Geography: Landlocked between India (East, West & South) and China in the North. Highest Peak Mt.Everest. Area: 1,47,181 Sq.Km. Population: 2,32,00,000 Political Situation: Process of drafting new Constitution by Constituent Assembly & peace process. Development priority on: (i) relief, reconstruction and reintegration, (ii) achieve employment-oriented, propoor and broad-based economic growth (iii) promote good-governance and effective service delivery (iv) increase investment in physical infrastructures (v) give emphasis on social development (vI) adopt an inclusive development process and carry out targeted programs Economy: GDP: 960011 Million Nrs.(2008/9) GDP Growth Rate: 4.7%(2008/9) & 5.5% Projection for F.Y.2009/10 Total Expenditure: 213 billion 578.3 million Nrs. In F.Y.2008/9 and 285.930 billion projection (2009/10) Revenue: 143 billion in 2008/9 & 176 billion projection in 2009/10

Debt Sustainability Analysis (DSA)
(An Experience of Nepal)

Presentation By: Rajendra Bahadur Bajracharya
Deputy Financial Comptroller General Debt Management Section, FCGO

Ministry of Finance Government of Nepal

Debt Sustainability Analysis (DSA)
Debt Sustainability Concepts

It is the ability and capacity of managing debt burden in present and future in term of solvency (ability to pay) & liquidity (adequacy of assets to pay). Debt sustainability refer to making a country’s ability to service its borrowing, foreign & domestic, public & publicly guaranteed, private nonguaranteed, including both short and long-term debt, without compromising its long-term development goals & objectives. Failure to meet debt obligation could lead to a serious economic crisis. So, managing public debt within a sustainable level is an equally important policy issue. IMF defines debt sustainability as a situation in which a borrower is expected to continue servicing its debts without an unduly large future correction to the balance of income and expenditure given the cost of financing in the market.

What DSA Delivers?
Identifying countries’ credit worthiness. Identifying countries in actual or potential debt distress situations leading to determining grant eligibility. Deliver status of a country's potentially eligibility for debt relief under HIPC Initiative or debt relief by other donors. Assessment of a country's debt sustainability with country economic policies and institutional capability, and vulnerability to shocks. Assessment of different debt ratios and comparison with thresholds indicators. Judging liquidity and solvency problems of a country using its debt indicators

DSA exercises in Nepal and its outcomes/results
Nepal has been implementing the debt sustainability analysis recommended by the IMF and other international agencies and is considering the introduction of a medium-term fiscal management plan together with the regular publication of fiscal strategy statement report.

DSA exercises in Nepal and its outcomes/results…Cont.
In Nepal, it is started taking into account the forecasting of key macroeconomic components as follows:
1. Budget deficit: it is the first component of the basic debt creating flow. Required expenditure or excessive expenditure and unpredicted revenue shortfall inevitably requires more borrowings, and thus, serve to increase the debt-to-GDP ratio

DSA exercises in Nepal and its outcomes/results…Cont.
2. Cost of Financing: The cost of financing in terms of real interest rate, economic growth, and exchange rate are assessed for DSA. A higher interest rate raises debt servicing and consequently the debt-to-GDP ratio. Both domestic & international financial market conditions (including contagion effects) affect the interest rate, thereby raising the debt burden. A higher economic growth rate, on the other hand, decreases the debt-to-GDP ratio. When the economic growth rate is high, the economy has sufficient income to meet the interest obligations on the debt and pay back the principal. The exchange rate affects debt-to-GDP ratio because the external debt is denominated or reported in foreign currency. Sharp changes in the exchange rate can increase the net liability position of the borrower to an unsustainable level

DSA exercises in Nepal and its outcomes/results…Cont.
3. Other Debt- creating Flows: Contingent Liability and Privatization Revenues: A particularly important source of uncertainty surrounding projections of debt and debt service is associated with contingent claims such as those associated with either explicit or implicit guarantees of debt or bank deposits. Many contingent claims by their nature, pass unnoticed under normal conditions & are difficult to estimate, but they are more likely to emerge in time of crisis. Indeed, such claims have been a key feature in recent crisis in emerging markets, in which defaults in one sector have spilled over to others.

• Till now the capacity of DSA has been a major issue which is to be developed in Nepal's Debt Management Unit.

DSA exercises in Nepal and its outcomes/results…Cont.
• When the public debt management issue was just started and not well organized in Nepal and clear responsibilities and accountability of concerned institutions were not well assigned in the existing institutional and legal framework at that time the Asian Development Bank has provided a technical assistance for "Strengthening Institutional Capacity for Effective Public Debt Management (ADB TA 4017-Nep)" in Nepal. • For improving debt recording and management, the computer software application developed by Commonwealth Secretariat (COMSEC) Commonwealth Secretariat-Debt Recording and Management System (CS-DRMS) has been updated with training.

DSA exercises in Nepal and its outcomes/results……..Cont.
• It’s report has recommended for the comprehensive changes in the institutional arrangements and legal reforms to support the proposed institutional changes. • A policy document on public debt management and other contingent liabilities has been prepared, and as a part of analytical capacity building, methodology for macroeconomic analysis and debt sustainability analysis has been developed.

DSA exercises in Nepal and its outcomes/results……..Cont. It has also prepared analytical tools for DSA as follows:
1. 2. 3. Macro econometric model of Nepal, Feb. 2004 DSA of Nepal's public debt, Feb.2004 Report on the workshop of macroeconomic model of the Nepal economy and DSA, Feb. 2004.

Public debt dynamics are assessed using the Low-Income Country Debt Sustainability Analysis (LIC-DSA) Framework, which was jointly prepared by the World Bank and the IMF.

As per the debt sustainability analysis conducted by IMF jointly with the World Bank, Nepal's external debt dynamics are subjected to a high risk. DSA of 2008 shows Nepal's external debt burden assessed as follows:

NPV of debt in percent of: Exports GDP Revenue Debt Service in percent of: : Exports Revenue

Indicative Thresholds (Medium)




Projected Average 2007/8-2027/28

150 40 250

172 28 213

163 25 211

148 22 163

116 15 114

20 30

9 12

9 12

11 12

7 6

DSA of 2008 report shows Nepal's external debt burden assessed as follows: (2004/5)

300 250 200 150 100 50 0
N PV /R D .S ev er . ,/E xp or D .S t er ./R ev . xp o G D P rt

Threshold 2004/5


N PV /

DSA of 2008 report shows Nepal's external debt burden assessed as follows: (2006/7)







0 Threshold 2006/7 Line 3

NPV/Export 150 148

NPV/GDP 40 22

NPV/Rev. 250 163

D.Ser./Exp. 2 11

D.Ser./Rev. 30 12



Line 3


DSA exercises in Nepal and its outcomes/results……..Cont.
As per the DSA conducted by the IMF jointly with IDA (report of May, 2008), following major results have been concluded: The initial net present value of debt has improved compared to the previous DSA (June 2007) due to the appreciation of the Nepalese rupee and lower than projected loan disbursements in the interim period. In view of the improved debt indicators, Nepal's external debt dynamics are assessed to be subject to a moderate risk of debt distress. This is a change from the previous DSA, which classified Nepal as at high risk of debt distress. At present the external debt situation of Nepal does not seem unsustainable.

How the DSA has helped Nepal going forward?
Debt-to-GDP,Exports,Revenue, etc. are forecast for more than 5 years and seek to determine whether the public debt would be sustainable. External debt projection Evaluation of critical ratios with multi-years forecasting. Initiation for grant funding, rather than external loans, from IDA, ADB and other Donors required for the PRGF and Millennium Development Goals (MDGs) programs to reduce the risk of debt service problems. Reviewing of public debt and fixing of upper limit of public debt under legal framework has been established.

Table showing Debt Situation of Nepal (In Million NRS)
Descriptions Total DOD External Domestic Total Repayment (Principal) External Domestic Total Interest Payment External Domestic Exchange Rate GDP Ratio Per capita debt burden (Not in Million) 2003/4 318911.81 232778.07 86133.74 10794.85 5765.82 5029.04 6543.88 2141.7 4402.18 74.75 67.5 13400 2004/5 307206.19 219641.9 87564.29 13533.32 5953.19 7580.13 6218.01 2146.71 4071.3 70.94 58.07 12143 2005/6 328679.28 233968.61 94710.67 14264.8 6987.5 7277.3 6158.7 2163.9 3994.8 74.69 56.38 12750 2006/7 320688.57 216629.0 104059.63 16752.3 7538.8 9213.5 6164.0 2055.8 4108.2 65.44 47.82 12147 2007/8 366572.09 249965.41 116606.68 16386.9 7869.4 8517.5 6373.7 2145.3 4228.4 69.1 47.68 13577


Budget Expenditure Position reflecting initiation for grant funding, rather than external loans
80000 70000 60000 50000 40000 30000 20000 10000 0 2006/7 2008/9 Total ODA Grants Debt


How the DSA has helped Nepal going forward?...cont.
Developed concept of establishing a separate Debt Management Office (DMO) looking after overall public debt management issues. Capacity development of debt recording and reporting. "A Public Financial Management (PFM) Strategy for Nepal's Public Financial Management Reform Program (PFMRP), Phase I (2009/10- 2011/12)" has been approved by PEFA Steering Committee, headed by Secretary of MOF, which has incorporated as a (No. 3) program outcomes of 'improved budget execution' with activity 'build institution capacity and operational CS-DRMS software to carry out debt sustainability analysis (DSA)' to achieve the output of improved debt management in Nepal.

How the DSA has helped Nepal going forward?...cont.
• Nepal's Three Year Interim Plan has established its public debt management objective recognizing a proper balance between government revenue and expenditure making possible through maximizing the utilization of both, external and internal debt. It has also recognized that the objective of public debt management is to ensure sustainability, efficiency and effectiveness in order to meet the debt liability.

Lesson Learned
• DSA is an alerting tool for our country to understand our debt situation which enable us to maintain our debt in a manageable level. • It is lesson learned that study to be conducted on use of total public debt for DSAs and consequently of government revenue in determining debt indicators and compare with their threshold values.

What has changed?
Improved in macroeconomic stability in Nepal. Implementation of key structural reform measures. Improvements in public expenditure management and implementation of different action plans to achieve improvement on PEFA (public expenditure and financial accountability) indicators.

What has changed?...cont.
Increased spending in priority areas consistent with PRSP with reducing headcount poverty level. Projection of domestic borrowing in annual budget of Government of Nepal within the permissible limits required to maintain macroeconomic balance and stability. Rapid mobilization of internal revenue through broadening revenue base for speedy development activities. Consultations and discussions with experts, economists, ex-chief secretaries, ex-secretaries, politicians, various parties’ leaders on Nepal’s debt sustainability and its remedies.

What has changed?...cont.
Political commitment in governance. Priority on raising domestic borrowing for deficit financing rather than external borrowing. Special emphasis and priority given to increase the grants proportion in total foreign aid and in the situation of lacking such grant assistance the policy of mobilizing concessionary loans to the development of infrastructure and to high yield productive sectors and human development on a priority basis.

What can be done differently?
Under DSA, domestic debt can be assessed and compare with domestic investment in terms of share and loan so that a country like Nepal could give high emphasis on formulating and implementing its investment policies on competitive and productive basis which will ultimately contribute in revenue generation and economic growth rate. Under DSA, assessment of per capita income could be compare with public debt ratios for transparency. Under DSA, debt ratios could be assessed with International Investment Position (IIP).

Thank You


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