Public Debt Management

Question 1

What are the factors that contribute to increase in public debt.

Answer 1

1. Fiscal deficits
2. Economic downturns
3. Wars and conflicts
4. Demographic changes
5. Infrastructure investment
6. Financial bailouts
7. Social welfare programs
8. Tax policies
9. Interest payments:
10. Contingent liabilities

Question 2

Implication of the public debt in the economy:

Answer 2

1. Interest payments
2. Less money for private investment
3. Trouble with repaying debt
4. Stability concerns
5. Less flexibility for the government
6. Burden on future generations
7. Risk of inflation
8. Impact on economic growth
9. Impact on society and politics
10. Impact on confidence

Question 3

What are the solutions for addressing the proper implementation of public debt in Nepal ?

Answer 3

1. Develop a prudent debt strategy:
2. Explore concessional and climate-related financing:
3. Improve fiscal management and revenue diversification:
4. Embrace evidence-based policy-making:
5. Enhance accountability and transparency:
6. Maximize return on investment:
7. Build institutional capacity and procedural rigor:

Question 4

3. What are the internal and external debt in the public debt management ?

Answer 4

1. Internal Debt: also known as domestic debt, refers to the debt that a government owes to its own residents or institutions within its own country. It is denominated in the domestic currency. Key characteristics :

• Holders: Held by domestic individuals, households, financial institutions, pension funds, and central banks within the country.
• Instruments: Treasury bills, government bonds, savings bonds, or retail bonds. These instruments have fixed or variable interest rates and maturity periods.
• Importance: It can have implications for domestic interest rates, monetary policy, and the overall stability of the domestic financial system.
• Control: Governments have relatively more control over the terms and conditions of internal debt issuance. They can tailor their borrowing strategies and debt instruments to meet the specific requirements and preferences of domestic investors.

2. External Debt: Also known as foreign debt, refers to the debt that a government owes to foreign lenders, institutions, or other governments. It is denominated in foreign currencies. Key characteristics:

• Holders: Held by foreign entities, such as foreign governments, international organizations, foreign investors, and international financial institutions.
• Instruments: Governments issue external debt through instruments such as sovereign bonds or loans from foreign entities. These instruments are typically denominated in foreign currencies, such as US dollars, euros, or Japanese yen.
• Exchange rate risk: External debt exposes governments to exchange rate risk because repayment obligations are denominated in foreign currencies. Currency fluctuations can affect the debt burden, making it more or less expensive to service and repay the debt.
• Vulnerability to global conditions: External debt can make a government more vulnerable to global economic and financial conditions. Changes in international interest rates, global liquidity, or shifts in investor sentiment can impact the cost and availability of external borrowing.

Question 5

What is the need for Public Debt in Nepal ?

Answer 5

• Infrastructure Development:
• Social Development:
• Economic Stability:

Question 6

Advantages and Disadvantages of External Debt:

Answer 6

Advantages:
* Access to Capital
* Diversification of Risks
* Technological Transfer
* Foreign Exchange Inflows:

Disadvantages of External Debt:
* Debt Servicing Burden
* Dependency on Foreign Capital
* Debt Servicing Burden:
* Limited access to international lending.
* Devaluation of local currency.
* Vulnerability to External Shocks.
* Loss of Economic Sovereignty.
* Currency and Exchange Rate Risks.

Question 7

Advantages and Disadvantages of Internal Debt:

Answer 7

Advantages of Internal Debt:
* Control and Flexibility:
* Economic Stimulus:
* Interest Rate Control
* Development of Domestic Financial Markets.
* Lower Dependency on Foreign Entities

Disadvantages of Internal Debt:

• Crowding out Private Investment.
• Inflationary Pressure.
• Limited Pool of Funds.
• Interest Rate Risks.
• Domestic Financial Market Vulnerabilities.
• Political Interference