National Natural Resources and Fiscal Commission Sets Internal Borrowing Limits for Federal, Provincial, and Local Levels for FY 2083-84

The National Natural Resources and Fiscal Commission has determined the limits for internal borrowing that the federal, provincial, and local levels can undertake in the upcoming fiscal year 2083-84. Based on the overall economic condition, revenue trends, expenditure pressures, and the state of the financial market, the Commission has emphasized maintaining discipline in debt mobilization and has formally recommended this to the three tiers of government.

According to the recommendation made by the Commission to the government on Falgun 27, the federal government will be permitted to mobilize internal debt up to a maximum of five point five percent of the Gross Domestic Product in the next fiscal year. This limit has been set to maintain overall stability and ensure debt sustainability.

For provincial governments, the authority to raise internal debt has been tied to certain conditions. The Commission has recommended that provincial governments can borrow internally up to a maximum of twelve percent of the total sum of revenue received from the Government of Nepal through revenue sharing and revenue collected from their own internal sources. For this, it has been stipulated that necessary legal, structural, and procedural infrastructure must be in place, and prior approval from the Government of Nepal is mandatory.

A similar limit has been set for local levels. According to the Commission, local governments can raise internal debt up to a maximum of twelve percent of the total sum of revenue received from the federal and provincial governments and income from their own sources. Approval from the Government of Nepal will also be mandatory for this. However, it has been clarified that this limit will not apply to loans channeled through specialized institutions established by the Government of Nepal for infrastructure construction at the local level.

The Commission has also provided detailed suggestions for the effective and sustainable use of internal debt. It has been mentioned that when taking loans, cost-benefit analysis of the project, net present value, and internal rate of return evaluation must be mandatory. Emphasis has been placed on investing loans only in commercial projects where the financial internal rate of return is higher than the cost of capital, and in social sector projects with a high economic rate of return.

Furthermore, the Commission suggests ensuring that the returns generated from projects or programs financed by the loan can cover the repayment of principal and interest. The Commission stated that loans should only be mobilized for projects that contribute to production growth, employment generation, income growth, infrastructure development, and capital formation. The report also mentions that the provision under the Inter-Governmental Fiscal Management Act, 2074, requiring provincial and local governments to include internal debt as a source of budget only after obtaining approval from the Government of Nepal, must be strictly enforced. Additionally, it has been suggested that during budget formulation, the source details of every project and program must mandatorily include internal debt.

To enhance transparency and coordination in public debt management, the Commission has pointed out the need to develop an integrated electronic information system. It has been recommended that the accounting, reporting, and monitoring of all internal debt taken by the federal, provincial, and local levels, as well as overall public debt, should be operated through a single system via the Public Debt Management Office, and the Commission's access to it must also be ensured.

The Commission has also recommended that internal debt should not be used for current or administrative expenditures. It is mentioned that loans should only be used for projects that provide long-term benefits, create employment, and contribute to capital formation. Furthermore, the Commission has suggested making arrangements where short-term debt instruments are used to raise loans only when market interest rates are low, and the renewal of such instruments should also be included in the budget as new debt and approved by the parliament.

The Commission has also highlighted the need for all three tiers of government to regularly provide realistic details of revenue and expenditure. It has been stated that arrangements should be made to submit a report to the Commission by the end of each fiscal year, disclosing the estimated and actual mobilization of internal debt categorized by sector, project, title, and source.