Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Nepal

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Nepal

Nepal: Joint Bank-Fund Debt Sustainability Analysis1

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This DSA updates the joint World Bank-Fund analysis of February 2020 to reflect Nepal’s recent economic development, which have been considerably affected by the COVID-19 pandemic and related containment policies. Even under the COVID-19 pandemic, Nepal’s debt is assessed to remain at a low risk of external and overall debt distress, unchanged from the 2020 DSA4. None of the debt and debt service indicators breach the indicative threshold values. However, given elevated gross financing needs in Nepal, a deeper global slowdown could negatively affect Nepal’s risk of debt distress. The Nepalese authorities should continue to: (i) improve domestic productivity; (ii) streamline bureaucratic processes; (iii) compile PPP projects and private sector external debt; (iv) implement a medium-term debt strategy and develop the government bond market; and (v) improve subnational governments’ public financial management and reporting, and implement a prudent framework for subnational borrowing.

Table 1.

Nepal: External Debt Sustainability Framework, Baseline Scenario, 2019–2040

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ 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.3/ Includes exceptional financing (ie. 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. The residuals in this table are mainly related to reserve drawdown and net errors and omissions. For example, there were reserve drawdown of 4.2% of GDP and positive net E&Os of 2.7% of GDP in FY2018/19.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.9/ Fiscal year. For example, year 2019 means FY2018/19 (mid-July 2018 to mid-July 2019).
Table 2.

Nepal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–2040

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities and staff estimates and projections.1/ Coverage of debt: The central, state, and local governments plus extra budgetary funds, central bank, government-guaranteed debt, non-guaranteed SOE debt . Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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 and other debt creating/reducing flows.5/ Defined as a primary deficit m inus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.7/ The residuals in this table are mainly related to net acquisition of financial assets For example, the projection of net acquisition of financial assets in FY2019/20 is 1.6% of GDP.8/ Fiscal year. For example, year 2019 means FY2018/19 (mid-July 2018 to m id-July 2019).
Figure 1.
Figure 1.

Nepal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 155; 10.5089/9781513543253.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Nepal: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 155; 10.5089/9781513543253.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2030. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Nepal: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 155; 10.5089/9781513543253.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Nepal: Realism tools

Citation: IMF Staff Country Reports 2020, 155; 10.5089/9781513543253.002.A002

Table 3.

Nepal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–2030

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Nepal: Sensitivity Analysis for Key Indicators of Public Debt , 2020–2030

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Debt coverage has not changed from the February 2020 DSA.

2

Nepal’s composite indicator score is 3.28, which signals a strong debt-carrying capacity.

3

The macroframework underlying this DSA update is the same as that included in the staff report of the 2020 RCF request, based on available information at the time. However, the COVID-19 economic impact and policy response are rapidly evolving, and risks are heavily tilted to the downside. This DSA does not incorporate the potential debt service reprofiling of official bilateral debt.

4

IMF Country Report No 20/96, April 2020

Nepal: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Nepal
Author: International Monetary Fund. Asia and Pacific Dept
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    Nepal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2020–2030

  • View in gallery

    Nepal: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

  • View in gallery

    Nepal: Drivers of Debt Dynamics – Baseline Scenario

  • View in gallery

    Nepal: Realism tools