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Economic Situation and Management of External Debt in Nepal

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Title: Economic Situation and Management of External Debt in Nepal


1
Economic Situation and Management of External
Debt in Nepal
  • Presented by
  • Professor Tarun Das
  • Institute for Integrated Learning in management,
    New Delhi, India
  • Formerly, Economic Adviser, MOF and
  • Planning Commission, Govt.of India

2
Contents
  • Economic Background of Nepal
  • Current Economic and external Debt Situation
  • Economic Outlook and Risks
  • Major Observations and Conclusions

3
1.1 Economic Background-1
  • Any economic prospect of Nepal need to be
    considered in the background that Nepal lies in a
    specific geo-political situation between the two
    economic giants of the world India and China.
  • Nepal is a Least Developed Land Locked Country
    (LLDC) and one of the poorest country, but it has
    direct access to the sea of humanity in the
    either side of its border that constitutes the
    largest market in the world.

4
1.2 Economic Background-2
  • Nepal is committed to the so-called LPG (viz.
    liberalization, privatisation and globalisation).
  • Foreign aid accounted for more than half of the
    development budget.
  • Govt priorities focused on the integrated
    develop-ment of agriculture, industry, transport
    telecom.
  • Agriculture is principal economic activity,
    employing 80 of the population and providing 37
    of GDP.
  • Nepal made significant progress in exploiting
    basic resources such as tourism and
    hydroelectricity.
  • Progress in Indo-Nepal Economic co-operation.

5
1.3 Economic Background-3
  • Progress in Regional Economic co-operation.
  • Nepal became full-fledged member of WTO on 23
    April 2004.
  • Similarly Nepal is now a member of two regional
    trading arrangements South Asian Free Trade
    Agreement (SAFTA) and BIMST-EC.
  • The signing of SAFTA framework treaty in 6
    January 2004 and BIMST-EC free trade area on 8
    February, 2004 has been a landmark in the
    economic history of Nepal as these would help to
    integrate the Nepalese trade and economy at the
    regional and trans-regional level.

6
1.4 Economic Background-4
  • Nepal is currently an observer to the Bangkok
    Agreement. This is a regional preferential
    trading arrangement encompassing South Asia,
    South East Asia and Far East, with the membership
    of six countries viz. China, India, Sri Lanka,
    Bangladesh, Lao PDR, and South Korea, with
    collective population of around 2.5 billion.
  • Currently, more than 1500 products have been
    bought under the preferential trading
    arrangement. This agreement is based on positive
    list approach following the product-to-product
    negotiations.
  • These Free Trade Agreements (FTAs) are supposed
    to enter into progressive stages of free trade
    including a common currency in South Asian called
    rup. 

7
2.1 Economic Growth and Financial Sector
  • Nepals economic growth has been adversely
    affected by the recent political conflicts.
  • Real GDP growth rate declined from 5 per annum
    in 1990s to only 2 during 2000-2005.
  • Inflation remained low except 6.6 in 2004-05.
  • International reserves were adequate.
  • Despite significant progress in management and
    credit evaluation practices, the share of
    non-performing assets in NBL and RBB remained
    high.
  • Broad money growth slowed from 12¾ percent in
    2003/04 to 8 percent in 2004/05

8
2.2 Trends of growth, money supply and inflation
(per cent)

9
2.3 Trends of budgetary operations (per cent of
GDP)

10
2.4 Balance of Payments (US Million)

11
2.5 Fiscal Situation
  • Overall fiscal deficit of Nepal remained
    manageable in 2004/05, despite revenue shortfalls
    (due to weaker economic growth, continued excise
    leakages and delayed excise duty refunds from
    India) and expenditure over-runs due to higher
    civil service wages and allowances, and
    security-related expenditures.
  • Overall deficit at 1 of GDP was significantly
    lower than budget target at 2½ percent of GDP.
  • External loans fell short of the budget target,
    as assistance from the World Bank, ADB and donors
    dwindled. The domestically financed deficit was
    also lower than budgeted (at ½ percent of GDP).

12
2.6 External Trade
  • Nepal's major exports are carpets and garments
    accounting for 70 of total goods exports. Trade
    with India rose rapidly after conclusion of the
    1996 bilateral trade treaty, and now accounts for
    50 of all exports and 47 of all imports.
  • Nepal's principal export destinations include
    India (50), United States (22), Germany (8),
    United Kingdom (3), and France (2).
  • Principal imports of Nepal consist of gold,
    machinery, equipment, POL and fertilizers.
  • Major sources of imports in 2004 were India
    (47), China (10), UAE (9), Singapore (4) and
    Saudi Arabia (4).

13
2.7 Current Account Balance
  • The current account and overall balance of
    payments remained in surplus.
  • Despite disruptions related to the insurgency and
    the elimination of textile quotas, total exports
    rose by 10 in 2004/05, mainly due to rise in
    exports to India by 30 percent.
  • Import growth was stagnant due to weak economic
    activity. A 35 increase in oil imports was
    offset by a 6 decline in non-oil imports.
  • Remittances continued to be buoyant, and the
    current account surplus increased from 1 of GDP
    in 2003/04 to 3 of GDP in 2004/05.
  • International reserves increased to
    US1.5 billion (7¾ months of imports) at end
    2004/05.

14
2.8 India, Nepal, Bangladesh and Vietnam are
categorized as Less Indebted Low Income Countries

15
2.9 External Debt Indicators of South Asian
countries in 2003
16
2.10 Nepal- External Debt Indicators ( Million)
17
2.11 Nepal- External Debt Indicators ( Million)

18
2.12 - NepalExternal Debt Indicators ()

19
2.13-Nepal- External Debt Indicators ()

20
2.14-Nepal-Currency Composition of External
Debt ()

21
3.1 Economic Outlook and Risks
  • Nepal's growth prospects are contingent on
    political stability and improved security.
  • Continuation of structural reforms along with
    political stability and better security
    conditions can lead to a distinct improvement in
    agricultural, manufacturing and service
    production, tourism earnings and government
    activities.
  • This will help Nepal to achieve growth rates
    around 5-5½ percent in the near and medium term.
  • With the rupee peg, inflation is expected to
    broadly follow price developments in India, which
    are moderate and under control

22
3.2 External Sector Outlook
  • 1. Export growth is projected to average
    8 percent with diversification of Nepalese
    exports beyond traditional sectors.
  • 2. Both oil and non-oil imports are projected to
    pick up with improved economic activity.
  • 3. Consequently, the BOP surplus is projected to
    decline in the near term.
  • 4.Trade deficits could be covered by remittances
    and aid.
  • 5. International reserves are projected to remain
    around 6-7 months of imports of goods and
    services.

23
4.1 Conclusions and Recommendations
  • Nepal is presently passing through a critical
    political and economic juncture.
  • Authorities may be complemented for maintaining
    macroeconomic stability and implementing reform
    program under a difficult economic-political
    environment.
  • They are advised to resolve political and
    economic uncertainties and make progress toward
    sustained peace and security, which are essential
    steps for poverty reduction and private sector
    led growth.

24
4.2 Poverty Reduction Strategy
  • Authorities are advised to continue with the
    policies envisaged under the Nepal's Poverty
    Reduction Strategy Paper (PRSP) accepted by the
    Fund-bank.
  • PRSP is an appropriate framework to address key
    constraints on growth, macroeconomic stability,
    and reduction of poverty.
  • This would help mobilize external assistance and
    lay the foundation for possible debt relief under
    the HIPC Initiative and the Multilateral Debt
    Relief Initiative.

25
4.3 Fiscal Policies-1
  • 1. Nepal has made significant progress on
    revenue mobilization, expenditure prioritization,
    social sector spending and containment of budget
    deficit.
  • 2. But, there are concerns that security-related
    expenditure needs remain high, and development
    spending is low relative to budget targets,
    especially in conflict-affected areas.
  • 3. There is a need to increase fiscal
    transparency, improve public expenditure
    management systems and monitoring, contain
    contingent liabilities and address donors
    concerns about the quality of spending.

26
4.4 Fiscal Policies-2
  • 4. Authorities should make all efforts to
    improve tax administration, widen tax base and to
    increase revenue collections.
  • 5. They should also raise spending on
    infrastructure and social sectors to achieve PRSP
    goals.
  • 6. Administrative pricing of petroleum products
    may be replaced by an automatic pricing mechanism
    to improve the financial conditions of the Nepal
    Oil Corporation and to avoid additional burden on
    the budget.

27
4.5 Financial Sector Reforms
  • 1. In the banking sector, efforts should be made
    to recover non-performing assets from the willful
    defaulters in order to improve the balance sheets
    of the NBL and RBB, reduce contingent liabilities
    for the budget and pave the way for their
    privatization.
  • 2. The legal framework for financial sector
    activity can be further improved through
    amendments to the Banking and Financial
    Institutions Ordinance.
  • 3. NRB may be encouraged to enhance financial
    sector supervision, and raise its internal audit
    and accounting standards. Authorities are also
    advised to move forward with implementation of
    strong anti-money laundering and combating the
    financing of terrorism regime.
  •  

28
4.6 Agricultural Reforms
  • Given the importance of agriculture and the
    high level of rural poverty, there is need to
    initiate progressive agrarian reforms such as
  • (a) providing complementary inputs to land
    and
  • (b) improving rural infrastructure to
    promote commercialization and market access for
    agricultural products.

29
4.7 Trade and Exchange Rate Policy
  • 1. The exchange rate peg to the Indian rupee
    remains appropriate, as it enables the economy to
    benefit from close ties with India and helps to
    keep inflation at low levels.
  • The level of the peg should be monitored and
    reviewed in the light of Nepal's growing
    integration with the world economy through its
    membership in the WTO and regional trading
    arrangements.
  • External competitiveness should be enhanced
    through structural reforms and infrastructure
    investments to lower transactions and
    transportation costs.
  • Despite concessional nature of external debt, the
    exchange rate risk is high due to steady
    depreciation of rupee in terms of dollar.

30
4.8 Public Sector Reform
  • 1. The pace of public enterprises and governance
    reforms need to be accelerated to improve their
    efficiency.
  • 2. It is desirable to proceed decisively with
    the liquidation of unviable loss-making
    enterprises and encourage privatisation
    mechanisms such as share sales and management
    contract.
  • 3. The regulatory framework needs to be
    strengthened and labor markets be made more
    flexible to create an enabling environment for
    private sector participation.

31
4.9 External Debt Recording System
  • 1. There is an urgent need to improve external
    debt data recording system for better policy
    formulation and monitoring, and full
    implementation of the IMF Technical Assistance
    recommendations on monitoring and management of
    external debt.
  • Nepal provided inaccurate information related to
    the second disbursement made in November 2004
    under the IMF Poverty Reduction and Growth
    Facility arrangement due to weaknesses in its
    debt recording system. As a result of this
    misreporting, the disbursement was non-complying.
  • Although the arrears have now been cleared, it is
    essential to put in place proper debt recording
    system and to improve capability.

32
4.10 Implications for Public Debt Managers
  • World is a global village
  • Knowledge and ICT are the most valuable assets
  • There are wider choice of resources- domestic/
    foreign, debt/ equity/ portfolio etc.
  • Management of domestic debt and non-debt creating
    financial flows are integral parts of management
    of external debt.
  • Managers have to manage greater Risk- Currency,
    exchange rate, interest rate, commodity prices,
    markets
  • Emphasis on decentralisation, consultation and
    risk sharing.

33
4.11 Need to strengthen Systems for
  • Management information system (MIS)
  • Asset-Liability Management (ALM)
  • Good governance
  • International best practices for financial audit
    and accounting, and management of external and
    internal debt
  • Identification, measurement, monitoring,
    assessment, mitigation, unbundling, sharing and
    management of risk
  • Performance Audit
  • Policy Audit

34
  • Thank you
  • Have a Good Day
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