sovereign debt management in india by tarun das

8/6/2019 Sovereign Debt Management in India by Tarun Das

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ESCAP-Nepal Lecture-3 External Debt in Nepal- Tarun Das 1

Economic Situation and

Management of External Debtin Nepal

Presented by

Professor Tarun Das

Institute for Integrated Learning in

management, New Delhi, IndiaFormerly, Economic Adviser, MOF andPlanning Commission, Govt.of India


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Contents

1. Economic Background of Nepal

2. Current Economic and external Debt

Situation3. Economic Outlook and Risks

4. Major Observations and Conclusions


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1.1 Economic Background-1

1. Any economic prospect of Nepal need to beconsidered in the background that Nepal liesin a specific geo-political situation betweenthe two economic giants of the world Indiaand China.

2. Nepal is a Least Developed Land LockedCountry (LLDC) and one of the poorest country, but it has direct access to the sea of

humanity in the either side of its border thatconstitutes the largest market in the world.


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9. Progress in Regional Economic co-operation.10. Nepal became full-fledged member of WTO on 23

April 2004.11. Similarly Nepal is now a member of two regional

trading arrangements; South Asian Free TradeAgreement (SAFTA) and BIMST-EC.12. The signing of SAFTA framework treaty in 6

January 2004 and BIMST-EC free trade area on 8February, 2004 has been a landmark in the

economic history of Nepal as these would help tointegrate the Nepalese trade and economy at theregional and trans-regional level.


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13. Nepal is currently an observer to the BangkokAgreement. This is a regional preferential tradingarrangement encompassing South Asia, SouthEast Asia and Far East, with the membership ofsix countries viz. China, India, Sri Lanka,Bangladesh, Lao PDR, and South Korea, withcollective population of around 2.5 billion.

14. Currently, more than 1500 products have beenbought under the preferential tradingarrangement. This agreement is based on positive

list approach following the product-to-productnegotiations.

15. These Free Trade Agreements (FTAs) aresupposed to enter into progressive stages of freetrade including a common currency in South Asian

called rup.


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2.1 Economic Growth andFinancial Sector

1. Nepals economic growth has been adverselyaffected by the recent political conflicts.

2. Real GDP growth rate declined from 5% per annum

in 199

0s to only 2% during 20002005.3. Inflation remained low except 6.6% in 2004-05.4. International reserves were adequate.5. Despite significant progress in management and

credit evaluation practices, the share of non-performing assets in NBL and RBB remained high.

6. Broad money growth slowed from 12 percent in2003/04 to 8 percent in 2004/05


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2.2 Trends of growth, money supply

and inflation (per cent)

Items 2000-01

2001-02

2002-03

2003-04

2004-05

1.Real GDP Growth 5.6 -0.6 3.4 3.4 2.5

2.CPI inflation rate 3.4 3.5 6.1 2.0 6.6

3.Deficit (% of GDP) 4.5 4.3 1.6 1.0 0.9

4.M3 (% of GDP) 15.2 4.4 9.8 12.7 8.0

5.Credit (% of GDP) 18.8 9.2 12.0 9.3 13.3


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2.3 Trends of budgetary operations(per cent of GDP)

Items 2000-01

2001-02

2002-03

2003-04

2004-05

1.Total revenue 11.4 11.5 12.3 12.2 13.0

2.Total expenditure 17.5 17.2 16.0 15.5 16.0

3.Current exp. 11.1 11.5 11.4 11.2 11.7

4.Capital exp. 6.4 5.6 4.6 4.3 4.3

5.Overall deficit 4.5 4.3 1.6 1.0 0.9


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2.4 Balance of Payments (US$ Million)

Items 2000-

01

2001-

02

2002-

03

2003

-04

2004-

05

1.Current A/C 162 106 16 59 226

2.In percent of GDP 2.9 1.9 0.3 0.9 3.1

3.Overall balance 38 -39 93 235 24

4.Official reserves 1020 1048 1178 1471 1507

5.Rupees per US$ 74.7 78.0 74.8 74.1 70.0


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2.5 Fiscal Situation

1. Overall fiscal deficit of Nepal remainedmanageable in 2004/05, despite revenue shortfalls(due to weaker economic growth, continuedexcise leakages and delayed excise duty refunds

from India) and expenditure over-runs due tohigher civil service wages and allowances, andsecurity-related expenditures.

2. Overall deficit at 1% of GDP was significantlylower than budget target at 2 percent of GDP.

3. External loans fell short of the budget target, asassistance from the World Bank, ADB and donorsdwindled. The domestically financed deficit wasalso lower than budgeted (at percent of GDP).


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2.6 External Trade

1. Nepal's major exports are carpets and garmentsaccounting for 70% of total goods exports. Tradewith India rose rapidly after conclusion of the1996 bilateral trade treaty, and now accounts for

50% of all exports and 47% of all imports.2. Nepal's principal export destinations include India

(50%), United States (22%), Germany (8%),United Kingdom (3%), and France (2%).

3. Principal imports of Nepal consist of gold,machinery, equipment, POL and fertilizers.4. Major sources of imports in 2004 were India

(47%), China (10%), UAE (9%), Singapore (4%)and Saudi Arabia (4%).


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2.7 Current Account Balance

1. The current account and overall balance of payments remained in surplus.2. Despite disruptions related to the insurgency and

the elimination of textile quotas, total exports roseby 10% in 2004/05, mainly due to rise in exports

to India by 30% percent.3. Import growth was stagnant due to weak

economic activity. A 35% increase in oil importswas offset by a 6% decline in non-oil imports.

4. Remittances continued to be buoyant, and thecurrent account surplus increased from 1% ofGDP in 2003/04 to 3% of GDP in 2004/05.

5. International reserves increased to US$1.5 billion(7 months of imports) at end 2004/05.


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2.8 India, Nepal, Bangladesh andVietnam are categorized as LessIndebted Low Income Countries

Severely Indebted:

Either PV/XGS > 220%

Or PV/GNP > 80%

Low Income:

PC-GNP less than $765

Middle Income : PC-GNPbetween $766 and $9385

Moderately Indebted:

Either 132%


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2.9 External Debt Indicators ofSouth Asian countries in 2003

Coun ry and Rank n resen Va ue V/ G V o ndeb edness

er s of presen f ex erna deb ra o expor s and nco e

va ue of ex erna deb (US$ b on) (per cen ra o (%) Class f ca on

1. nd a 100.3 19 106 Less/ Low

2. ak s an 29.7 41 189 odera e/ Low

3. Bangladesh 12.8 25 128 Less/ Low

4. Srl Lanka 8.4 51 110 odera e/Middle

5. Nepal 2.1 38 131 Less/Low

6.Bhu an 0.4 74 252 Severe/Low7. Maldives 0.2 35 41 Severe/Middle


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2.10 Nepal- External DebtIndicators ($ Million)

Year 1980 1990 2000 2003

EDT 205 1640 2846 3253

LTD 156 1572 2805 3176

PG 156 1572 2805 3176

Use of IMF 42 44 12 11

Short-term 7 24 29 66

GNI 1958 3640 5514 5843

XGS 272 447 1456 1873


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2.11 Nepal- External Debt

Indicators ($ Million)

1980 1990 2000 2003

TDS 8 70 103 113

Interest 5 29 31 31Pr.Rep 3 41 72 82

MGS 419 846 1825 2016

RES 272 354 987 1286

BCA -39 -289 -131 171


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2.12 - Nepal

External Debt Indicators (%)

1990 1999 2000 2003

/ 75 367 195 174

/ 10.5 45.1 51.6 55.7

/ 2.9 15.7 7.1 6

/ 1.8 6.5 2.1 1.7

/ 0.3 0.8 0.6 0.5

R / 132.7 21.6 34.7 39.5


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2.13-Nepal-

External Debt Indicators (%)

1990 1999 2000 2003

RES/ EDT 132.7 21.6 34.7 39.5

RES/ MGS ( 7.8 5 6.5 7.7

Short/EDT 3.4 1.5 1 2

Conc/ EDT 76 89 98 97

Multi/EDT 62 77 86 84

Pub/EDT 97 99 99 98


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2.14-Nepal-CurrencyComposition

of External Debt (%)

1990 1999 2000 2003

Yen 8 8 9 11

US$ 50 50 39 43

Multiple 31 33 42 36

Others 11 9 10 10

Total 100 100 100 100


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3.1 Economic Outlook and Risks1 Nepal's growth prospects are contingent on

political stability and improved security.2 Continuation of structural reforms along

with political stability and better securityconditions can lead to a distinctimprovement in agricultural, manufacturingand service production, tourism earningsand government activities.

3 This will help Nepal to achieve growth ratesaround 55 percent in the near and

medium term.4 With the rupee peg, inflation is expected tobroadly follow price developments in India,which are moderate and under control


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3.2 External Sector Outlook1. Export growth is projected to average

8 percent with diversification of Nepaleseexports 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 67 months of imports ofgoods and services.


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4.1 Conclusions and Recommendations1. Nepal is presently passing through a critical

political and economic juncture.2. Authorities may be complemented for

maintaining macroeconomic stability andimplementing reform program under adifficult economic-political environment.

3. They are advised to resolve political andeconomic uncertainties and make progress

toward sustained peace and security, whichare essential steps for poverty reduction andprivate sector led growth.


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4.2 Poverty Reduction Strategy

1. Authorities are advised to continue with thepolicies envisaged under the Nepal's PovertyReduction Strategy Paper (PRSP) accepted bythe Fund-bank.

2. PRSP is an appropriate framework to addresskey constraints on growth, macroeconomicstability, and reduction of poverty.

3. This would help mobilize external assistance

and lay the foundation for possible debt reliefunder the HIPC Initiative and the MultilateralDebt Relief Initiative.


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4.4 Fiscal Policies-2

4. Authorities should make all efforts to improvetax administration, widen tax base and toincrease revenue collections.

5. They should also raise spending oninfrastructure and social sectors to achievePRSP goals.

6. Administrative pricing of petroleum productsmay be replaced by an automatic pricingmechanism to improve the financial

conditions of the Nepal Oil Corporation and toavoid additional burden on the budget.


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4.5 Financial Sector Reforms

1. In the banking sector, efforts should be made torecover non-performing assets from the willfuldefaulters in order to improve the balance sheetsof the NBL and RBB, reduce contingent liabilitiesfor the budget and pave the way for theirprivatization.

2. The legal framework for financial sector activity canbe further improved through amendments to theBanking and Financial Institutions Ordinance.

3. NRB may be encouraged to enhance financialsector supervision, and raise its internal audit andaccounting standards. Authorities are alsoadvised to move forward with implementation ofstrong anti-money laundering and combating thefinancing of terrorism regime.


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4.6 Agricultural Reforms

Given the importance of agriculture andthe high level of rural poverty, there isneed to initiate progressive agrarianreforms such as:

(a) providing complementary inputs toland and(b) improving rural infrastructure topromote commercialization and marketaccess for agricultural products.


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4.7 Trade and Exchange Rate Policy

1. The exchange rate peg to the Indian rupeeremains appropriate, as it enables the economy

to benefit from close ties with India and helps tokeep inflation at low levels.

2. The level of the peg should be monitored andreviewed in the light of Nepal's growingintegration with the world economy through itsmembership in the WTO and regional tradingarrangements.

3. External competitiveness should be enhancedthrough structural reforms and infrastructureinvestments to lower transactions andtransportation costs.

4. Despite concessional nature of external debt,the exchange rate risk is high due to steadydepreciation of rupee in terms of dollar.


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4.8 Public Sector Reform

1. The pace of public enterprises andgovernance reforms need to be acceleratedto improve their efficiency.

2. It is desirable to proceed decisively with theliquidation of unviable loss-making

enterprises and encourage privatisationmechanisms such as share sales andmanagement contract.

3. The regulatory framework needs to be

strengthened and labor markets be mademore flexible to create an enablingenvironment for private sector participation.


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4.10 Implications forPublic Debt Managers

World is a global village

Knowledge and ICT are the most valuableassets

There are wider choice of resources-domestic/ foreign, debt/ equity/ portfolio etc.

Management of domestic debt and non-debtcreating financial flows are integral parts ofmanagement of external debt.

Managers have to manage greater Risk-

Currency, exchange rate, interest rate,commodity prices, markets

Emphasis on decentralisation, consultationand risk sharing.


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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 externaland internal debt

Identification, measurement, monitoring,assessment, mitigation, unbundling, sharingand management of risk

Performance Audit

Policy Audit


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Thank you

Have a Good Day

sovereign debt management in india by tarun das

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