Nepali Times
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Falling exports and plummeting investment are eating into Nepal's reserves. But an even bigger crisis is looming: a lot of the interest and principle payments of our foreign loans are nearing their due.

Foreign debt now stands at nearly Rs 230 billion. Servicing it is already eating up the biggest chunk of Nepal's budget and amounts to 70 percent of our GDP.

Worse, the government doesn't have a mechanism to calculate exactly how much we owe to whom and how to schedule those payments. In most countries, this is done with sophisticated computer software. Here we depend on the good faith of our donors. When they ask us to pay, we pay.

As more and more of Nepal's past loans mature, its servicing is biting off an ever larger chunk of our foreign reserves. The Financial Comptroller General Office admits the highest share of the government expenditure went to debt repayment in the last three years.

Last year, approximately 20 percent of the total budget expenditure was spent on servicing domestic and foreign loans. The percentage of regular expenditure is almost 30 percent.

The grace period of Nepal's major longterm loans have now ended, increasing the debt burden. Between 2000 and 2002, debt servicing increased by nearly 10 percent, depleting the country's foreign exchange reserves. "Apart from debt servicing, foreign loans have more than doubled since the 1990s," says economist Bishwambher Pyakural.

The alarm bells should be clanging, but in the corridors of the Financial Comptroller General's Office it seems to be business as usual. Officialdom can't even calculate the amortisation on loans. "We don't yet have a mechanism to calculate and tally what the donors claim as the principle and the interest to be paid," one official admitted sheepishly. "We have been servicing the debt purely on the good faith of the donors. They send us the bill and we simply pay them."

With such blind faith, the comptroller's office has ended up paying interest of even those loans whose principles were paid long ago. "It has happened many times in the past," one Finance Ministry official said.

The Asian Development Bank is trying to equip the government agencies to deal with debt servicing through the Strengthening Institutional Capacity for Effective Public Debt Management Project. It has introduced the Commonwealth Secretariat Debt Recording Management System, a software that helps update debt repayment schedules. The trouble is, no one has been trained to work this software.

"There seems to be some problem about training the staff at FCGO," Finance Ministry Joint Secretary Krishna Gyawali told us. "We are aware that our debt management is not satisfactory."

Paperwork on loans received since the 1950s are swathed in dusty cloth and stacked on top of the steel cabinets where insects have been feasting on them for decades. The communication gap between the Finance Ministry and the comptroller's office doesn't help calculate amortisation since donor commitment, the actual disbursement, the interest rate and the negotiated exchange rate all need to be considered.

Yet, Nepali officials exude pride in the fact that Nepal has never defaulted on a foreign loan. "We have paid on the dot every time in the last 50 years," said one official proudly. The ADB project in a recent study showed Nepal's loans are highly concessional and the real rate of interest is less than the economic growth rate. "That is why such loans are deemed to be sustainable," says Bhuvan Bajracharya, team leader of the project at the Finance Ministry.

Luckily, the devaluation of the US dollar has already saved the country some Rs 700 million in repayment of dollar denominated loans in the current fiscal year. The money has been used to offset part of the Rs 77 billion internal debt, officials said.

The IMF's Nepal resident representative, Sukhwinder Singh, says Nepal's debt service ratio is still not so bad. "Considering the net present value, Nepal's foreign loan component comes down to 22 percent of the GDP and the loan repayment ratio to the GDP is 3.6 percent which is quite normal by international standards," he told us.

But some economists say Nepal can't afford to service its loan burden and should seek debt relief from donors and join the group of Heavily Indebted Poor Countries (HIPIC) to get the debt relief. "We should try to get our loans written off," says expert Devendra Raj Pandey. "Especially because we know these are loans given to past authoritarian regimes and are now being paid by ordinary Nepalis."

But Finance Ministry officials say joining the HIPIC club would be a shame on Nepal. "We have never been a defaulter, so why should we be called HIPIC?" they ask. "We will lose all our hard-earned international credibility."

(11 JAN 2013 - 17 JAN 2013)