Domestic debt: Govt seeks extra budget to repay internal debts

The government has been forced to manage an extra budget than the allocated amount for repaying the internal debt in the current fiscal year with the liabilities to the domestic creditors increasing along with the rise in interest rate amid a liquidity crunch in the market. The government increased the budget for internal loans payment by nearly 60 percent for FY 2022/23 but that will not be enough for domestic debt liability for the current fiscal year. “We have estimated more than Rs 20 billion in the additional budget for the current fiscal year to repay the internal loans, both principal and interest,” said a senior official of the Public Debt Management Office (PDMO).

The government has allocated Rs 134.32 billion allocated for internal debt servicing, of which Rs 43.73 billion has been allocated for paying the interest on the internal loans for this fiscal year.

The allocated budget for domestic debt servicing is higher by 58.17 percent compared to the total repayment the government made to the domestic creditors in FY 2021/22. The government had spent Rs 84.9 billion in domestic debt servicing in the last fiscal year, according to the PDMO. With an arrangement of over Rs 20 billion for repaying the domestic debt, the government will be paying almost double what it paid in the last fiscal year for domestic debt servicing. The allocated budget has not been enough for repaying domestic debt at a time when it has been seeing a sharp drop in revenue collection. As of February 1, the government’s revenue collection stood at Rs 480.28 billion in FY 2022/23, which is far less than the collection of Rs 574.27 billion during the same period last fiscal year. On Tuesday, the Ministry of Finance in a press statement admitted that the government’s resource is under pressure because of a number of factors including increased liability for social security, salary, and pension as well as the inadequacy of budgetary allocation for debt payment due to the increased interest rate of domestic debts. The ministry also announced a number of measures to reduce recurrent expenditure and budgetary allocation for non-essential projects. The PDMO official said that the allocated budget for domestic debt repayment would be inadequate because the government had to pay more in interest than estimated during the first half of the current fiscal year. “The interest rate to be paid to the subscribers of the government’s development bonds reached as high as 12 percent in December and January,” said the official, adding that it increased the interest to be paid to the creditors. According to the official, in the second quarter of the current fiscal year, the interest of the government bonds has come down to 7-8 percent. The government has allocated Rs 43.73 billion for paying interest on domestic loans for the current fiscal year. It spent Rs 37.58 billion to repay the interest to the domestic creditors in the last fiscal year. The government's both internal and external debt has been on the rise for the last few fiscal years. Along with the rise in overall debt, the amount to be allocated for repaying the loans has also increased. There has been a sharp rise in domestic debt in recent years with the government requiring more resources to implement federalism and tackle major crises like the earthquake, and the Covid-19 pandemic. The government’s outstanding internal loans reached as high as Rs 957.61 billion as of the first quarter of the current fiscal, up from just Rs 391.16 billion in FY 2017/18, according to the PDMO. Rising debt liabilities over the last few years also forced the government to allocate more and more budgetary allocations for repayment.