. Remedial measures coupled with a strong political resolve as regards the optimum utilisation of foreign funds are some of the ways to prevent Nepal from falling into the Highly Indebted Poor Countries’ club, a frightening prospect by any reckoning.