KATHMANDU: Of late, donor agencies have started emphasizing loans rather than grants in foreign aid to Nepal. The government has not lobbied much for grants, leading to an increasing debt portion as these agencies emphasize loans. In the fiscal year 2023/24, the government aimed to collect foreign grants amounting to Rs 49 billion but received only Rs 11.22 billion, achieving just 22.24 percent of the target.

According to the Development Assistance Report 2021/22 issued by the Ministry of Finance, Nepal received grants equal to USD 583 million (Rs 78 billion) from donors in 2012/13. This amount decreased to USD 269 million (Rs 36 billion) in 2021/22 and further reduced to Rs 11.22 billion in the last fiscal year.

The Public Debt Management Office reported that the country received foreign loans equivalent to Rs 82.67 billion up to mid-June of the last fiscal year. The government had targeted raising foreign aid equal to Rs 262 billion, including Rs 49.94 billion in grants and Rs 212 billion in loans, for FY 2023/24, but it failed to meet this target.

In the previous fiscal year, FY 2022/23, the government expected to receive Rs 55 billion in grants but received only Rs 21.29 billion. The annual report of the Public Debt Management Office indicates an increase in loan receipts. Analyzing the trend, the report states that foreign debt obligations are on the rise, with multilateral debt obligations increasing by 15.13 percent and bilateral debt obligations by 6.93 percent in FY 2022/23.

Fluctuations in foreign debt obligations are also influenced by changes in exchange rates. The increase in external debt is attributed to reconstruction efforts following the 2015 earthquake and the impact of the COVID-19 pandemic starting in 2019.

A senior official of the Ministry of Finance mentioned that since Nepal's debt repayment capacity is increasing, donor agencies are not emphasizing grants as much. "We are constantly taking initiatives to get grants," said the official. "Some have been successful, but it is true that grants have decreased recently." Despite the increase in public debt obligations, Nepal's debt repayment capacity is reportedly good, according to a recent report by the International Monetary Fund.

Government officials state that donor agencies assess the country's ability to repay debt before deciding whether to provide grants or loans. They are becoming reluctant to give grants, believing Nepal's capacity is better.

Experts believe the government's inability to create a trustworthy environment and its weak bargaining power are reasons donors are hesitant to provide more grants. Economist Keshav Acharya notes that government officials prefer taking loans over grants due to the fewer conditions attached to loans. "Though the portion of loans taken by Nepal is not large yet, it is necessary to use them properly," he said.

Former Vice Chairman of the National Planning Commission and former Governor Dipendra Bahadur Chhetri criticized the government for taking loans for non-productive programs to fulfill political ambitions. He emphasized the importance of investing in areas that provide a return on investment and warned against the habit of taking loans for political purposes.

Chhetri also highlighted that subsidized loans for distribution-oriented programs, like the Prime Minister's Employment Program, burden future generations with unnecessary debt without any return. He stressed that the government should avoid taking loans for such programs.

Interest Expense of Debt Exceeds Capital Expenditure

Despite assurances from agencies like the International Monetary Fund that Nepal is not at risk of falling into a debt trap, last year Nepal spent Rs 113 billion more on payments of principal and interest on loans than on capital expenditure.

The Public Debt Management Office reported that the government spent Rs 305 billion on domestic and foreign loan interest payments in FY 2023/24. Of this amount, Rs 255 billion was spent on repaying internal debt, and the rest on external debt repayment.

The Financial Comptroller General Office, which tracks government income and expenditure, reported that total capital expenditure last year was only Rs 192 billion. Data from the Public Debt Management Office shows that public debt, which has been increasing for almost a decade, reached Rs 2,433 billion at the end of the last fiscal year. The share of external debt is 51.47 percent. Due to high-interest rates, internal debt payments are higher despite a lower share of internal debt.