Nepal may ask donors to write off part of debt

KATHMANDU:

The government is likely to ask development partners to write off a part of its external debt to generate additional resources to finance recovery and reconstruction works in the aftermath of the devastating earthquake of April 25.

“This is one of the issues that we’d like to discuss during the international donors’ meeting scheduled for the end of June,” Finance Minister Ram Sharan Mahat told The Himalayan Times today, without disclosing the debt amount that the government seeks to be cancelled.

Nepal’s total external debt hovers around Rs 337 billion. If part of this debt is written off, one school of thought says, Nepal will need to spend less on debt servicing; and the amount that the country saves could be channelled towards recovery and reconstruction works.

The government released around Rs 16.37 billion to multilateral lending institutions, like the World Bank (WB) and Asian Development Bank (ADB), and another Rs 3.99 billion to bilateral donors, like Japan, for principal repayment in the last fiscal year. In the same year, the government also released around Rs 3.49 billion for interest payment on loans that it acquired from development partners.

This fiscal year, the government intends to spend Rs 25.13 billion on principal repayment and Rs 4.85 billion on interest payment to service external debt. The amount being spent on debt servicing this fiscal is 4.85 per cent of the annual budget.

If development partners agree to launch debt relief package for Nepal, the country’s debt servicing cost would definitely go down.

“But would the money released through debt relief package be sufficient to execute recovery and reconstruction works?” questioned former finance secretary Rameshwor Khanal.

The earthquake is estimated to have damaged properties worth over Rs 500 billion. To finance reconstruction, the government has already announced to establish 200-billion-rupee National Reconstruction Fund, in which the government would

contribute Rs 20 billion.

“Since the funding needs are huge, the government must seek fresh assistance from development partners rather than lobby for debt relief,” said Khanal.

Many, like Khanal, do not want the country to push for debt relief fearing it might lead to moral hazard.

“When you know funds do not have to be paid back, people tend to become less accountable. This raises chances of inefficient use of money,” said Khanal. “Also, we may lose trust of foreign financial institutions if we start seeking such packages.”

Already, development partners like the WB and the ADB have stopped extending grant assistance to Nepal citing there is ‘low risk of debt distress’ here. This means Nepal’s fiscal position is quite strong and debt sustainability level is also high.

This is one of the reasons why many have started saying the country should make use of its fiscal space — because debt-GDP ratio here stands at less than 30 per cent — instead of lobbying for debt relief. Said ADB Country Director Kenichi Yokoyama: “We will consider on debt relief package based on needs of Nepal and how the government intends to finance (recovery and reconstruction).”

Source: THT