Main causes of “Debt Crisis” in the country.

Nepal is one of the least developed countries of the world. Shortage of resources
to finance the public expenditure is one of the major problems of all LDCs. in such
situation they require to borrow money. But in today’s modern world, not only the
LDCs but also the developed countries borrow money for government financing.
Nepalese government also face budget deficit and hence manages the deficit
financing by foreign loan, foreign aid and internal loan. History of public debt of
Nepal is not so long. Government started to take domestic loan in 1962 and
external loan in 1963. The first foreign creditors of Nepal were formal USSR and
UK. After that public debt has important role in the government budget.

Borrowing debt is not a problem. But the problem is not being able to repay the
loan on time. Debt crisis is a situation in which a country is unable to pay back its
government debt. If the revenue of the country is less than its expenditure, debt
crisis may arise. Some of the major causes of debt crisis in the context of Nepal
are listed and explained below:

1. Trade imbalance:
The gap between imports and exports is called trade deficit or trade
imbalance. In simple terms, a trade deficit means a country is buying
more goods and services than it is selling. Looking at Nepal's situation,
imports are always more than exports. Over time, a trade deficit can cause
more outsourcing of jobs to other countries. As a country imports more
goods than it buys domestically, then the home country may create fewer
jobs in certain industries. A huge reliance on imports also leaves a
country vulnerable to economic downturns. Currency devaluations, for
example, make imports more costly. This situation stimulates inflation.
So, to manage budget deficit Nepal takes debt.

2. Rising household and government debt levels:

When an individual takes loans and cannot pay in time, the bank may face
financial crisis. Its effect will reach to national level. If household loan is
not paid in time, there will be low flow of money in the market and the
country may face financial crisis. Whereas if the government has a lot of
debt, that causes inflation and an individual has to take loan to fulfill his
requirements. Per capita debt in in the head of every individual. Therefore,
household debt and government debt have cyclic relation. So, both of them
 causes financial deficit and hence government should borrow. So rising
household and government debt may cause debt crisis in the country.

3. Loss of confidence:
Nepal doesn’t have good record of using and spending the foreign loan
efficiently. Unable to select required project of development is one of the
major problems. Leaders are not capable to find out the real problems and
the bureaucrats are not capable of handling the projects running by the
government. The government carrying high debt may constrain themselves
in control natural disaster, financial crisis and war. This may increase stress
in the government and may not have confidence in the worse situation to
control the economy. Corruption from both political and bureaucracy level
has wasted the foreign add. Due to such reasons, the trust of foreign allies
towards the country has decreased. They are exposing high interest rate.

4. Improper management of debt:

Foreign aid on one head is being spent on another. As the plans are not
completed on time, their cost and completion date are pushed back.
Because of this a lot of time, labor, and money has been spent on the same
scheme. Projects have become more expensive due to increase in price of
construction materials, wages of workers, etc. Due to the projects not being
completed on time, the trust of the donors has decreased. So that because
of improper management of debt our country needs to take new debt to
complete the existing projects, which may cause debt crisis.

5. Monetary policy inflexible:

Monetary policy refers to the actions undertaken by nation’s central bank
to control money supply to achieve macroeconomic goals that promotes
sustainable economic growth. If these policies are not flexible, it may rise
in debt of the nation. Central bank needs to formulate the policies as per
the requirement. For example, in the present situation it has to decrease
the interest rates for the investors and give subsidies in the tax. It should
try to attract the foreign investment in the fields like tourism, health and
education. This will help the nation on timely payment of the outstanding
debt. Otherwise, negative nay happen and country may face debt crisis.
For example in 2066-67, NRB directed that the financial institutions have
to keep their real estate and house loan exposure to 40 per cent of the total
loan exposure by the end of this fiscal year, to 30 per cent by the end of
the fiscal year 2067-68 and to 25 per cent by the end of the fiscal year
2068-69.
 Conclusion:

The public debt is the amount of money that a government owes to outside
debtors. Public debt allows governments to raise funds to grow their economy
or pay for services. Not only the LDCs but also the developed countries borrow
money for government financing. Borrowing debt is not a problem. But the
problem is not being able to repay the loan on time. The following can be the
measures to ensure efficient and effective public debt management (Ghimire,
R.P. 2007. Public Debt Management in Nepal)

a. Formulation of dedicated national debt policy

b. Loan investment in selective development projects
c. Planned, selective and strategic loan investment
d. Periodic disclosure of countries debt situation
e. Focus on revenue mobilization

Submitted By:
Sudarshan Gautam
Roll. No: 26
M.A. Economics, 1st Semester