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1. External Debt and Risk Management Krishna Bahadur Manandhar Deputy Governor

2. External Debt and Risk Management • The first question that arises in the discussion of risk management is: • Why bother? • What is it about risk that makes us wish to understand it better? • The answer depends on the nature of the institution, but probably falls into one of the following categories:

3. External Debt and Risk Management • To control the magnitude of potential losses; • To measure risk-adjusted performance; and • Since it is difficult to manage things that cannot be defined and measured, an objective, consistent definition of risk can help an organization form a common fame of reference and create a risk management process that fits its objectives.

4. External Debt and Risk Management • Risks generally are categorised as follows: • Market Risk: adverse movements in the price of a financial asset. • Credit Risk: failure of a counter party to meet all financial obligations. • Liquidity Risk: availability of a reasonable market for the securities held in a portfolio.

5. External Debt and Risk Management • Legal Risk: action by a court or regulatory body to invalidate a financial contract. • Operations Risk: deficient procedures, human error, system failure, or fraud.

6. External Debt and Risk Management • Policy makers always need to focus on the ability to service its debts. • For this purpose, all debts i.e. external and domestic, public and private, short-term and long term will have to be taken into consideration. • The focus of the present presentation is only on external debt. • in the external debt also, the focus is on the public sector.

7. External Debt and Risk Management • This is mainly due to the fact that private sector borrowing is not significant. • This in turn is due to the foreign exchange law, which the country is following. • The principle objective of a sound debt management policy obviously is to maintain debt sustainability. • The issue of debt sustainability becomes more important and critical, once we look into the issue from the need to liberalise the economy by relaxing exchange control measures.

8. External Debt and Risk Management • Traditionally, the issue of debt sustainability has been analysed from these angles: • Debt and current account balance • Debt to output ratio • Debt to export ratio • Debt to fiscal deficit

9. External Debt and Risk Management • While these approaches can provide an indication of what level of borrowing is sustainable, it is difficult to assess whether any one ratio is thigh and thus should be reduced. • Conceptually, the issue of debt sustainability and debt service difficulties are analysed from – • liqudiity difficulties and • Insolvency • These is no difficulty in following this methodology in the case of corporate debt.

10. External Debt and Risk Management • But in the case of sovereign borrowing this simply will not work mainly because of the fact that sovereign countries do not become bankrupt and disappear. • Due to these factors, sovereign debt sustainability needs to be looked into from different angles.

11. Summary of Balance of Payment Presentation

12. Summary of Balance of Payment Presentation

13. Summary of Balance of Payment Presentation

14. Summary of Balance of Payment Presentation

15. Summary of Balance of Payment Presentation

16. Summary of Balance of Payment Presentation

17. US Dollar Exchange Rate

18. US Dollar Exchange Rate

19. US Dollar Exchange Rate

20. Thank You !