Government Preparing Hedging Fund to Reduce Foreign Exchange Risk on Public Debt

Kathmandu — The government is preparing to introduce a hedging fund through the upcoming fiscal year 2083/84 budget in an effort to reduce the growing financial burden created by fluctuations in foreign exchange rates on Nepal’s external debt. The move comes as concerns rise over the rapid increase in public debt liabilities caused not only by new borrowing but also by the continuous weakening of the Nepali currency against major global currencies.

Officials at the Ministry of Finance say the proposed mechanism is being prioritized by Finance Minister Swarnim Waglé as Nepal faces increasing exposure to currency-related debt risks. In recent years, Nepal has significantly expanded foreign borrowing to finance infrastructure development and public expenditure. However, as the Nepali rupee depreciates against currencies such as the US dollar, euro, Japanese yen and Chinese yuan, the repayment burden measured in local currency has continued to rise sharply.

Government data show that in the current fiscal year alone, currency depreciation has added an additional burden of nearly Rs 167 billion to Nepal’s public debt obligations. As a result, the country’s total public debt has crossed more than 45 percent of the national economy’s size, intensifying concerns about long-term fiscal sustainability.

Economists say the problem lies in the structural mismatch between Nepal’s borrowing and revenue systems. While the government borrows heavily in foreign currencies from institutions such as the World Bank, Asian Development Bank and International Monetary Fund, most government revenues are collected in Nepali rupees. As the domestic currency weakens, the cost of repaying foreign loans automatically increases even without additional borrowing.

Officials explain the situation through a simple example. If Nepal borrows one billion US dollars when the exchange rate stands at Rs 130 per dollar, the debt initially equals Rs 130 billion. But if the exchange rate later rises to Rs 160 per dollar by the repayment period, the same loan suddenly costs Rs 160 billion in local currency terms. In such a case, the country faces an additional Rs 30 billion burden solely because of exchange rate fluctuations.

To manage this risk, the government is preparing to introduce a hedging system — a financial arrangement designed to protect borrowers from future currency volatility. Under such arrangements, repayment rates can be fixed in advance, allowing governments to reduce uncertainty even if foreign currencies strengthen significantly in the future.

The idea of introducing hedging in Nepal’s public debt management has existed for years, but it is now receiving stronger attention due to rising exchange-rate pressure. The Office of the Auditor General has also recommended that the government establish mechanisms to reduce foreign exchange risks, warning that currency fluctuations are placing growing pressure on debt management.