Economic Situation and Management of External Debt in Nepal

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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

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Contents

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

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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.

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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.

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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.

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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. 

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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

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

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2.3 Trends of budgetary operations (per cent of
GDP)

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2.4 Balance of Payments (US Million)

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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).

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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).

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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.

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

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

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2.12 - NepalExternal Debt Indicators ()

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2.13-Nepal- External Debt Indicators ()

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2.14-Nepal-Currency Composition of External
Debt ()

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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

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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.

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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.

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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.

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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.

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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.

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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.
•  

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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.

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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.

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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.

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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.

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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.

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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

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• Thank you
• Have a Good Day