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Nepal: Request for Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
August 2015
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Background

1. The April 25, 2015 earthquake was a major shock to the economy but the risk of debt distress is expected to remain low. The earthquake is expected to have a significant short-term effect on growth, as key sectors of the economy have been affected, most notably agriculture and tourism.3 Reconstruction needs are significant and have pushed up gross external financing requirements over the next 4–5 years. The baseline scenario assumes that the financing gap will be filled primarily with loans. Even with the resulting increased borrowing, the risk of debt distress remains low, thanks to the low starting level of external debt and the high concessionality of new debt.

2. The present value of external debt undershot the 2014 projection in the previous DSA, but is expected to rise somewhat over the medium term. The previous DSA projected the present value (PV) of public and publicly-guaranteed (PPG) external debt to decline to 13.6 percent of GDP in 2014 and to fall by almost 2 percent of GDP over the next five projection years. This DSA compares as follows:

  • The continued low execution of foreign-financed capital spending, higher-than-expected economic growth and a higher-than-expected GDP deflator in U.S. dollar terms pushed the PV of PPG external debt down to 10.7 percent of GDP in 2014, 2.9 percent of GDP lower than projected in the previous DSA. This provides the new base to project the path of external public debt in the current DSA.

  • Unlike the decline over the medium term projected in the previous DSA, the PV of PPG external debt is now projected to rise by 1.4 percent of GDP over the next 6 projection years, to 12.1 percent of GDP by 2020, owing to the increased concessional external borrowing to help finance the post-earthquake reconstruction (Table 1a).

Table 1a.Nepal: External Debt Sustainability Framework, Baseline Scenario, 2012–2035 1/(In percent of GDP, unless otherwise indicated)
ActualHistorical 6/ AverageStandard 6/ DeviationProjections
2012201320142015201620172018201920202015-2020

Average
202520352021-2035

Average
External debt (nominal) 1/22.920.217.918.019.219.319.519.819.719.815.2
of which: public and publicly guaranteed (PPG)22.720.017.918.019.219.319.519.819.719.815.2
Change in external debt2.8−2.7−2.30.11.20.10.30.3−0.1−0.1−0.7
Identified net debt-creating flows−5.2−4.3−5.2−3.52.51.31.30.2−1.0−2.8−2.8
Non-interest current account deficit−5.0−3.5−5.0−2.32.5−2.83.42.52.21.10.2−1.5−1.7−1.5
Deficit in balance of goods and services23.526.829.731.638.036.336.035.535.337.145.5
Exports10.110.711.79.67.88.08.28.68.99.49.4
Imports33.637.541.341.245.844.344.244.144.246.555.0
Net current transfers (negative = inflow)−27.5−29.3−32.6−23.75.0−32.8−33.0−32.2−32.1−32.7−33.4−36.9−45.5−39.5
of which: official−2.1−1.3−1.8−1.4−2.3−1.9−1.8−1.7−1.7−1.8−2.0
Other current account flows (negative = net inflow)−1.0−0.9−2.1−1.6−1.6−1.6−1.6−1.7−1.7−1.7−1.7
Net FDI (negative = inflow)−0.6−0.5−0.2−0.20.2−0.2−0.3−0.3−0.3−0.4−0.7−0.7−0.7−0.7
Endogenous debt dynamics 2/0.4−0.30.0−0.5−0.7−0.9−0.6−0.6−0.5−0.6−0.5
Contribution from nominal interest rate0.20.20.50.00.00.10.10.10.20.20.1
Contribution from real GDP growth−1.0−0.9−1.1−0.6−0.7−0.9−0.7−0.7−0.7−0.8−0.6
Contribution from price and exchange rate changes1.10.40.5
Residual (3-4) 3/8.01.62.93.7−1.3−1.2−1.00.11.02.72.1
of which: exceptional financing0.00.00.00.00.00.00.00.00.00.00.0
PV of external debt 4/10.710.911.511.711.912.112.112.29.6
In percent of exports92.0113.8147.1145.2144.2139.8135.2129.9102.1
PV of PPG external debt10.710.911.511.711.912.112.112.29.6
In percent of exports92.0113.8147.1145.2144.2139.8135.2129.9102.1
In percent of government revenues58.459.260.560.260.260.760.660.444.6
Debt service-to-exports ratio (in percent)10.69.511.27.89.69.39.08.98.67.07.6
PPG debt service-to-exports ratio (in percent)10.69.511.27.89.69.39.08.98.67.07.6
PPG debt service-to-revenue ratio (in percent)6.75.87.14.14.03.83.83.83.93.23.3
Total gross financing need (Billions of U.S. dollars)−0.6−0.2−0.7−0.50.90.80.70.50.1−0.7−1.3
Non-interest current account deficit that stabilizes debt ratio−7.8−0.8−2.7−2.92.22.41.90.90.3−1.4−1.0
Key macroeconomic assumptions
Real GDP growth (in percent)4.84.15.44.30.93.44.45.43.93.83.84.14.04.04.0
GDP deflator in US dollar terms (change in percent)−5.4−1.8−2.66.28.63.96.54.54.52.12.03.92.02.02.0
Effective interest rate (percent) 5/0.90.92.51.10.50.10.30.30.50.71.00.51.01.01.0
Growth of exports of G&S (US dollar terms, in percent)11.78.412.06.97.3−11.9−8.812.611.411.19.64.06.06.96.5
Growth of imports of G&S (US dollar terms, in percent)0.614.013.214.79.07.023.86.58.35.86.09.67.88.07.6
Grant element of new public sector borrowing (in percent)49.445.344.944.946.044.945.949.748.749.5
Government revenues (excluding grants, in percent of GDP)16.017.518.418.419.119.419.719.919.920.221.620.6
Aid flows (in Billions of US dollars) 7/0.70.50.60.50.80.90.90.91.01.42.1
of which: Grants0.50.30.50.40.60.70.70.70.81.01.6
of which: Concessional loans0.20.10.10.10.20.20.20.20.20.40.6
Grant-equivalent financing (in percent of GDP) 8/2.74.33.73.53.43.23.12.42.9
Grant-equivalent financing (in percent of external financing) 8/76.769.372.773.075.778.580.485.881.9
Memorandum items:
Nominal GDP (Billions of US dollars)18.919.319.821.223.626.028.229.931.742.677.0
Nominal dollar GDP growth−0.82.22.67.411.210.18.66.05.88.26.16.16.1
PV of PPG external debt (in Billions of US dollars)2.22.32.73.03.33.63.85.17.3
(PVt-PVt-1)/GDPt-1 (in percent)0.61.81.31.20.90.71.10.70.20.5
Gross workers’ remittances (Billions of US dollars)4.44.95.56.26.77.37.98.59.314.031.6
PV of PPG external debt (in percent of GDP + remittances)8.48.49.09.19.39.49.39.26.8
PV of PPG external debt (in percent of exports + remittances)27.028.231.932.432.832.431.629.019.1
Debt service of PPG external debt (in percent of exports + remittances)3.31.92.12.12.02.12.01.61.4
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

3. The total stock of public debt in Nepal declined in 2014 to 28.3 percent of GDP from 32.3 percent in 2013, largely reflecting prudent fiscal policy and favorable economic growth.

  • External debt stood at 17.9 percent of GDP by the end of FY 2013/2014 (US$3.5 billion), of which 86 percent was concessional borrowing from the World Bank and the Asian Development Bank (ADB). Japan was the largest bilateral creditor, followed by Korea, India and China.

  • Domestic debt declined from 12.2 percent of GDP in 2012/13 to 10.4 percent by the end of FY2013/14, as low budget execution resulted in a budget surplus.

Nepal: Structure of External Public Debt, 2014
Value (in

million USD)
In percent

of GDP
NPV (in

million USD)
Public debt3,53117.92,468
Multilateral3,21516.32,435
Asian Development Bank1,5027.61,245
World Bank1,5828.01,028
IMF360.232
Other950.5130
Official Bilateral3331.733
Paris Club2251.110
Non-Paris Club1080.523
Commerical
Source: Nepali authorities; Fund staff estimates.
Source: Nepali authorities; Fund staff estimates.

4. The authorities have taken several measures in recent years to enhance debt management capacity, but further improvement is needed in several areas. World Bank staff conducted a Debt Management Performance Assessment (DeMPA) in August 2014. Compared to an earlier assessment, in February 2010, it was found that progress had been made on cash flow forecasting and cash balance management, as well as on coordination with macro policy. On the latter, the assessment highlighted the recent creation of separate open market committees—for public debt management and monetary management. The DeMPA called for improving the effectiveness of managerial oversight on the debt management functions. It was also recommended to task one entity with the preparation of a comprehensive debt management strategy, analyze the cost and risks of the debt portfolio, and make debt service forecasts more robust.

Nepal: Public Domestic Debt 1/(in billions of Nepalese rupees unless otherwise stated)
201220132014
Government bonds 2/209207202
Treasury Bills131.6136.5136.5
Development Bonds57.551.647.1
National Savings Bonds15.715.716.6
Citizen Savings Bonds4.13.21.5
Foreign Employment Bonds0.00.10.1
Special Bonds0.20.00.0
Memorandum items:
Total domestic debt outstanding as percent of GDP13.712.210.4
NRB overdrafts (+) / deposits (-)−2−14−31
Source: Nepali authorities; Fund staff estimates

Fiscal years ending in mid-July

Source: Nepali authorities; Fund staff estimates

Fiscal years ending in mid-July

Macroeconomic Assumptions

5. Macroeconomic assumptions for the current DSA are consistent with the macroeconomic framework underlying the current Rapid Credit Facility (RCF) arrangement. The main differences from the previous DSA include (Box 1): (i) a deterioration in growth prospects; (ii) slower revenue gains relative to the previous DSA, reflecting short-run revenue losses related to the earthquake followed by a gradual recovery over the medium term; and (iii) a deteriorating current account in the near and medium term, driven by rising imports of reconstruction-related materials, which more than offset temporarily stronger remittances. In the long term, however, the current account is expected to recover somewhat.

  • Real GDP growth is expected to fall from 5.4 percent in 2013/14 to 3.4 percent in 2014/15, due to significant economic losses resulting from the earthquake. Growth is expected to gradually recover over the medium term as reconstruction gains momentum. The baseline assumes improved budget execution of capital spending compared to the previous DSA in line with authorities’ efforts in this area and with intensified reconstruction efforts. However, experience in other fragile countries struck by natural disaster suggests that potential growth is likely to be adversely affected by the earthquake. In light of this, growth in the medium and long run is projected around 4 percent, lower than the 4.5 percent assumed previously.

  • Fiscal policy is expected to remain responsible. Revenue is expected to deteriorate in the short term and slowly recover thereafter, while the expenditure effect on the budget related to reconstruction and investment expenditure is expected to dominate over the medium term. The resulting higher fiscal deficits reflect these expenditures—the primary balance is expected to deteriorate from a surplus of 1.9 percent of GDP in 2014 to a deficit of 1.4 percent in 2035. Net incurrence of liabilities is projected to rise from -1.3 percent of GDP in 2013/14 to an average of 3.0 percent over the next five years, decreasing to 1.0 percent towards the end of the DSA horizon. This path is consistent with a stable debt profile. Financing of the deficit is expected to tilt increasingly towards domestic sources (net domestic financing rising to 1.7 percent of GDP in the long term), as public financial management improves and external loans decline relative to GDP.

  • The external current account is projected to move from a sizeable surplus in 2013/14 to moderate deficits over the medium term. The exchange rate peg with the Indian rupee is assumed to remain at the current level over the projection period. Import growth is expected to moderate in line with remittances. Export growth is projected to increase only moderately, reflecting weak competitiveness due to significant infrastructure bottlenecks. As a consequence, the ratio of exports to GDP is expected to gradually decline over the medium term.

  • Relative to the previous DSA, the baseline assumes additional external financing of approximately US$2.7 billion from 2015/16 to 2019/20 in order to meet post-earthquake reconstruction related financing needs. This is the amount of new pledges of financial assistance in the form of grants and loans announced by Nepal’s development partners in the context of the International Conference on Nepal’s Reconstruction (ICNR) held in Kathmandu on June 25, 2015 (See Table 6 in the accompanying Staff Report for Request for Disbursement under the Rapid Credit Facility). About forty percent of this additional financing is assumed to come in the form of grants and the remainder in the form of loans.

Box 1.Macroeconomic Assumptions Table

Previous DSACurrent DSACurrent vs. Previous
2014MTLT20142015MTLTMTLT
Real growth (%)4.84.74.55.43.44.24.0−0.5−0.5
Inflation (GDP deflator, %)8.87.15.08.75.97.25.00.10.0
Revenues and grants (% GDP)21.121.722.520.820.322.122.80.40.3
Grants (% GDP)2.82.52.32.41.92.62.30.00.0
Primary expenditure (% GDP)21.422.924.018.920.924.524.21.60.2
Net acquisition of non-financial assets (% GDP)3.74.45.23.33.95.75.01.3−0.2
Primary deficit (% GDP)0.31.11.5−1.90.62.31.41.2−0.1
Net incurrence of liabilities1.32.12.5−1.30.63.01.00.9−1.5
Net domestic financing (% GDP)1.01.01.50.91.01.71.70.70.2
Exports of G&S (y/y growth)4.17.26.012.0−11.97.26.50.00.5
Imports of G&S (y/y growth)10.910.26.113.27.010.17.6−0.11.6
Remittances (y/y growth)15.07.96.012.411.28.58.50.62.5
Current account balance (% GDP)4.20.9−0.84.62.8−2.01.3−2.92.1
Note: MT (medium term) is the average over the next 5 years, and LT (long term) is the average over the following 7-20 years.
Note: MT (medium term) is the average over the next 5 years, and LT (long term) is the average over the following 7-20 years.

External Debt Sustainability

A. Baseline

6. Under the baseline scenario, Nepal’s external debt indicators remain well below indicative sustainability thresholds (Figure 1 and Table 1b). As in the previous DSA, remittances are formally included in the analysis as inflows remained robust even before the earthquake, reaching 28 percent of GDP in 2013/14. However, debt dynamics may be susceptible to volatility in remittance flows, as captured under standard shocks, discussed below. Over the medium term, the present value (PV) of external debt stabilizes at a level equal to: 9 percent of GDP+remittances, 29 percent of exports + remittances, and 60 percent of revenues. The ratio of debt service-to-exports + remittances stabilizes at 2 percent over the medium term, while the ratio of debt service to revenues stabilizes at 3 percent.

Figure 1.Nepal: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2015–2035 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a Non-debt flows shock; in c. to a Non-debt flows shock; in d. to a Combination shock; in e. to a Non-debt flows shock and in figure f. to a Combination shock

Table 1b.Nepal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–2035(In percent)
Projections
20152016201720182019202020252035
PV of debt-to-GDP + remittances ratio
Baseline89999997
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/87532112
A2. New public sector loans on less favorable terms in 2015-2035 289101111111211
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201789999997
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/89999997
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20178910101010107
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/816222020201810
B5. Combination of B1-B4 using one-half standard deviation shocks815221919191710
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/81111121212128
PV of debt-to-exports+remittances ratio
Baseline2832323332322919
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/282418128557
A2. New public sector loans on less favorable terms in 2015-2035 22834363838383930
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20172831323232312919
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/2830323232312819
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20172831323232312919
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/28791077068665528
B5. Combination of B1-B4 using one-half standard deviation shocks2865906159574825
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/2831323232312919
PV of debt-to-revenue ratio
Baseline5961606061616045
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/59453322149810
A2. New public sector loans on less favorable terms in 2015-2035 25964676972748171
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-20175960616162616145
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/5957585859595944
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-20175965696970707051
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/599913412912812711566
B5. Combination of B1-B4 using one-half standard deviation shocks599713513113012911869
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/5983838283838361
Debt service-to-exports+remittances ratio
Baseline22222221
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/22222210
A2. New public sector loans on less favorable terms in 2015-2035 222222222
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201722222221
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/22222221
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-201722222221
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/23433342
B5. Combination of B1-B4 using one-half standard deviation shocks23322232
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/22222221
Debt service-to-revenue ratio
Baseline44444433
A. Alternative Scenarios
A1. Key variables at their historical averages in 2015-2035 1/44433311
A2. New public sector loans on less favorable terms in 2015-2035 244444555
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2016-201744444433
B2. Export value growth at historical average minus one standard deviation in 2016-2017 3/44444433
B3. US dollar GDP deflator at historical average minus one standard deviation in 2016-201744444544
B4. Net non-debt creating flows at historical average minus one standard deviation in 2016-2017 4/44555576
B5. Combination of B1-B4 using one-half standard deviation shocks44555576
B6. One-time 30 percent nominal depreciation relative to the baseline in 2016 5/46555555
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/4848484848484848
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly a an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly a an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

B. Stress Tests and Alternative Scenarios

7. Debt dynamics remain resilient to standard shocks. These stress tests include shocks to GDP growth, exports, non-debt creating flows, and a combination of these shocks, as well as a onetime 30 percent nominal depreciation shock. Under the most severe shock (to non-debt creating flows, capturing a remittance shock), the PV of debt to exports + remittances rises rapidly over the next three years but stays below the threshold, and thereafter declines again, while all other indicators remain well below the thresholds.

Public Debt Sustainability

8. Under the baseline, the ratio of public debt to GDP rises gradually from 28.3 percent in 2014 to 31.2 percent in 2035. In PV terms, public debt to GDP also increases from 21.1 percent in 2014 to 25.6 percent by 2035, while as a ratio of revenues and grants, the PV of public debt rises from 101.5 percent in 2014 to 108.4 percent by 2035. As with the 2014 DSA, the composition of public debt is projected to tilt towards higher domestic debt, from 37 percent in 2014 to 51 percent of total public debt in 2035.

9. Debt dynamics remain resilient under standard stress tests. In the context of the PV of public debt-to-GDP ratio, the most extreme shocks are the real GDP growth at historical average minus one standard deviation and the permanently lower GDP growth. These tests result in the PV of public debt-to-GDP ratio increasing to 31 percent by 2035, again staying well below the 56 percent threshold.

10. Contingent liabilities arise mainly from the operations of state owned enterprises (SOEs), and rising pension costs need to be addressed to head off future risks:

  • Nepal Oil Corporation (NOC) and Nepal Electricity Authority (NEA) have been the two biggest loss-making SOEs, on average making combined losses of 1½ percent of GDP a year, and needing frequent government bail-outs despite periodic (though not automatic) price adjustments to recover costs. However, as a result of the decline in international oil prices during the second half of 2014, NOC’s losses have been reduced. In fact, in early 2015 retail prices exceeded NOC’s breakeven prices.

  • Civil service pension liabilities, currently at a modest 1¼ percent of GDP, rise to 1½ percent by 2025, and can be addressed through adequate parametric reforms in the medium term according to a 2014 IMF TA mission on pension reforms.

Authorities’ Views

11. The authorities broadly concurred with the findings of the DSA. While underscoring their commitment to a prudent borrowing policy, they noted the country’s large reconstruction need in the aftermath of the earthquake. The authorities will seek to mobilize concessional borrowing to finance the reconstruction effort and put the economy on a path of higher growth and faster poverty reduction.

Conclusion

12. The DSA suggests Nepal’s risk of debt distress is low. Generally prudent fiscal policy and low execution of capital spending budgets have continued to underpin declining levels of public debt. Higher financing requirements driven by post-earthquake reconstruction and higher public investment expenditures are expected to be manageable under the assumption that they are temporary and that financing terms are favorable. As a result, indicators of the public external debt stock and public debt service ratios remain comfortably within the policy-dependent indicative thresholds, even under stress tests, due to the assumed continued high level of concessionality of official borrowing.

Figure 2.Nepal: Indicators of Public Debt Under Alternative Seniors, 2015–2035 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio on or before 2025.

2/ Revenues are defined inclusive of grants.

Table 2a.Nepal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012–2035(In percent of GDP, unless otherwise indicated)
ActualAverage5/Standard Deviation5/EstimateProjections
2012201320142015201620172018201920202015-20

Average
202520352021-35

Average
Public sector debt 1/36.432.328.325.126.527.528.428.428.831.631.2
of which: foreign-currency denominated22.720.017.918.019.219.319.519.819.719.815.2
Change in public sector debt1.9−4.2−4.0−3.11.41.00.90.00.50.4−0.5
Identified debt-creating flows2.9−3.1−5.3−1.01.30.90.90.00.50.4−0.5
Primary deficit1.2−1.8−1.90.31.30.63.03.22.71.21.52.01.60.61.4
Revenue and grants18.719.320.820.321.821.922.222.322.422.623.6
of which: grants2.71.82.41.92.72.62.52.52.52.42.0
Primary (noninterest) expenditure19.917.518.920.924.825.124.923.623.924.224.3
Automatic debt dynamics1.8−1.3−3.3−1.6−1.7−2.2−1.9−1.3−1.1−1.2−1.1
Contribution from interest rate/growth differential−1.8−1.7−2.2−1.8−1.1−1.8−1.4−0.8−1.1−1.2−1.1
of which: contribution from average real interest rate−0.2−0.2−0.6−0.9−0.1−0.4−0.40.20.00.00.1
of which: contribution from real GDP growth−1.6−1.4−1.6−0.9−1.1−1.3−1.0−1.0−1.0−1.2−1.2
Contribution from real exchange rate depreciation3.60.4−1.10.2−0.6−0.5−0.4−0.40.0
Other identified debt-creating flows−0.1−0.10.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)−0.1−0.10.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes−1.0−1.01.3−2.10.10.00.00.00.00.00.0
Other Sustainability Indicators
PV of public sector debt21.118.018.819.920.720.621.224.025.6
of which: foreign-currency denominated10.710.911.511.711.912.112.112.29.6
of which: external10.710.911.511.711.912.112.112.29.6
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/6.24.11.93.56.55.75.44.24.65.15.3
PV of public sector debt-to-revenue and grants ratio (in percent)101.588.986.490.593.492.494.5106.3108.4
PV of public sector debt-to-revenue ratio (in percent)115.098.098.8102.6105.1103.9106.4118.6118.7
of which: external 3/58.459.260.560.260.260.760.660.444.6
Debt service-to-revenue and grants ratio (in percent) 4/12.415.013.39.713.48.58.59.510.110.913.6
Debt service-to-revenue ratio (in percent) 4/14.516.515.110.615.39.69.610.611.412.214.9
Primary deficit that stabilizes the debt-to-GDP ratio−0.72.42.13.71.62.21.81.21.01.21.1
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)4.84.15.44.30.93.44.45.43.93.83.84.14.04.04.0
Average nominal interest rate on forex debt (in percent)1.01.93.41.30.80.10.30.30.50.71.00.51.01.01.0
Average real interest rate on domestic debt (in percent)−0.4−2.7−8.0−4.03.23.5−1.6−1.70.72.00.61.61.71.6
Real exchange rate depreciation (in percent, + indicates depreciation)19.12.0−5.6−3.510.71.2
Inflation rate (GDP deflator, in percent)6.66.68.79.03.75.98.68.37.75.55.06.85.05.05.0
Growth of real primary spending (deflated by GDP deflator, in percent)11.1−8.514.01.76.313.924.26.73.1−1.85.38.64.23.94.1
Grant element of new external borrowing (in percent)49.445.344.944.946.044.945.949.748.7
Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

The risk rating is determined using the LIC DSA framework. Nepal’s fiscal year starts in mid-July. For example, fiscal year 2014 extends from mid-July 2013 until mid-July 2014.

The thresholds are determined based on Nepal’s policy performance rating, which is “medium” according to the CPIA score which averaged 3.31 in 2011–13. Nepal continues to receive large amounts of remittances, averaging 25.7 percent of GDP and 237.3 percent of exports of goods and services per annum during the past three years. As remittances exceed relevant thresholds (10 percent of GDP and 20 percent of exports of goods and services) they are incorporated into the analysis.

The Post Disaster Needs Assessment estimates preliminary headline damage at around US$5bn (24 percent of GDP). Economic losses (e.g. the impact on the economy due to the slowdown in economic activities in the aftermath of the earthquake, such as through forgone revenue in tourism, etc.) are estimated at around 9 percent of GDP.

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