India`s sovereign external debt management

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Transcript India`s sovereign external debt management

Economic Situation and
Management of External Debt
in Nepal
Presented by
Professor Tarun Das
Institute for Integrated Learning in
management, New Delhi, India
Formerly, Economic Adviser, MOF and
Planning Commission, Govt.of India
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Contents
1. Economic Background of Nepal
2. Current Economic and external Debt
Situation
3. Economic Outlook and Risks
4. Major Observations and Conclusions
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1.1 Economic Background-1
1. Any economic prospect of Nepal need to be
considered in the background that Nepal lies
in a specific geo-political situation between
the two economic giants of the world – India
and China.
2. Nepal is a Least Developed Land Locked
Country (LLDC) and one of the poorest
country, but it has direct access to the sea of
humanity in the either side of its border that
constitutes the largest market in the world.
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1.2 Economic Background-2
3. Nepal is committed to the so-called LPG (viz.
liberalization, privatisation and globalisation).
4. Foreign aid accounted for more than half of the
development budget.
5. Govt priorities focused on the integrated development of agriculture, industry, transport & telecom.
6. Agriculture is principal economic activity,
employing 80% of the population and providing
37% of GDP.
7. Nepal made significant progress in exploiting basic
resources such as tourism and hydroelectricity.
8. Progress in Indo-Nepal Economic co-operation.
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1.3 Economic Background-3
9. Progress in Regional Economic co-operation.
10. Nepal became full-fledged member of WTO on 23
April 2004.
11. Similarly Nepal is now a member of two regional
trading arrangements; South Asian Free Trade
Agreement (SAFTA) and BIMST-EC.
12. The signing of SAFTA framework treaty in 6
January 2004 and BIMST-EC free trade area on 8
February, 2004 has been a landmark in the
economic history of Nepal as these would help to
integrate the Nepalese trade and economy at the
regional and trans-regional level.
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1.4 Economic Background-4
13. Nepal is currently an observer to the Bangkok
Agreement. This is a regional preferential trading
arrangement encompassing South Asia, South
East Asia and Far East, with the membership of
six countries viz. China, India, Sri Lanka,
Bangladesh, Lao PDR, and South Korea, with
collective population of around 2.5 billion.
14. Currently, more than 1500 products have been
bought
under
the
preferential
trading
arrangement. This agreement is based on positive
list approach following the product-to-product
negotiations.
15. These Free Trade Agreements (FTAs) are
supposed to enter into progressive stages of free
trade including a common currency in South Asian
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called “ rup”. External Debt in Nepal- Tarun Das
2.1 Economic Growth and
Financial Sector
1. Nepal’s economic growth has been adversely
affected by the recent political conflicts.
2. Real GDP growth rate declined from 5% per annum
in 1990s to only 2% during 2000−2005.
3. Inflation remained low except 6.6% in 2004-05.
4. International reserves were adequate.
5. Despite significant progress in management and
credit evaluation practices, the share of nonperforming assets in NBL and RBB remained high.
6. Broad money growth slowed from 12¾ percent in
2003/04 to 8 percent in 2004/05
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2.2 Trends of growth, money supply
and inflation (per cent)
Items
1.Real GDP Growth
2000 2001- 2002- 2003 2004-01
02
03
-04
05
5.6 -0.6
3.4
3.4
2.5
2.CPI inflation rate
3.4
3.5
6.1
2.0
6.6
3.Deficit (% of GDP)
4.5
4.3
1.6
1.0
0.9
4.M3 (% of GDP)
15.2
4.4
9.8
12.7
8.0
5.Credit (% of GDP)
18.8
9.2
12.0
9.3
13.3
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2.3 Trends of budgetary operations
(per cent of GDP)
Items
2000 2001- 2002- 2003 2004-01
02
03
-04
05
1.Total revenue
11.4
11.5
12.3 12.2
13.0
2.Total expenditure
17.5 17.2
16.0 15.5
16.0
3.Current exp.
11.1
11.5
11.4
11.2
11.7
4.Capital exp.
6.4
5.6
4.6
4.3
4.3
5.Overall deficit
4.5
4.3
1.6
1.0
0.9
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2.4 Balance of Payments (US$ Million)
Items
2000- 2001- 2002- 2003 200401
02
03
-04
05
1.Current A/C
162
106
16
59
226
2.In percent of GDP
2.9
1.9
0.3
0.9
3.1
3.Overall balance
38
-39
93
235
24
4.Official reserves
1020 1048 1178 1471 1507
5.Rupees per US$
74.7
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78.0 74.8 74.1
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70.0
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2.5 Fiscal Situation
1. Overall fiscal deficit of Nepal remained
manageable in 2004/05, despite revenue shortfalls
(due to weaker economic growth, continued
excise leakages and delayed excise duty refunds
from India) and expenditure over-runs due to
higher civil service wages and allowances, and
security-related expenditures.
2. Overall deficit at 1% of GDP was significantly
lower than budget target at 2½ percent of GDP.
3. External loans fell short of the budget target, as
assistance from the World Bank, ADB and donors
dwindled. The domestically financed deficit was
also lower than budgeted (at ½ percent of GDP).
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2.6 External Trade
1. Nepal's major exports are carpets and garments
accounting for 70% of total goods exports. Trade
with India rose rapidly after conclusion of the
1996 bilateral trade treaty, and now accounts for
50% of all exports and 47% of all imports.
2. Nepal's principal export destinations include India
(50%), United States (22%), Germany (8%),
United Kingdom (3%), and France (2%).
3. Principal imports of Nepal consist of gold,
machinery, equipment, POL and fertilizers.
4. Major sources of imports in 2004 were India
(47%), China (10%), UAE (9%), Singapore (4%)
and Saudi Arabia (4%).
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2.7 Current Account Balance
1. The current account and overall balance of
payments remained in surplus.
2. Despite disruptions related to the insurgency and
the elimination of textile quotas, total exports rose
by 10% in 2004/05, mainly due to rise in exports
to India by 30% percent.
3. Import growth was stagnant due to weak
economic activity. A 35% increase in oil imports
was offset by a 6% decline in non-oil imports.
4. Remittances continued to be buoyant, and the
current account surplus increased from 1% of
GDP in 2003/04 to 3% of GDP in 2004/05.
5. International reserves increased to US$1.5 billion
(7¾ months of imports) at end 2004/05.
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2.8 India, Nepal, Bangladesh and
Vietnam are categorized as Less
Indebted Low Income Countries
Severely Indebted:
Either PV/XGS > 220%
Or
PV/GNP > 80%
Low Income:
PC-GNP less than $765
Middle Income : PC-GNP
between $766 and $9385
Moderately Indebted:
Either 132% <PV/XGS< 220%
or
48% <PV/GNP< 80%
Low Income:
PC-GNP less than $765
Middle Income : PC-GNP
between $766 and $9385
Less Indebted:
Both PV/XGS< 132%
and PV/GNP< 48%
Low Income:
PC-GNP less than $765
Middle Income : PC-GNP
between $766 and $9385
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2.9 External Debt Indicators of
South Asian countries in 2003
Country and Rank in Present Value PV/ GNP PV to
terms of present of external debt ratio
exports
value of external debt (US$ billion) (per cent) ratio (% )
1. India
100.3
19
106
2. Pakistan
29.7
41
189
3. Bangladesh
12.8
25
128
4. Srl Lanka
8.4
51
110
5. Nepal
2.1
38
131
6. Bhutan
0.4
74
252
7. Maldives
0.2
35
41
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Indebtedness
and income
Classification
Less/ Low
Moderate/ Low
Less/ Low
Moderate/ Middle
Less / Low
Severe/ Low
Severe/ Middle
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2.10 Nepal- External Debt
Indicators ($ Million)
Year
1980
EDT
205
LTD
156
PG
156
Use of IMF cedit42
Short-term debt7
GNI
1958
XGS
272
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1990
1640
1572
1572
44
24
3640
447
2000
2846
2805
2805
12
29
5514
1456
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2003
3253
3176
3176
11
66
5843
1873
16
2.11 Nepal- External Debt
Indicators ($ Million)
1980
1990
2000
2003
TDS
8
70
103
113
Interest
5
29
31
31
Pr.Rep
3
41
72
82
MGS
419
846
1825
2016
RES
272
354
987
1286
BCA
-39
-289
-131
171
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2.12 - Nepal
External Debt Indicators (%)
EDT/ XGS
EDT/ GNI
TDS/ XGS
INT/ XGS
INT/ GNI
RES/ EDT
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1990
1999
2000
2003
75
10.5
2.9
1.8
0.3
132.7
367
45.1
15.7
6.5
0.8
21.6
195
51.6
7.1
2.1
0.6
34.7
174
55.7
6
1.7
0.5
39.5
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2.13-NepalExternal Debt Indicators (%)
1990
1999
2000
2003
RES/ EDT 132.7
RES/ MGS (months)
7.8
Short/EDT
3.4
Conc/ EDT
76
Multi/EDT
62
21.6
5
1.5
89
77
34.7
6.5
1
98
86
39.5
7.7
2
97
84
Pub/EDT
99
99
98
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2.14-Nepal-Currency Composition
of External Debt (%)
Yen
US$
Multiple
Others
Total
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1990
1999
2000
2003
8
50
31
11
100
8
50
33
9
100
9
39
42
10
100
11
43
36
10
100
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3.1 Economic Outlook and Risks
1
2
3
4
Nepal's growth prospects are contingent on
political stability and improved security.
Continuation of structural reforms along
with political stability and better security
conditions can lead to a distinct
improvement in agricultural, manufacturing
and service production, tourism earnings
and government activities.
This will help Nepal to achieve growth rates
around 5−5½ percent in the near and
medium term.
With the rupee peg, inflation is expected to
broadly follow price developments in India,
which are moderate and under control
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3.2 External Sector Outlook
1. Export growth is projected to average
8 percent with diversification of Nepalese
exports beyond traditional sectors.
2. Both oil and non-oil imports are
projected to pick up with improved
economic activity.
3. Consequently, the BOP surplus is
projected to decline in the near term.
4.Trade deficits could be covered by
remittances and aid.
5. International reserves are projected to
remain around 6−7 months of imports of
goods and services.
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4.1 Conclusions and Recommendations
1. Nepal is presently passing through a critical
political and economic juncture.
2. Authorities may be complemented for
maintaining macroeconomic stability and
implementing reform program under a
difficult economic-political environment.
3. They are advised to resolve political and
economic uncertainties and make progress
toward sustained peace and security, which
are essential steps for poverty reduction and
private sector led growth.
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4.2 Poverty Reduction Strategy
1. Authorities are advised to continue with the
policies envisaged under the Nepal's Poverty
Reduction Strategy Paper (PRSP) accepted by
the Fund-bank.
2. PRSP is an appropriate framework to address
key constraints on growth, macroeconomic
stability, and reduction of poverty.
3. This would help mobilize external assistance
and lay the foundation for possible debt relief
under the HIPC Initiative and the Multilateral
Debt Relief Initiative.
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4.3 Fiscal Policies-1
1. Nepal has made significant progress on
revenue mobilization, expenditure
prioritization, social sector spending and
containment of budget deficit.
2. But, there are concerns that security-related
expenditure needs remain high, and
development spending is low relative to
budget targets, especially in conflict-affected
areas.
3. There is a need to increase fiscal transparency,
improve public expenditure management
systems and monitoring, contain contingent
liabilities and address donors’ concerns about
the quality of spending.
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4.4 Fiscal Policies-2
4. Authorities should make all efforts to improve
tax administration, widen tax base and to
increase revenue collections.
5. They should also raise spending on
infrastructure and social sectors to achieve
PRSP goals.
6. Administrative pricing of petroleum products
may be replaced by an automatic pricing
mechanism to improve the financial
conditions of the Nepal Oil Corporation and to
avoid additional burden on the budget.
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4.5 Financial Sector Reforms
1. In the banking sector, efforts should be made to
recover non-performing assets from the willful
defaulters in order to improve the balance sheets of
the NBL and RBB, reduce contingent liabilities for the
budget and pave the way for their privatization.
2. The legal framework for financial sector activity can be
further improved through amendments to the Banking
and Financial Institutions Ordinance.
3. NRB may be encouraged to enhance financial sector
supervision, and raise its internal audit and
accounting standards. Authorities are also advised to
move forward with implementation of strong antimoney laundering and combating the financing of
terrorism regime.
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4.6 Agricultural Reforms
Given the importance of agriculture and
the high level of rural poverty, there is
need to initiate progressive agrarian
reforms such as:
(a) providing complementary inputs to
land and
(b) improving rural infrastructure to
promote commercialization and market
access for agricultural products.
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4.7 Trade and Exchange Rate Policy
1. The exchange rate peg to the Indian rupee
remains appropriate, as it enables the economy
to benefit from close ties with India and helps to
keep inflation at low levels.
2. The level of the peg should be monitored and
reviewed in the light of Nepal's growing
integration with the world economy through its
membership in the WTO and regional trading
arrangements.
3. External competitiveness should be enhanced
through structural reforms and infrastructure
investments to lower transactions and
transportation costs.
4. Despite concessional nature of external debt,
the exchange rate risk is high due to steady
depreciation of rupee in terms of dollar.
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4.8 Public Sector Reform
1. The pace of public enterprises and
governance reforms need to be accelerated
to improve their efficiency.
2. It is desirable to proceed decisively with the
liquidation of unviable loss-making
enterprises and encourage privatisation
mechanisms such as share sales and
management contract.
3. The regulatory framework needs to be
strengthened and labor markets be made
more flexible to create an enabling
environment for private sector participation.
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4.9 External Debt Recording System
1. There is an urgent need to improve external
debt data recording system for better policy
formulation and monitoring, and full
implementation of the IMF Technical
Assistance recommendations on monitoring
and management of external debt.
2. Nepal provided inaccurate information related
to the second disbursement made in
November 2004 under the IMF Poverty
Reduction and Growth Facility arrangement
due to weaknesses in its debt recording
system. As a result of this misreporting, the
disbursement was non-complying.
3. Although the arrears have now been cleared,
it is essential to put in place proper debt
recording system and to improve capability.
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4.10 Implications for
Public Debt Managers
 World is a global village
 Knowledge and ICT are the most valuable
assets
 There are wider choice of resourcesdomestic/ foreign, debt/ equity/ portfolio etc.
 Management of domestic debt and non-debt
creating financial flows are integral parts of
management of external debt.
 Managers have to manage greater RiskCurrency, exchange rate, interest rate,
commodity prices, markets
 Emphasis on decentralisation, consultation
and risk sharing.
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4.11 Need to strengthen Systems for
 Management information system (MIS)
 Asset-Liability Management (ALM)
 Good governance
 International best practices for financial audit
and accounting, and management of external
and internal debt
 Identification, measurement, monitoring,
assessment, mitigation, unbundling, sharing
and management of risk
 Performance Audit
 Policy Audit
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Thank you
Have a Good Day
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