Analysing new Public Debt Management Bill

– This article was originally published by Ashesh Shrestha in The Himalayan Times on December 29, 2019.

The new Public Debt Management bill has been registered in the Lower House of the parliament.  In the preamble, the bill has defined its objective as to properly manage public finance by maintaining co-ordination between fiscal and monetary policy, and by managing domestic and foreign loans as per the needs of the changed context. The bill has introduced a separate body which will be handling all the matters related to management of public debt including estimation of borrowing required for a fiscal year, identification of the sectors for mobilization of the public loans, issuance and auctioning of the debt instruments, among others which used to be jointly handled by the central bank and Financial Comptroller General’s Office previously. At the advent of federalism, a new act for managing public debt was of course necessary as the newly formed sub-national governments also have been given rights to retrieve loans for financing their expenditure needs. However, some of the aspects of the bill need reconsideration for successfully managing government finance in all three levels of government. This article will focus on some of these issues.

Sub-section 2 of the Section 5 allows Nepal Government on behalf of itself or other levels of the government to retrieve external loan of no more than NRs 1.2 trillion at once or during multiple occasions. This decision to fix external debt ceiling appears rational in terms of preventing external debt crisis that can seriously jeopardize the macroeconomic condition of the country. However, the rationale behind rigidly placing the external debt ceiling at a certain amount may not be sufficiently scientific.

Instead, the external debt ceiling should be relative to the changing size of the National economy. As such, debt limit in terms of not surpassing certain percentage of the National Gross Domestic Production (GDP) could appear rather relevant as it addresses the periods of changed macroeconomic condition of the country. On such context, the percentage threshold of the ratios can be scientifically devised by thoroughly observing the macroeconomic structure of the country. On the other hand, debt ceiling placed at a certain rigid amount may stop becoming rational or relevant as the fundamental economic indicators of the country changes with time.

Sub-section 4 of the section 14 of the Public Debt Management provides the provision for the Federal Government, at its discretion, to assure the internal loans retrieved by sub-national governments. As such, the Federal Government shall ultimately be liable for the default of the debt taken by the sub-national governments. However, in order to prevent such condition from occurring, sub-section 4 of the section 8 of the Bill allows the Federal Government to recoup the outstanding principal and interest payment of the loan retrieved by sub-national governments by forfeiting the amount of revenue to be shared by the Federal Government with the defaulting sub-national governments. However, in case of default by the sub-national governments of the kind of debt not assured by the Federal Government, it is unclear if it will merely be considered as default by that defaulting sub-national government or shall have ramifications at national-level as well. Subsequently, the resolution after default of the debt by the defaulting sub-national governments of the loan not assured by the Federal Government is not certain either.

As such, the bill should clarify whether default of the unassured debt by the sub-national governments will have implication at national level. Likewise, the bill should also detail the consequences in along with resolutions that shall be adopted after default of such federally unassured debt.

Likewise, section 4 of the bill covering the function and duties of the Public Debt Management Office (PDMO) and other areas clearly mention the function of the PDMO to manage internal loans also retrieved by provincial and local governments by limiting within the recommendation provided by the National Natural Resources Fiscal Commission (NNRFC). As such, PDMO shall be expected to administer and manage the entire work of debt issuance, auctioning, record-keeping, and other administration of the loans retrieved by sub-national governments until it is finally deposited in the consolidated funds of the respective sub-national governments. Analytically, such provision of managing and administering the entire debt management issue of sub-national governments by a Federal agency rejects the spirit of Federalism, and represents centralization in this crucial aspect of Public Finance.  It tends to create a rigid hierarchical order among the level of governments in areas of debt financing and management. Besides, it is also doubtful if it is practical for a single federal debt management agency to administer the process of debt financing for 761 units of governments at Federal, Provincial and local level. As such, sub-national governments should be provided with the responsibility to build their own mechanism for administration of their debt instruments from auctioning to issuance and administration.