NEPAL

Geography:
ƒ Landlocked between India (East, West & South) and China in the North. Highest
Peak Mt.Everest.
Area: 1,47,181 Sq.Km.
Population: 2,32,00,000
Political Situation:
ƒ Process of drafting new Constitution by Constituent Assembly & peace process.
Development priority on:
ƒ (i) relief, reconstruction and reintegration, (ii) achieve employment-oriented, pro-
poor and broad-based economic growth (iii) promote good-governance and
effective service delivery (iv) increase investment in physical infrastructures (v)
give emphasis on social development (vI) adopt an inclusive development
process and carry out targeted programs
Economy:
ƒ GDP: 960011 Million Nrs.(2008/9)
ƒ GDP Growth Rate: 4.7%(2008/9) & 5.5% Projection for F.Y.2009/10
ƒ Total Expenditure: 213 billion 578.3 million Nrs. In F.Y.2008/9 and 285.930 billion
projection (2009/10)
ƒ Revenue: 143 billion in 2008/9 & 176 billion projection in 2009/10
FINANCIAL COMPTROLLER GENERAL OFFICE
Debt Sustainability Analysis (DSA)
(An Experience of Nepal)

Presentation By:
Rajendra Bahadur Bajracharya
Deputy Financial Comptroller General
Debt Management Section, FCGO
Ministry of Finance
Government of Nepal
 Debt Sustainability Analysis (DSA)
Debt Sustainability Concepts

ƒ It is the ability and capacity of managing debt burden in present and

future in term of solvency (ability to pay) & liquidity (adequacy of assets
to pay).
ƒ Debt sustainability refer to making a country’s ability to service its
borrowing, foreign & domestic, public & publicly guaranteed, private non-
guaranteed, including both short and long-term debt, without
compromising its long-term development goals & objectives.
ƒ Failure to meet debt obligation could lead to a serious economic crisis.
So, managing public debt within a sustainable level is an equally
important policy issue.
ƒ IMF defines debt sustainability as a situation in which a borrower is
expected to continue servicing its debts without an unduly large future
correction to the balance of income and expenditure given the cost of
financing in the market.
 What DSA Delivers?
ƒ Identifying countries’ credit worthiness.
ƒ Identifying countries in actual or potential debt
distress situations leading to determining grant
eligibility.
ƒ Deliver status of a country's potentially eligibility for
debt relief under HIPC Initiative or debt relief by
other donors.
ƒ Assessment of a country's debt sustainability with
country economic policies and institutional capability,
and vulnerability to shocks.
ƒ Assessment of different debt ratios and comparison
with thresholds indicators.
ƒ Judging liquidity and solvency problems of a country
using its debt indicators
 DSA exercises in Nepal and its
outcomes/results

ƒ Nepal has been implementing the debt

sustainability analysis recommended by the
IMF and other international agencies and is
considering the introduction of a medium-term
fiscal management plan together with the
regular publication of fiscal strategy statement
report.
DSA exercises in Nepal and its
outcomes/results…Cont.

ƒ In Nepal, it is started taking into account the

forecasting of key macroeconomic
components as follows:
1. Budget deficit: it is the first component of the basic debt creating flow.
Required expenditure or excessive expenditure and unpredicted revenue
shortfall inevitably requires more borrowings, and thus, serve to increase
the debt-to-GDP ratio
DSA exercises in Nepal and its
outcomes/results…Cont.

2. Cost of Financing: The cost of financing in terms of real interest rate,

economic growth, and exchange rate are assessed for DSA. A higher
interest rate raises debt servicing and consequently the debt-to-GDP ratio.
Both domestic & international financial market conditions (including
contagion effects) affect the interest rate, thereby raising the debt burden. A
higher economic growth rate, on the other hand, decreases the debt-to-GDP
ratio. When the economic growth rate is high, the economy has sufficient
income to meet the interest obligations on the debt and pay back the
principal. The exchange rate affects debt-to-GDP ratio because the external
debt is denominated or reported in foreign currency. Sharp changes in the
exchange rate can increase the net liability position of the borrower to an
unsustainable level
DSA exercises in Nepal and its
outcomes/results…Cont.

3. Other Debt- creating Flows: Contingent Liability and Privatization

Revenues: A particularly important source of uncertainty
surrounding projections of debt and debt service is associated
with contingent claims such as those associated with either
explicit or implicit guarantees of debt or bank deposits. Many
contingent claims by their nature, pass unnoticed under normal
conditions & are difficult to estimate, but they are more likely to
emerge in time of crisis. Indeed, such claims have been a key
feature in recent crisis in emerging markets, in which defaults in
one sector have spilled over to others.
• Till now the capacity of DSA has been a major
issue which is to be developed in Nepal's Debt
Management Unit.
DSA exercises in Nepal and its
outcomes/results…Cont.
• When the public debt management issue was just
started and not well organized in Nepal and clear
responsibilities and accountability of concerned
institutions were not well assigned in the existing
institutional and legal framework at that time the
Asian Development Bank has provided a technical
assistance for "Strengthening Institutional Capacity
for Effective Public Debt Management (ADB TA
4017-Nep)" in Nepal.
• For improving debt recording and management, the
computer software application developed by
Commonwealth Secretariat (COMSEC) -
Commonwealth Secretariat-Debt Recording and
Management System (CS-DRMS) has been updated
with training.
DSA exercises in Nepal and its
outcomes/results……..Cont.
• It’s report has recommended for the
comprehensive changes in the institutional
arrangements and legal reforms to support the
proposed institutional changes.
• A policy document on public debt management
and other contingent liabilities has been prepared,
and as a part of analytical capacity building,
methodology for macroeconomic analysis and
debt sustainability analysis has been developed.
DSA exercises in Nepal and its
outcomes/results……..Cont.

ƒ It has also prepared analytical tools for

DSA as follows:
1. Macro econometric model of Nepal, Feb. 2004
2. DSA of Nepal's public debt, Feb.2004
3. Report on the workshop of macroeconomic model of the
Nepal economy and DSA, Feb. 2004.
• Public debt dynamics are assessed using
the Low-Income Country Debt
Sustainability Analysis (LIC-DSA)
Framework, which was jointly prepared by
the World Bank and the IMF.
As per the debt sustainability analysis conducted by IMF jointly with
the World Bank, Nepal's external debt dynamics are subjected to a
high risk. DSA of 2008 shows Nepal's external debt burden assessed as
follows:

Indicators Indicative 2004/5 2005/6 2006/7 Projected Average

Thresholds 2007/8-2027/28
(Medium)
NPV of debt in
percent of:

Exports 150 172 163 148 116

GDP 40 28 25 22 15

Revenue 250 213 211 163 114

Debt Service in
percent of: :
Exports 20 9 9 11 7

Revenue 30 12 12 12 6
DSA of 2008 report shows Nepal's external debt burden
assessed as follows: (2004/5)

300
250 Threshold
200 2004/5
150
100
50
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DSA of 2008 report shows Nepal's external debt
burden assessed as follows: (2006/7)

300

250

200

150

100

50

0
NPV/Export NPV/GDP NPV/Rev. D.Ser./Exp. D.Ser./Rev.

Threshold 150 40 250 2 30

2006/7 148 22 163 11 12
Line 3

Threshold 2006/7 Line 3

FINANCIAL COMPTROLLER GENERAL OFFICE

 DSA exercises in Nepal and its
outcomes/results……..Cont.
As per the DSA conducted by the IMF jointly with IDA
(report of May, 2008), following major results have
been concluded:
ƒ The initial net present value of debt has improved
compared to the previous DSA (June 2007) due to the
appreciation of the Nepalese rupee and lower than
projected loan disbursements in the interim period.
ƒ In view of the improved debt indicators, Nepal's
external debt dynamics are assessed to be subject to
a moderate risk of debt distress.
ƒ This is a change from the previous DSA, which
classified Nepal as at high risk of debt distress.
ƒ At present the external debt situation of Nepal does
not seem unsustainable.
How the DSA has helped Nepal going
forward?
ƒ Debt-to-GDP,Exports,Revenue, etc. are forecast for
more than 5 years and seek to determine whether the
public debt would be sustainable.
ƒ External debt projection
ƒ Evaluation of critical ratios with multi-years
forecasting.
ƒ Initiation for grant funding, rather than external loans,
from IDA, ADB and other Donors required for the
PRGF and Millennium Development Goals (MDGs)
programs to reduce the risk of debt service problems.
ƒ Reviewing of public debt and fixing of upper limit of
public debt under legal framework has been
established.
 Table showing Debt Situation of Nepal (In Million NRS)
Descriptions 2003/4 2004/5 2005/6 2006/7 2007/8

Total DOD 318911.81 307206.19 328679.28 320688.57 366572.09

External 232778.07 219641.9 233968.61 216629.0 249965.41

Domestic 86133.74 87564.29 94710.67 104059.63 116606.68

Total Repayment 10794.85 13533.32 14264.8 16752.3 16386.9

(Principal)
External 5765.82 5953.19 6987.5 7538.8 7869.4
Domestic 5029.04 7580.13 7277.3 9213.5 8517.5
Total Interest Payment 6543.88 6218.01 6158.7 6164.0 6373.7

External 2141.7 2146.71 2163.9 2055.8 2145.3

Domestic 4402.18 4071.3 3994.8 4108.2 4228.4
Exchange Rate 74.75 70.94 74.69 65.44 69.1

GDP Ratio 67.5 58.07 56.38 47.82 47.68

Per capita debt burden 13400 12143 12750 12147 13577

(Not in Million)

FINANCIAL COMPTROLLER GENERAL OFFICE

Budget Expenditure Position
reflecting initiation for grant
funding, rather than external loans
80000
70000
60000
50000
Total ODA
40000
Grants
30000 Debt
20000
10000
0
2006/7 2008/9

FINANCIAL COMPTROLLER GENERAL OFFICE

How the DSA has helped Nepal going
forward?...cont.
ƒ Developed concept of establishing a separate Debt
Management Office (DMO) looking after overall public
debt management issues.
ƒ Capacity development of debt recording and reporting.
"A Public Financial Management (PFM) Strategy for
Nepal's Public Financial Management Reform
Program (PFMRP), Phase I (2009/10- 2011/12)" has
been approved by PEFA Steering Committee, headed
by Secretary of MOF, which has incorporated as a (No.
3) program outcomes of 'improved budget execution'
with activity 'build institution capacity and operational
CS-DRMS software to carry out debt sustainability
analysis (DSA)' to achieve the output of improved debt
management in Nepal.
How the DSA has helped Nepal
going forward?...cont.

• Nepal's Three Year Interim Plan has

established its public debt management
objective recognizing a proper balance
between government revenue and expenditure
making possible through maximizing the
utilization of both, external and internal debt. It
has also recognized that the objective of public
debt management is to ensure sustainability,
efficiency and effectiveness in order to meet
the debt liability.
Lesson Learned
• DSA is an alerting tool for our country to
understand our debt situation which
enable us to maintain our debt in a
manageable level.
• It is lesson learned that study to be
conducted on use of total public debt for
DSAs and consequently of government
revenue in determining debt indicators
and compare with their threshold values.
What has changed?
ƒ Improved in macroeconomic stability in
Nepal.
ƒ Implementation of key structural reform
measures.
ƒ Improvements in public expenditure
management and implementation of
different action plans to achieve
improvement on PEFA (public
expenditure and financial accountability)
indicators.
What has changed?...cont.
ƒ Increased spending in priority areas consistent with
PRSP with reducing headcount poverty level.
ƒ Projection of domestic borrowing in annual budget of
Government of Nepal within the permissible limits
required to maintain macroeconomic balance and
stability.
ƒ Rapid mobilization of internal revenue through
broadening revenue base for speedy development
activities.
ƒ Consultations and discussions with experts,
economists, ex-chief secretaries, ex-secretaries,
politicians, various parties’ leaders on Nepal’s debt
sustainability and its remedies.
What has changed?...cont.
ƒ Political commitment in governance.
ƒ Priority on raising domestic borrowing for
deficit financing rather than external borrowing.
ƒ Special emphasis and priority given to increase
the grants proportion in total foreign aid and in
the situation of lacking such grant assistance
the policy of mobilizing concessionary loans to
the development of infrastructure and to high
yield productive sectors and human
development on a priority basis.
What can be done differently?
ƒ Under DSA, domestic debt can be assessed and
compare with domestic investment in terms of share
and loan so that a country like Nepal could give high
emphasis on formulating and implementing its
investment policies on competitive and productive
basis which will ultimately contribute in revenue
generation and economic growth rate.
ƒ Under DSA, assessment of per capita income could be
compare with public debt ratios for transparency.
ƒ Under DSA, debt ratios could be assessed with
International Investment Position (IIP).
Thank You

FINANCIAL COMPTROLLER GENERAL OFFICE