Nepal's Growing Debate on Public Debt: A Necessity or a Risk?

The issue of public debt has become a focal point of discussion in Nepal. While some argue that external borrowing is essential for economic growth, others caution that debt could become a financial trap for a developing nation like Nepal, drawing parallels to Sri Lanka’s economic crisis.

Nepal's financial constraints necessitate borrowing. The budget for the fiscal year 2081/82 stands at NPR 1.86 trillion, with only NPR 352 billion allocated for capital expenditures, reflecting limited financial resources. This allocation is insufficient to meet the growing demands of the population, hindering developmental activities.

Domestic revenue generation remains inadequate, with an estimated NPR 1.26 trillion expected from internal sources. However, the struggling private sector and weakened industries make achieving this target unlikely. The fiscal gap is further exacerbated by sluggish revenue collection and the absence of significant foreign grants.

To address the NPR 547 billion budget deficit, the government plans to secure NPR 330 billion from domestic borrowing and NPR 217 billion from external sources. While Nepal's public debt, currently at NPR 2.518 trillion (44% of GDP), is within international norms, efficient utilization of borrowed funds remains a challenge.

Experts emphasize that debt itself is not detrimental if invested prudently in productive sectors. Lessons from developed nations like Japan and India, which have significantly higher debt-to-GDP ratios, show that borrowing can drive development. For Nepal, concessional loans with low interest rates, ranging from 0.5% to 2.5%, offer an opportunity to boost infrastructure and economic growth.

Given the limited internal revenue and stagnant grant inflows, borrowing is unavoidable. Proper debt management and strategic investment are crucial to ensuring that loans contribute meaningfully to Nepal's economic development.