Public debt is a term used to describe a government's issue of domestic or international loans, which continues to serve as a viable alternative to support government expenditure and development projects for which the government lacks money. The concept of public debt originated from Great Britain and started only in the 17th century. 

A government takes loans when the revenue it generates through the taxes and other sources is less than the expenditure it has to incur on the projects and initiatives it promises to deliver.  Due to the political difficulty of higher taxes that decreases the amount of money available to people and affects economic growth, the countries frequently borrow to close the gap between their income and consumption. However, in today's globalized era, the rise in public debt is a result of shifting political and economic conditions in an effort to achieve a balance between the two. Countries borrow from each other or from global organizations like the World Bank and the International Monetary Fund (IMF).

Nepal started budgeting only in 1951 and ever since, Nepal has had a budgetary deficit (the expenditure incurred is higher than the revenues generated). However, public debt in Nepal was taken only after 11 years of initiation of the budgetary practice. Thus, our history of public debt is not very old. The government started to take domestic loans in 1962 whereas it started to take foreign loans in 1963 from the USSR and the UK. In recent years, loans are widely accepted as means of financing measures to reduce Balance of Payment (BOP) deficit, trade deficit or imbalance, and resource gap. 

With the enforcement of Public Debt Act 1960, public debt in forms of Treasury Bills was issued in Nepal for the first time in 1962 amounting to Rs.7 million. Another instrument of public debt, Development Bond, was first issued in fiscal year 1963/64, amounting to Rs 131.0 million. National Savings Certificate was first issued in January 1984 amounting Rs.250 million. Besides, there are many other bonds such as; Special Bonds, Land Compensation Bonds (1964), Forest Compensation Bonds (1965), Interest Prize Bond (1991) and other various special bonds.

In Nepal, government expenditure is increasing very fast as compared to increase in revenue. As a result, the budget as well as fiscal deficit are widening each year. The increasing saving-investment gap, the lack of sufficient revenue generation and the rise in the outstanding debt hints that public debt is a necessity in Nepal. However, data suggests that the dependence on external and internal debt has increased so much that the aggregate public debt in Nepal increased from Rs.261.59 billion in the year 2000/01 to Rs.2011.58 billion in the year 2021/22^P.

P = Provisional Estimated
R= Revised Estimated

Source: Current Macroeconomic and Financial Situation Tables Based on 11 months data of 2022-23 from Nepal Rastra Bank

As per the NRB data, the revised estimates of the fiscal year 2077/78 shows that the annual growth of the domestic debt stands at 30.5%, the foreign debt at 14.8% and the total debt at 21.5%. The provisional estimates of the year 2078/79 ,however , suggest that annual growth rate of the domestic data stands at 23%, foreign debt at 10% and the overall debt at 16%. Moreover, the debt to GDP ratio has exceeded the periodic targets of the sustainable development goals and the final 2030 target of 35%.

A study "Trend and Structure of Public Debt Situation in Nepal" by Mr. Sarad Raj Acharya has made the conclusion that, government borrowing by Nepal has been increasing rapidly and financed mostly on the unproductive sectors and hence government always lacks the resources then borrows the loan to pay the previous ones. He argued that such excessive dependency upon external loans might lead the nation into debt trap, if the term of trade is not improved. Studies have also shown that developing countries like Nepal mostly need foreign currency to import many capital goods required for development activities. These countries have to depend more on external borrowing than internal borrowing because of low levels of saving.  

“We are falling into a domestic debt trap, we have reached a point where we are having to borrow more money to pay our debt,” warned former finance minister Yubaraj Khatiwada. “Alternatively, the government’s capacity to spend on development is now weaker.”According to Finance Minister Dr Prakash Sharan Mahat, the government will raise Rs1.24 trillion in revenues in the fiscal year 2023-24, however the government plans to borrow Rs240 billion in internal loans, and will be spending over Rs 275.79 billion paying off old debt. Hence, the debt trap situation is scary for Nepal and the credit rating of the country is also decreasing simultaneously. 

The foreign exchange reserve is a strong indicator which shows whether or not we can do away with our external loans. The fluctuation in the exchange rate stands as a major hindrance in this because all the external loans that have been borrowed have to be paid back in the foreign currency via the foreign exchange reserve. The depreciation of the Nepali rupee versus the US dollar has increased Nepal's debt obligation in local currency terms. Foreign currency debt payments may become more challenging for us due to the shrinking foreign currency reserve and rising government borrowing from international creditors. This may force the nation into a loop of borrowing more money to repay its existing foreign debt. 

The nation must spend the borrowed funds wisely in addition to implementing plans that help in debt reduction for the Government of Nepal. At the moment, borrowing has primarily been used in unproductive industries. The Government of Nepal should use the borrowed funds to build a sustainable economy by investing in productive sectors with high levels of efficiency in order to be able to repay the loans over time. 

Nepal should also focus on diversifying its economy beyond traditional areas of agriculture and tourism. Encouraging industries such as manufacturing, information technology, renewable energy and services can help generate additional revenue streams and reduce dependency on foreign loans. Strengthening tax collection through reduced tax evasion and voluntary compliance is essential to strike a balance between promotion of economic growth and maintenance of  a fair and progressive tax system. Revenues collected through tax reduce the need for seeking loans, internal or external. Encouraging export oriented industries can also help generate foreign exchange and reduce trade imbalances. Nepal can provide the incentives of subsidies to industries which have the potential for export. 

However, it is important to note that these measures require a comprehensive and sustained effort from the government, along with active participation from various stakeholders, to effectively manage Nepal’s debt trap and promote sustainable economic growth.