INTRODUCTION:
The government mobilizes internal debt in order to cover the budget deficit. Internal debt plays an important role in maintaining economic stability in the country and implementing national policies and programs to build capital and create jobs. Although the internal debt will cover the shortage of resources, due to the economic, political and financial risks associated with it, the internal debt must be mobilized within certain limits. The government tries to effectively use such instruments with minimal risk by keeping the sources of internal debt, its use and the effects it brings within its control.
The internal credit union, which is an important dimension of financial federalism, can be mobilized by the state and local levels has been made in the constitution of Nepal. In Article 251, sub-section (1), clause (f) of the Constitution of Nepal, it is stipulated that the National Natural Resources and Finance Commission should analyze macroeconomic indicators and recommend the limit of internal debt that can be taken by the federal, state and local governments. Similarly, in Article 115 and Article 203 of the Constitution, it is stipulated that the government of Nepal and the state government can take loans and give guarantees only in accordance with the federal law. Section 14 of the Inter-Governmental Finance Management Act, 2074 stipulates that the Government of Nepal, provinces and local levels can take internal loans within the limits recommended by the National Natural Resources and Finance Commission.
Similarly, in section 68 of the Local Government Operation Act, 2074, provision is made regarding the internal debt mobilized by the local level. In this section, there are provisions that internal debt should be productive, employment-oriented, mobilized for internal income growth and capital works, loans can be taken for a period of 25 years, etc.
The National Natural Resources and Finance Commission has analyzed macro-economic indices in accordance with the provisions of the constitution and based on the study of past practice in Nepal’s internal debt mobilization and the study of international practice in this regard, has recommended the limit of internal debt that the government of Nepal, provinces and local levels can take in the fiscal year 2075/76. This report has recommended the necessary suggestions regarding the internal debt limits recommended by the Commission to the Government of Nepal, the state and local levels and the amendments to be made in the existing legal and procedural arrangements for internal debt mobilization.
OBJECTIVE:
The objective of this study is to study the sides necessary to explain in order to “Determine the limit of internal debt that organization, province and local government can take by considering all the economic indicators” according to Article 251, Chapter 1(F) of Constitution of Nepal, National Natural Resources and Fiscal Commission.
FINDINGS:
1 National Natural Resources and Fiscal Commission (NNRFC) can receive internal debt not more than 10% of federal government revenue distribution and province level internal source revenue in the Fiscal Year 2075/76. It can be estimated that provinces can collect Rs. 74 Arabs 97 Crores under this limit. Considering the recommendation made by NNRFC, provinces can receive internal loan of Rs. 7 Arabs 70 Crores.
2 There is no information available on estimated amount of internal revenue to determine the internal debt of local level. That is why, rendering of indicators of internal loan to local and provincial levels through the grant amount and revenue distribution provided by Federal government to local level; the indicator is 1.479. The amount of Rs. 19 Arabs 9 Crores is estimated to be the internal loan taken by 753 local levels according to the indicators based on which total internal loan of province level and local level is estimated to be Rs. 18 Arabs 59 Crores 82 Lakhs. On the basis of the analysis, collection of total internal loan and total gross domestic product ratio made by province government and local level is 0.536. Since the ratio is below 1%, observing the total outstanding loan and the fiscal space ratio of Nepal government, the internal debt recommended by NNRFC is seen not to disrupt the economic system.
3 It is best to take into consideration the following indicators to recommend the internal loan by the commission:
Public loan and GDP ratio
Internal loan and remittance ratio
Prevailing interest rate
The amount of internal debt that the government can take and outstanding loan amount ratio.
Key indicators of financial sector convenience.
Remittance
4 The internal loan operated by the financial organization, province and local level affect the financial transfer and loan amount. Administrative and technical skill lacking situation in the current context impacts negatively in resource mobilization. Likewise, it is necessary to evaluate the capacity to collect revenue in political as well as administrative level of all three levels. A plan should be developed so that regular activities of all three levels do not get affected while repaying the principal amount and interest. If the volume of internal debt increases in all three levels, there is a high chance of pressure in the source of public sector investment automatically investment is likely to shrink. If investing in high productive projects, it is advisable to apply the loan not only on the basis of revenue but also on the basis of return.
5 It is appropriate to use succeeding two main tools to raise internal debt at province and local levels:
i. Borrowing without issuing a letter of credit: Devices of this nature can be used by both the local and state governments. However, there will be a provision to take such loan based on the plan. When taking a loan, it is possible to take loan from various financial institutions, development banks and institutions established to invest in development by fulfilling the bases prescribed by the federal government.
ii. To take a loan by issuing a letter of credit: Such bonds are based on long-term and large-scale projects. Loans should be taken for such projects on the basis of return rather than revenue. Only the federal or state government can issue such a letter of credit. When issuing such a letter of credit, the designated bank or financial institution should be appointed as an intermediary to complete the process of obtaining a loan from it. The bonds issued in this way are of a kind that everyone can buy.
While the state government can use both types of instruments while mobilizing internal loans, it is appropriate for the local level to use only the instruments that can be borrowed without issuing a letter of credit.
6 As the constitution and law of Nepal have paved the way for the state government to take internal loan, there is a provision to take loan on legal basis. Accordingly, Article 203 (2) of the Constitution of Nepal, Intergovernmental Finance Management Act, 2074 BS, law related to internal debt, etc. have delegated the right to raise loans to the state government.
7 For the purpose of borrowing, structurally, the Public Debt Management Office (PDMO) of the Ministry of Finance, p. Take Ni. The Department of Internal Debt Management at the state level and the state offices of Nepal Rastra Bank will be involved.
8 In relation to the internal debt taken by the local level, it shall be as provided in Article 230 (2) of the Federal Law of Nepal. In addition, the local level will be able to mobilize internal debt within the jurisdiction given by the Intergovernmental Finance Management Act, 2074 BS and the Local Government Operation Act, 2074 BS. Institutionally, the Public Debt Management Office of the Ministry of Finance, the Local Debt Internal Debt Management Unit, the Fund and Accounts Control Office and the banks operating the local reserve fund will be active to mobilize the loans.
RECOMMENDATIONS:
1 If the size of the budget of the federal government, state and local level increases gradually, the demand for internal loans will also increase. Since the main basis for determining the limit of such internal debt is the gross domestic product, the federal government is operating on that basis so that the internal debt does not exceed 5 percent of the gross domestic product. When the provinces and local levels mobilize internal debt, it is appropriate to take it only so that it does not increase by 1 percent of the gross domestic product and it seems less likely that it will cause a negative disturbance in the country’s economy.
2 In the federal structure, the constitution has determined the constitutional jurisdiction of those levels of government to raise internal debt. In this regard, some of the existing laws and regulations of the following states should be amended to pave the way for internal debt collection:
a. Nepal Rastra Bank Act 2058
b. Bank and Financial Relations Act 2073
c. National Debt Rules 2059
d. Inter-Governmental Financial Management Act 2074
e. Local Government Act 2074
f. Mortgage deed related Act 2063
3. It seems that it would be appropriate to continue the basis recommended by the National Natural Resources and Fiscal Commission for the fiscal year 2075/76 to raise internal debt by not exceeding 10% of the sum of the revenue received from the federal government and the revenue received from the internal sources of the state level. It is relevant to continue the same basis at the local level as well.
4. Internal debt should be taken based on the following macroeconomic indicators including analysis of internal resources, distribution of revenue and the debt ratio of the state union:
• Ratio of Public Debt to Gross Domestic Product
• Ratio of Internal debt burden to prevailing interest rate of revenue
• The ratio of excess borrowing by the government to total outstanding debt
• Key indicators of financial sector stability
• Remittance
5. The province can use both types of financial instruments: a) borrowing without issuing debentures and b) borrowing by issuing debentures as per need. The local level will only use the equipment of ‘borrowing without issuing a letter of credit’ and any organized organizations will be allowed to purchase such equipment.
6. When the provincial government and local level take loans, the sources of loans will be as follows:
a. Government of Nepal
b. Banks and financial institutions
c. Non-banking financial institutions
d. Non-banking financial organizations
e. Public and Private Groups
f. General households (not applicable in case of local level).
7. In order to mobilize internal debt, the provincial and local levels will have to manage and develop the institutional structure, increase technical and administrative capabilities and invest in the development of human resources.
8. Financial management and balance should be maintained according to the financial management, debt issuance processes, monitoring evaluation and reporting. Provinces and local levels should mobilize internal debt as directed by law.
9. A detailed study is necessary to determine the optimal rate of financial loans without disturbing the macroeconomic index. Through such a detailed study, the situation of the union, province and four local levels (metropolitan, sub-metropolitan, municipal and village) can be analyzed and the limits of internal debt can be determined.
