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Economic Situation and Management of External Debt in Nepal

Economic Situation and Management of External Debt in Nepal. Presented by Professor Tarun Das Institute for Integrated Learning in management, New Delhi, India Formerly, Economic Adviser, MOF and Planning Commission, Govt.of India. Contents. Economic Background of Nepal

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Economic Situation and Management of External Debt in Nepal

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  1. Economic Situation and Management of External Debt in Nepal Presented by Professor Tarun Das Institute for Integrated Learning in management, New Delhi, India Formerly, Economic Adviser, MOF and Planning Commission, Govt.of India External Debt in Nepal- Tarun Das

  2. Contents Economic Background of Nepal Current Economic and external Debt Situation Economic Outlook and Risks Major Observations and Conclusions External Debt in Nepal- Tarun Das

  3. 1.1 Economic Background-1 Any economic prospect of Nepal need to be considered in the background that Nepal lies in a specific geo-political situation between the two economic giants of the world – India and China. Nepal is a Least Developed Land Locked Country (LLDC) and one of the poorest country, but it has direct access to the sea of humanity in the either side of its border that constitutes the largest market in the world. External Debt in Nepal- Tarun Das

  4. 1.2 Economic Background-2 Nepal is committed to the so-called LPG (viz. liberalization, privatisation and globalisation). Foreign aid accounted for more than half of the development budget. Govt priorities focused on the integrated develop-ment of agriculture, industry, transport & telecom. Agriculture is principal economic activity, employing 80% of the population and providing 37% of GDP. Nepal made significant progress in exploiting basic resources such as tourism and hydroelectricity. Progress in Indo-Nepal Economic co-operation. External Debt in Nepal- Tarun Das

  5. 1.3 Economic Background-3 Progress in Regional Economic co-operation. Nepal became full-fledged member of WTO on 23 April 2004. Similarly Nepal is now a member of two regional trading arrangements; South Asian Free Trade Agreement (SAFTA) and BIMST-EC. The signing of SAFTA framework treaty in 6 January 2004 and BIMST-EC free trade area on 8 February, 2004 has been a landmark in the economic history of Nepal as these would help to integrate the Nepalese trade and economy at the regional and trans-regional level. External Debt in Nepal- Tarun Das

  6. 1.4 Economic Background-4 Nepal is currently an observer to the Bangkok Agreement. This is a regional preferential trading arrangement encompassing South Asia, South East Asia and Far East, with the membership of six countries viz. China, India, Sri Lanka, Bangladesh, Lao PDR, and South Korea, with collective population of around 2.5 billion. Currently, more than 1500 products have been bought under the preferential trading arrangement. This agreement is based on positive list approach following the product-to-product negotiations. These Free Trade Agreements (FTAs) are supposed to enter into progressive stages of free trade including a common currency in South Asian called “ rup”. External Debt in Nepal- Tarun Das

  7. 2.1 Economic Growth and Financial Sector Nepal’s economic growth has been adversely affected by the recent political conflicts. Real GDP growth rate declined from 5% per annum in 1990s to only 2% during 2000−2005. Inflation remained low except 6.6% in 2004-05. International reserves were adequate. Despite significant progress in management and credit evaluation practices, the share of non-performing assets in NBL and RBB remained high. Broad money growth slowed from 12¾ percent in 2003/04 to 8 percent in 2004/05 External Debt in Nepal- Tarun Das

  8. 2.2 Trends of growth, money supply and inflation(per cent) External Debt in Nepal- Tarun Das

  9. 2.3 Trends of budgetary operations (per cent of GDP) External Debt in Nepal- Tarun Das

  10. 2.4 Balance of Payments (US$ Million) External Debt in Nepal- Tarun Das

  11. 2.5 Fiscal Situation Overall fiscal deficit of Nepal remained manageable in 2004/05, despite revenue shortfalls (due to weaker economic growth, continued excise leakages and delayed excise duty refunds from India) and expenditure over-runs due to higher civil service wages andallowances, and security-related expenditures. Overall deficit at 1% of GDP was significantly lower than budget target at 2½ percent of GDP. External loans fell short of the budget target, as assistance from the World Bank, ADB and donors dwindled. The domestically financed deficit was also lower than budgeted (at ½ percent of GDP). External Debt in Nepal- Tarun Das

  12. 2.6 External Trade Nepal's major exports are carpets and garments accounting for 70% of total goods exports. Trade with India rose rapidly after conclusion of the 1996 bilateral trade treaty, and now accounts for 50% of all exports and 47% of all imports. Nepal's principal export destinations include India (50%), United States (22%), Germany (8%), United Kingdom (3%), and France (2%). Principal imports of Nepal consist of gold, machinery, equipment, POL and fertilizers. Major sources of imports in 2004 were India (47%), China (10%), UAE (9%), Singapore (4%) and Saudi Arabia (4%). External Debt in Nepal- Tarun Das

  13. 2.7 Current Account Balance The current account and overall balance of payments remained in surplus. Despite disruptions related to the insurgency and the elimination of textile quotas, total exports rose by 10% in 2004/05, mainly due to rise in exports to India by 30% percent. Import growth was stagnant due to weak economic activity. A 35%increase in oil imports was offset by a 6% decline in non-oil imports. Remittances continued to be buoyant, and the current account surplus increased from 1% of GDP in 2003/04 to 3% of GDP in 2004/05. International reserves increased to US$1.5 billion (7¾ months of imports) at end 2004/05. External Debt in Nepal- Tarun Das

  14. 2.8 India, Nepal, Bangladesh and Vietnam are categorized as Less Indebted Low Income Countries External Debt in Nepal- Tarun Das

  15. 2.9 External Debt Indicators of South Asian countries in 2003 External Debt in Nepal- Tarun Das

  16. 2.10 Nepal- External Debt Indicators ($ Million) External Debt in Nepal- Tarun Das

  17. 2.11 Nepal- External Debt Indicators ($ Million) External Debt in Nepal- Tarun Das

  18. 2.12 - NepalExternal Debt Indicators (%) External Debt in Nepal- Tarun Das

  19. 2.13-Nepal- External Debt Indicators (%) External Debt in Nepal- Tarun Das

  20. 2.14-Nepal-Currency Composition of External Debt (%) External Debt in Nepal- Tarun Das

  21. 3.1 Economic Outlook and Risks • Nepal's growth prospects are contingent on political stability and improved security. • Continuation of structural reforms along with political stability and better security conditions can lead to a distinct improvement in agricultural, manufacturing and service production, tourism earnings and government activities. • This will help Nepal to achieve growth rates around 5−5½ percent in the near and medium term. • With the rupee peg, inflation is expected to broadly follow price developments in India, which are moderate and under control External Debt in Nepal- Tarun Das

  22. 3.2 External Sector Outlook 1. Export growth is projected to average 8 percent with diversification of Nepalese exports beyond traditional sectors. 2. Both oil and non-oil imports are projected to pick up with improved economic activity. 3. Consequently, the BOP surplus is projected to decline in the near term. 4.Trade deficits could be covered by remittances and aid. 5. International reserves are projected to remain around 6−7 months of imports of goods and services. External Debt in Nepal- Tarun Das

  23. 4.1 Conclusions and Recommendations • Nepal is presently passing through a critical political and economic juncture. • Authorities may be complemented for maintaining macroeconomic stability and implementing reform program under a difficult economic-political environment. • They are advised to resolve political and economic uncertainties and make progress toward sustained peace and security, which are essential steps for poverty reduction and private sector led growth. External Debt in Nepal- Tarun Das

  24. 4.2 Poverty Reduction Strategy • Authorities are advised to continue with the policies envisaged under the Nepal's Poverty Reduction Strategy Paper (PRSP) accepted by the Fund-bank. • PRSP is an appropriate framework to address key constraints on growth, macroeconomic stability, and reduction of poverty. • This would help mobilize external assistance and lay the foundation for possible debt relief under the HIPC Initiative and the Multilateral Debt Relief Initiative. External Debt in Nepal- Tarun Das

  25. 4.3 Fiscal Policies-1 1. Nepal has made significant progress on revenue mobilization, expenditure prioritization, social sector spending and containment of budget deficit. 2. But, there are concerns that security-related expenditure needs remain high, and development spending is low relative to budget targets, especially in conflict-affected areas. 3. There is a need to increase fiscal transparency, improve public expenditure management systems and monitoring, contain contingent liabilities and address donors’ concerns about the quality of spending. External Debt in Nepal- Tarun Das

  26. 4.4 Fiscal Policies-2 4. Authorities should make all efforts to improve tax administration, widen tax base and to increase revenue collections. 5. They should also raise spending on infrastructure and social sectors to achieve PRSP goals. 6. Administrative pricing of petroleum products may be replaced by an automatic pricing mechanism to improve the financial conditions of the Nepal Oil Corporation and to avoid additional burden on the budget. External Debt in Nepal- Tarun Das

  27. 4.5 Financial Sector Reforms 1. In the banking sector, efforts should be made to recover non-performing assets from the willful defaulters in order to improve the balance sheets of the NBL and RBB, reduce contingent liabilities for the budget and pave the way for their privatization. 2. The legal framework for financial sector activity can be further improved through amendments to the Banking and Financial Institutions Ordinance. 3. NRB may be encouraged to enhance financial sector supervision, and raise its internal audit and accounting standards. Authorities are also advised to move forward with implementation of strong anti-money laundering and combating the financing of terrorism regime. External Debt in Nepal- Tarun Das

  28. 4.6 Agricultural Reforms Given the importance of agriculture and the high level of rural poverty, there is need to initiate progressive agrarian reforms such as: (a) providing complementary inputs to land and (b) improving rural infrastructure to promote commercialization and market access for agricultural products. External Debt in Nepal- Tarun Das

  29. 4.7 Trade and Exchange Rate Policy 1. The exchange rate peg to the Indian rupee remains appropriate, as it enables the economy to benefit from close ties with India and helps to keep inflation at low levels. • The level of the peg should be monitored and reviewed in the light of Nepal's growing integration with the world economy through its membership in the WTO and regional trading arrangements. • External competitiveness should be enhanced through structural reforms and infrastructure investments to lower transactions and transportation costs. • Despite concessional nature of external debt, the exchange rate risk is high due to steady depreciation of rupee in terms of dollar. External Debt in Nepal- Tarun Das

  30. 4.8 Public Sector Reform 1. The pace of public enterprises and governance reforms need to be accelerated to improve their efficiency. 2. It is desirable to proceed decisively with the liquidation of unviable loss-making enterprises and encourage privatisation mechanisms such as share sales and management contract. 3. The regulatory framework needs to be strengthened and labor markets be made more flexible to create an enabling environment for private sector participation. External Debt in Nepal- Tarun Das

  31. 4.9 External Debt Recording System 1. There is an urgent need to improve external debt data recording system for better policy formulation and monitoring, and full implementation of the IMF Technical Assistance recommendations on monitoring and management of external debt. • Nepal provided inaccurate information related to the second disbursement made in November 2004 under the IMF Poverty Reduction and Growth Facility arrangement due to weaknesses in its debt recording system. As a result of this misreporting, the disbursement was non-complying. • Although the arrears have now been cleared, it is essential to put in place proper debt recording system and to improve capability. External Debt in Nepal- Tarun Das

  32. 4.10 Implications for Public Debt Managers • World is a global village • Knowledge and ICT are the most valuable assets • There are wider choice of resources- domestic/ foreign, debt/ equity/ portfolio etc. • Management of domestic debt and non-debt creating financial flows are integral parts of management of external debt. • Managers have to manage greater Risk- Currency, exchange rate, interest rate, commodity prices, markets • Emphasis on decentralisation, consultation and risk sharing. External Debt in Nepal- Tarun Das

  33. 4.11 Need to strengthen Systems for • Management information system (MIS) • Asset-Liability Management (ALM) • Good governance • International best practices for financial audit and accounting, and management of external and internal debt • Identification, measurement, monitoring, assessment, mitigation, unbundling, sharing and management of risk • Performance Audit • Policy Audit External Debt in Nepal- Tarun Das

  34. Thank you Have a Good Day External Debt in Nepal- Tarun Das

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