Governments around the world have been coming up with fiscal packages that will increase their level of indebtedness. The question “How is it going to be paid back?” has become redundant at this point and for good reasons it seems. It also seems inevitable that Nepal will likely follow in the footsteps of other nations in a desperate attempt to save the economy that has been massively hit by the ongoing pandemic. Increased borrowing from multilateral agencies seems likely in the days to come.
While most economies around the world already had stark and worrisome debt levels, Nepal’s debt level in subsequent Debt Sustainability analysis by IMF has remained low and projected debt levels have remained around the realm of Low risk. Perhaps it is the only silver lining in having less than required infrastructure spending. Although this may seem like we are in a unique situation whereby our low level of indebtedness allows us to borrow more from international institutions in order to provide for the much needed fiscal stimulus, certain things need to be considered first.
Low distress levels do not necessarily meant that Nepal is not vulnerable to shocks. Unlike the 2007/2008 crisis where our economy was cushioned due to our relatively low interactions with the international financial market, the recent crisis led by the pandemic has affected all economies. Moreover, it is the nature of the crisis that essentially poses the greatest risk. While first and foremost it is supply shock, it has actually spiraled into a demand shock thereby making it harder to come-up with policy measures because there are no historical examples to draw from. Due consideration to financial sector vulnerabilities as a result of waning remittances must also be given. As we have lost substantial amount of remittance, we have opened ourselves up to financial sector vulnerabilities that might put us at greater risk and subsequently affect our debt sustainability risk.
Equally important remains the fact that opportunistic behavior even in times of the pandemic has persisted which raises serious questions as to whether the stimulus (financed by debt) when announced reaches the right hands. More importantly the trend in under spending of the budget and spending during the end of the fiscal year is a worrisome phenomenon that might find its way in to the debt driven stimulus.
Public debt is itself not the wrong way to finance something. Its effectiveness will always be depended upon how well it is spent and how transparent the procedure of spending it is. It will if the GoN of Nepal decides to provide large stimulus be financed through taxation in the future. If spent properly the burden of taxation might not be as harsh as many might think. It would also be better to mobilize the resources that are readily available at the moment before moving forward with any external debt i.e. identifying zombie projects in the budget and freeing up resources, mobilizing the social security fund, mobilizing the Budi-Gandaki fund, using the Prime-Minister’s unemployment program for better and coordinated relief etc.