Foreign Debt Trap

  2 min 35 sec to read
Foreign Debt Trap

Fears of Nepal falling steadily into the foreign debt trap are growing. Government statistics also support these concerns, calling for immediate steps from the government to analyse all the pros and cons with broad consultation.

According to data from the Economic Survey 2023, Nepal's outstanding foreign debt was just over Rs 819 billion as of mid-July 2019. It increased to Rs 985 billion by mid-March 2022 and nearly Rs 1,070 billion by mid-March 2023. The expenditure on servicing such debt has also been rapidly rising. In the fiscal year ending in mid-July 2019, Nepal paid out Rs 23.56 billion as principal and Rs 5.23 billion as interest on its foreign debt.

Such payments increased to Rs 29.41 billion and Rs 7.54 billion, respectively, in the fiscal year ending in mid-July 2022. Taking foreign loans is not inherently bad, as long as the loan proceeds are used to enhance production capacity in the country and the capacity to service the debt obligations grows faster than the pace of growth in such obligations. This capacity comes from government revenue growth, which, in turn, relies on the growth in economic activities. Unfortunately, the case in Nepal is not so hopeful.

The country's economy is still in a recessionary phase. This means the revenue collection is not likely to go up in the near future. This means the government's focus should be on boosting the economy. Mobilisation of foreign assistance, including loans, thus becomes essential to meet the resource gap. When compared with other economies of the world, Nepal still has a significant scope to mobilise foreign loans, and as it has not defaulted on foreign loans, lenders are willing to provide further loans. 

However, the way Nepal is taking foreign loans raises concerns that the country is steadily falling into the foreign debt trap, similar to Sri Lanka and Pakistan. Foreign loan receipts are increasingly being used to repay old loan obligations. That will lead to defaults if this trend continues.

Another aspect worth noting, and more dangerous, is that the foreign loans are being used more for social and political improvements rather than creating and enhancing the capacity to produce and market goods and services. Investment in social and political areas is vital, and the country should invest in those areas as well. But neglecting areas, which can bring about tangible improvements in sectors that help increase production and marketing activities thereby boosting GDP and exports, and generating capacities to repay the loans, can be detrimental to the economy.

Even physical infrastructure created with foreign loans, which should increase production and marketing, have become burdens rather than assets to the state. The international airports in Pokhara and Bhairahawa are glaring examples of this phenomenon.

Given this backdrop, it is crucial for the government to take appropriate steps by analysing the current situation, identifying potential problems, finding the best solutions, and anticipating challenges that may arise during implementation of those solutions. The country's think tanks and business chambers must also play a leading role in urging the government to take decisive action. 

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