Banks have Rs 671bn in lending funds

Banks and financial institutions have Rs 671bn in lending funds, yet loan disbursement remains stagnant, leaving Rs 400bn in excess liquidity, according to the Nepal Rastra Bank (NRB).

“The government can currently borrow from banks at an average rate slightly above four percent,” an NRB official said. “This window is temporary, so the government should consider raising internal loans to boost spending.”

The Public Debt Management Office’s 2023-24 report shows the average internal loan interest rate is 5.27 percent, recently dropping below five percent. Funds raised should prioritize development and infrastructure, the NRB official emphasized.

“The government’s spending patterns are flawed,” he added, citing the establishment of Public Service Commissions in all provinces and new Planning Commissions as unnecessary burdens.

Public debt has risen to 44.14 percent of GDP from 42.67 percent last year. As of Oct-Nov,
Rs 2.51trn in public debt comprises Rs 1.26trn in external and Rs 1.25trn in internal debt, split nearly evenly. Some loans are used to repay older debts, with the ratio expected to drop to 42 percent by the fiscal year’s end.

Economists criticize the focus on debt repayment over capital expenditures. “Public debt is high but manageable,” said Finance Ministry spokesperson Mahesh Bhattarai. “During economic stagnation and bank liquidity surplus, borrowing for development can ease bottlenecks.”

Contractors report delayed payments, with Rs 18bn owed for completed projects and over Rs 40bn in claims pending, which could invigorate the economy if settled. However, the government’s capacity to increase internal borrowing is constrained. Internal loans should remain five percent to 5.5 percent of GDP, aligning with this year’s budget target.

Nepal’s debt-to-GDP ratio has exceeded 60 percent in the past, but while rising, it remains below critical levels. Studies show high ratios slow economic activity. Nepal benefits from concessional external loans under two percent interest but risks exchange rate fluctuations, causing a Rs 59.15bn loss in 2022-23 and a Rs 4.23bn gain in 2023-24.

Internal loans, though costlier, carry no exchange rate risks and generate revenue through taxable interest. Banks, while exempt from direct taxes on treasury bills and bonds, pay 30 percent corporate tax. Current liquidity presents a fleeting opportunity for internal borrowing.

Experts advise directing such funds to impactful and feasible projects, as internal loans lack the project-specific restrictions of external borrowing.