Laxmi Capital News
Funds marked for debt servicing may be insufficient

A sharp depreciation of Nepali currency vis-à-visthe US dollar has government officials fretting about the possibility that thefunds earmarked for debt servicing this fiscal will be insufficient.

Since the beginning of this fiscal, Nepali currency has slid by6.07 per cent. According to Nirmal Hari Adhikari, budget division head at thefinance ministry, the funds earmarked for the repayment of principal andinterest of foreign debt will be insufficient as Nepali currency iscontinuously sliding against the dollar. “We had earmarked the funds based onthe exchange rate during the time of budget formulation, with certain marginfor currency depreciation. However, the greenback strength has far exceeded ourassumption that the exchange rate would hover at around Rs 110 per dollar.”

The government’s foreign debt stands at around Rs 503.63 billion,according to financial comptroller general’s office. The budget for the 2018-19fiscal has allocated Rs 28.11 billion for repayment of principal and interestof the foreign loan.

In case funds for debt servicing are not enough, the governmentwill have to transfer the unspent money allocated to other sectors to make upfor the shortfall.

Stronger dollar will raise the cost of development works as well,according to the finance ministry. This is because of increased price ofpetroleum products as well as construction equipment. In a nutshell, allimports will be costlier, as per officials.

The dollar strength is also likely to affect the balance sheet ofNepal Electricity Authority — the power utility of the country — which hadfinally started generating profit from the previous fiscal. This is because NEAis purchasing electricity from the 60-megawatt KhimtiHydel Project at 10 UScents per unit and from 50-megawatt Upper Marsyangdi at seven cents (average)per unit. Moreover, Nepalis travelling abroad for vacation and education willhave bigger holes drilled in their pockets.

Last fiscal, Nepalis spent Rs 79.6 billion on travel while theamount spent for overseas education (in terms of Nepali rupee) by Nepalistudents stood at Rs 38.09 billion.

The depreciation of local currency, on the one hand, will causeinflation to skyrocket as imports become dearer, and on the other hand, resultin balance of payment crisis.

“To avoid BoP crisis, the government should curb import of certainluxury items, like gold, expensive private vehicles, reduce consumption ofpetroleum products and promote use of electricity — electric cars and electricappliances at home,” said JanardanDev Pant, a banker by profession. “We mustadopt austerity measures to avoid a crisis.” He said the central bank shouldconsider investing its foreign exchange reserve (that would cover the importfor certain months and be kept idle)  in high yield instruments, such asgovernment treasury and sovereign bonds.

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