Public Finance (Public Income,Public Expenditure,and Public Debt)

1

Introduction

Public Financial Management (PFM) is related to the management of the financial resources mobilization and public expenditure of the country.

PFM has to ensure that resource mobilization and utilization, budgeting and programming, budget approval, release and expenditure management, maintenance of accounts, and preparation of financial statements for reporting are performed in a transparent, accountable, and responsible manner, complying with the legal provisions of the country.

The main objectives of PFM are to maintain good financial governance and make public service delivery efficient and effective through fulfilling legal provisions in revenue mobilization, budget formulation and approval, budget release, budget implementation, and reporting.

The main dimensions of PFM are revenue or resource mobilization, aid mobilization, public debt, public expenditure, and public accountability. Public Expenditure.

Financial Accountability Assessment (PEFA) is a tool for measuring the performance of PFM and improving accountability. PEFA also functions as a framework tool to improve financial accountability and align External Development Partners (EDPs) with the country system. PEFA has 31 indicators developed to evaluate financial performance. Of these, 28 are used to evaluate the performance and quality of PFM, and three are related to EDPs' practices in providing aid to the recipient country. The objectives of PEFA are to maintain overall financial discipline, the strategic allocation of resources, and efficient and effective use of allocation in a transparent and accountable way; to improve service delivery (predictable cash position, delegation of resources, power, etc.); and to minimize fiduciary risk (adverse Audit Queries (AQs), the weak commitment of donors, etc.).

The Constitution of Nepal provisioned financial procedures for all three tiers of government to implement the federal system and specified standards for financial discipline and accountability.

The Constitution provides a mandate to prepare necessary laws to execute the powers assigned to all three tiers of government in the country.

The Constitution has a separate provision for financial procedures for federal, provincial,and local governments and provides a constitutional guarantee in mobilizing resources, fund management, public expenditure, accounting, internal control, reporting, and auditing components of PFM.

The Government of Nepal (GoN) has introduced the Financial Procedures and Accountability Act,2019 (2076) to regulate and manage the financial procedures of the federal government and also applicable some provisions in the province and local.This will ensure that the federal financial management system is transparent and accountable, maintain macroeconomic stability in the country and provide guidelines to provincial and local governments in financial management.

Public finance means mobilizing various sources of income required for the operation of the country, formulating the budget by allocating the resources and means thus mobilized, passing it, spending it through the concerned officials within the limit of the approved budget and keeping its records, reporting to the concerned bodies from time to time.

Accounting for maintaining the financial discipline as well as the overall management activities related to the acquisition, utilization, or protection of financial resources and means is the jurisdiction of public finance managemènt.

The management activity of controlling and regulating public revenue and expenditure by identifying, constructing, operating,and protecting the government funds is called public finance management.

For the management of public finance in Nepal, the basis of the constitution, financial procedure law, procurement law, revenue-related law, fiscal management act, and other laws are taken into consideration.

2 Public Income

2.1 Introduction to Public Income

In a nutshell, the tax and non-tax amount or the total amount of revenue that the government regularly receives from its citizens or associations according to the prevailing law is called public income.

In the broadest sense, public income refers to the amount of revenue and grants.

The total amount received in the government's consolidated fund is considered public income, but this concept does not consider it reasonable to take public debt as public income because public income includesthe amount of public debt which has to be repaid in the future.

Therefore, it seems reasonable to take the amount of revenue and grant received by the government which is not a direct obligation or has no obligation to repay it as public income.

2.2 The Status of Public Income

Revenue Collection

In the Fiscal Year 2077/78,the total revenue was Rs. 9 trillion 38 billion was collected and the federal revenue was Rs. 829 billion, which is not enough to cover the recurrent expenditure.

Although there has been an increase inrevenue collection in the last financial years, there is no basis to consider it sustainable.

As Nepal's revenue is based on imports, there is a tendency to increase revenue when imports increase and decrease revenue when imports decrease.

Although the total revenue mobilization has been increasing in proportion to the GDP for the last few years, the sustainability in revenue mobilization has not been maintained due to the inability to increase the share of internal revenue in the overall revenue.

Total revenue mobilization was 19.8 Percent of GDP in FY 2073/74 and 22.0 Percent in FY 2077/78.

Out of the total revenue collected in FY 2073/74, the share of revenue collected from customs points was 41.0 Percent and in FY 2077/78 the ratio was 44.7 Percent.

Resources should be mobilized to make the revenue based on consumption and import into a productive revenue system with a wide range, leakage-free, simple,strong, and sustainable.

Since the revenue under public income i.e. tax and non-tax is discussed in other sections of this paragraph, it is not repeated here.

International Development Assistance

On the one hand, it has not been possible to increase the spending capacity of foreign aid and achieve effective results from its operation, while on the other hand,it seems to have been used to increase the size of the annual budget.

In FY 2073/74,the estimate of foreign aid was Rs. 3 trillion 2 billion out of which Rs. 149 billion, or 49.3 Percent of the estimate was realised.

In FY 2077/78, about Rs. 360 billion out of which Rs. 163 billion, or 45.2 Percent of the estimate was disbursed.

In the Appropriation Ordinance of FY 2078/79, the source estimate of foreign aid is Rs. 373 billion, which is more than double the actual expenditure of foreign aid in the previous fiscal year.

Although there is a belief that adequate preparation and in-depth analysis of projects should be done while mobilizing foreign aid, it does not seem to have been implemented effectively.

Due to weak internal capacity in the development of such projects, the involvement of the concerned partners has been increasing and the expected performance has not been achieved due to unsatisfactory implementation capacity.

The effectiveness of foreign aid has not increased as aid is mobilized even in unproductive areas.

It seems that both the development partners and the government need to make more efforts to increase the effectiveness of foreign aid.

3 Public Expenditure

3.1 Introduction to Public Expenditure

Expenditure incurred by the local, state, and central governments for the operation of the state and the overall weIfare of the people as well as for the development workis called public expenditure.

Over time, the concept of public expenditure has also been changing.

In ancient times, when the public sector,i.e. the scope of work of the government was limited to maintaining peace and security, and the importance of public management was less, as a result, the expenditureof the government was less.

According to classical economists, since the government should have less interference in the economy and emphasis on individual economic freedom, government expenditure was considered unnecessary except for the essentials. In their opinion, public expenditure is not so important.

Economic concepts are also changing with time. During World War I, the government had to spend a lot of money.

Similarly, the economic downturn of 1929-33 also pushed to increase the role of government in the economy.

The belief is that the government should not only maintain peace and security but also do welfare work under the responsibility of the government as well as it needs to invest a large amount of money to create employment opportunities.

A large amount of money has to be spent on the economic and social activities of the people. For this, the belief emerges that the government should use the limited resources effectively for the mobilization of the economy.

Thus, in modern economics, public expenditure management is considered a major part of public finance management.

3.2 The State of Public Expenditure in Nepal

The total expenditure of the Federal Government has shrunk by 6.4 Percent to Rs.571.77 billion in FY 2077/78 in comparison to the corresponding period of the previous year.

As of FY 2077/78, the capital expenditure of the Federal Government has shrunk by 17.2 Percent to Rs. 79.87 billion in the corresponding period ofthe previous year.

In the Fiscal Year 2076/77,the total expenditures of federal, provincial, and local levelswereRs. 1191.06 billion in the corresponding period of the previous year.

Out of the consolidated total expenditure, net recurrent expenditure (excluding grant transfer) is Rs. 667.46 billion (56.0 Percent), capital expenditure was Rs. 405.56 billion (34.1 Percent), and financial management was Rs. 118.04 billion (9.9 Peicent).

Expenditure on capital and financing management of the federal government has decreased during this period.

In FY 2075/76,federal government expenditure was 28.8 Percent of GDP and in FY 2076/77,such expenditure was 27.9 Percent.

The ratio of recurrent expenditure, capital expenditure, and financing to GDp during this period was 20.0 Percent, 4.8 Percent, and 3.0 Percent respectively.

In the Fiscal Year 2076/77, the capital expenditure of the Federal Government increased by 6.8 Percent to Rs. 96.48 billion in the corresponding period of the previous year.

In FY 2076/77,the consolidated capital expenditure at the federal,state,and local levels was 34.1 Percent of the consolidated expenditure.

The share of the capital budget in the allocated budget of FY 2077/78 was 24.2 Percent. Such a share was 26.7 Percent in FY 2076/77.

3.3 Public Expenditure Management

The mode of economics that balances the aspirations and demands of the people and the limited resources is called public expenditure management.

In every country in the world where the resources are limited and the expenditure to be incurred bythe government is high.

The economic method of spending the limited resources in the field of economic, social, and development systems productively is called public expenditure management.

Public expenditure management is the management of public expenditure by the government to keep the society and economy active.

The role of the policy side is important in the context of the concept of public expenditure management as it is important not only for specific actions or programs but also for the state of the economy as a whole.

Good public expenditure management plays an important role in controlling expenditure, achieving fiscal discipline, strategically allocating resources in line with policy priorities, and achieving efficiency by minimizing the cost per unit of return and achieving targets.

Good Expenditure Management should have established the necessary relationship between revenue and expenditure.

Basic expenditure objectives also need to be interrelated with economic objectives.

3.4 Reasons for Raising Public Expenditure

Regional balance and population growth,

Increase of state functions,

With the rising cost of public service and the high price situation,

Improvement or increase in national wealth or income,

▶ Increase in ability to make expenditure,

Increase in work related to defence and security,

Use of public utility services: Extension of social services,

Due to technological change, more and new products have to be produced in the public service,

Changes in government spending due to global environmental factors,

Expansion of the public sector,

The defective financial and civic administration,

Political and social elements,

Aspiration for economic development,

As the growing population expands into administrative activities (such as defence, police and judiciary, etc.),

The threat or fear of war,

The situation where more allocation should be made for the defence of sovereignty,

Government expenditure in the area for the socio-economic upliftment and welfare of the majority of the citizens,

Social security program,

Expenditure on education and health sector,

Expenditure in the transport and electricity sector as economic infrastructure,

To increase investment, the government has to spend money on the road and physical infrastructure and economic infrastructure,

>Allocation to manage inflation.

3.5 Objectives of Public Expenditure Management

Protecting human life from external aggression and internal obstacles,

Resource allocation and control of inefficiencies in the market economy,

Maintain economic stability by controlling the fluctuations in the economy,

Allocate limited resources to meet extreme needs,

Enhancing economic and social welfare,

Sustainable management of income, expenditure and debt management,

Allocation of public resources to the strategic priorities,

Achieve the highest achievement and value for money spent on public service delivery,

Follow financial procedures and other legal procedures including procurement law and procedures.

3.6 Importance of Public Spending

Expanding the impact on national income, employment opportunities, expansion of physical infrastructure (roads, bridges, electric machines, transportation, and communication),

Since the private sector is unable to invest in the infrastructure sector,the government has to invest in such areas with huge investment and economic development,

Help prevent cyclical fluctuations in the economy,

Creates jobs and income generation of people by spending more and more by the government in the economic downturn,

Government spending cuts will help solve the problem of inflation in the economy,

The amount of public expenditure, the purpose of the expenditure, and the quality of the expenditure will also be important,

Public expenditure is a powerful means of public finance for equitable distribution of income and wealth,

Free education and health care facilities for poor people, grants, aid, and programs targeted at the poor to help low-income groups,

Assists with the policy of spending public expenditure in backward areas to correct regional inequality,

To develop people's capacity for holistic development,

To bring a sense of unity among the people,

Since the objectives of public expenditure are to achieve economic and social development, the importance of public expenditure is high.

3.7 Principles of Public Expenditure

Principle of Economy: According to this principle, the government should spend cost-effectively, should not spend unnecessarily, and should spend in such a way as to increase productivity as much as possible.

Principle of Acceptance: The principle of spending public funds should be under the approval of the parliament and within the approved limits and discourage unwanted expenditure.

Principle of Saving:Among the principles of budget, namely deficit budget, a balanced budget, and savings budget, the principle of saving budget is to follow the financial system healthy and safe.

Principle of Productivity: The principle is that public expenditure should increase the productivity of the economy by having favourable effects such as the development of industry and business, increase in employment opportunities, and improvement in the living standards of the people.

Principle of Equal Distribution: According to this principle, in public expenditure, the existing income inequality in the society should be reduced by proportional distribution or equitable distribution of income among different sections of the society.

Principle of Accountability: According to this principle, the officials in the concerned Government bodies should be accountable to the people for their expenditure.

Principle of Flexibility: The principle of government expenditure can be changed by changing the government expenditure policy as per the need.

Principle of Transparency: To bring cleanliness, honesty, and efficiency in public expenditure, and inform the people, it is necessary to spend transparently.

Principle of Maximum Social Benefit: To get maximum social benefits, public expenditure should be done within certain limits and should not be exceeded.

Principle of Balanced Budget: The government must try to spend public money within the limits of its resources. If there is a savings budget, the people are considered to be over-taxed, but if there is a deficit budget, it should be considered a sign of financial weakness of the state.

3.8 Nepal's Approach to Public Expenditure Management

Public spending plays a role in having an impact on the production and distribution of wealth in the community. To eliminate unequal distribution of wealth, the government seeks to bring justice to society through public spending. The public expenditure desired by the society increases the productive power and saving power of the society. Expenditure on transportation, communication, education, public health, scientific and industrial research, social unemployment, health insurance, and old-age pensions are important public expenditure. In the same way, after the imposition of a higher tax rate, people's desire to work and save will decrease, so this situation should not be allowed to happen.

To reduce the expenditure of recurrent nature as much as possible and to make the ratio of capital expenditure wise,

To manage public expenditure on a priority basis,

To increase the efficiency of government expenditure in a way that helps in maintaining macroeconomic stability,

Strengthening the financial system and maintaining fiscal discipline,

Prioritize spending on development projects that have a high profit-to-cost ratio,

To achieve high returns from government expenditure bycontrolling unproductive and wasteful expenditure and by diverting government resources to the priority areas in required quantity and time,

Expenditure criteria will be developed and gradually implemented to raise funds for government activities, and a three-yearcycle budgeting system will be adopted to prevent projects from running out of budget,

To prepare the criteria of annual operating expenses required for the government offices and to adopt the procedure of approving the budget accordingly,

Emphasize the provision of budget certainty and release of budget only based on achievement,

To increase the utility of government expenditure unnecessarily by demanding more budget and discouraging the tendency to spend unnecessarily,

To make the government expenditure achievable by controlling the tradition of spending the allocated funds in any way and allocating_the budget in unnecessary areas,

To control the leakage in government expenditure and help in its proper use,

To make the financial information and accounting system related to government expenditure clear and transparent and establish accountability towards public expenditure.

3.9 Efforts Made to Manage Public Expenditure

Developed programs, plans, and activities for policy and plan implementation,

Determined the priority of the program/project in p1, p2, p3, and nowp1,p2,

Started setting the priorities of the project/program according to the periodic plan,

Expenditure resource structure and management to forecast foreign resources,

Strategic priorities for spending, poverty alleviation, gender, climate,etc.,

Classification of expenditure into developmental, economic, social, infrastructure,good governance, and regional activities including agro-forestry and land reform,

Enablingbudgets to be consistent, interpreted, and comparable with al1 the nations of the world by categorizing them into recurrent, capital, and financial systems,

Medium-term budget structure for resource allocation according to ministry.

Introduced a system for allocating foreign aid at the program level rather than at the project level through regional approaches to budget allocation, ,

Multidisciplinary Investment Fund in the field of public financial management,

Provision of medium-term expenditure structure along with budget preparation,

Preparation of annual procurement plan and implementation plan including procurement method, the commencement of procurement work, and activities up to contract agreement during budget preparation,

Federal Ministerial Budget Information System (LMBIS), the Provincial Ministerial Budget Information System (PLMBIS), and the local level formula (SuTRA)using budget spendingand reporting,

Implementation of the program-based budget system from 2032/33,

The implementation plan, Annual Procurement Plan, Evaluation Index, and Monitoring Plan have been introduced to make the implementation objective and effective.

After being entered into the Line Ministry Budget Information System, it will be automatically authorized and the program will be considered approved, no authorization is needed, the program need not be approved,

A Treasury Single Account system has been implemented from 2066 to provide real-time expenditure of each activity, daily status information of government cash flow, and daily information of government expenditure,

According to the Financial Procedure and Accountability Act, 2076,the Financial responsibility and accountability provision has been incorporated,

The Government of Nepal has directed to collect expenditure proof documents including an internal control system for each expenditure by implementing expenditure guidelines,

Increased transparency of expenditure through a treasury singleaccount system,

Electronic money transfer to be credited to the bank account of the recipient's account,

Establishment of a system to maintain good governance in public procurement work by making separate Public Procurement Act 2063 and Rules 2064 regarding procurement as the process of expenditure,

Establishment of Public Procurement Monitoring Office assigning responsibility monitoring of procurement assigned to a public body, procurement unit,

Procurement procedures linked to program budget and expenditure,

Electronic procurement system used,

The arrangement has been made for accounting and reporting of appropriation, revenue, deposit, construction, etc.,

Implementing the Nepal Public Sector Accounting Standard (NPSAS), Cash Based -International Budget Expenditure Reporting System has been implemented at all three levels of government since 2009,

A Computerized Government Accounting System (CGAS) has been used from 2077 BS and an electronic accounting system has been made activity-based,

The Office of the Financial Comptroller General has issued an Internal Control System Directive 2076 to strengthen internal accountability,

Development and implementation of internal audit guidelines, and standards and conducting auditing regularly,

Public bodies are given time to rectify, transact, and correct errors even before the final audit report,

The Office of the Auditor-General has implemented audit criteria and reduced the time to submit reports,

Implementing risk-based and performance-based audits,

Financial Accountability is measured using Public Expenditure and Financial Accountability (PEFA),

The Financial Procedure and Accountability Act 2076 has made provision for accountability of the Administrative Officer (Chief Accounting Officer) as well as Minister and Prime Minister for non-spending, non-procurement, planning and budget proposals.

The government has made it mandatory to make a budget only by implementing the medium-term expenditure structure.

According to the concept of Project Bank,the National Planning Commission has prepared a list of projects for each ministry and has made arrangements for budget allocation and programs based on that.

The concept of a multi-year project is being implemented.

3.10 Priority Basis of Public Expenditure

Projects/programs under the guiding principles and policies of the Constitution of Nepal,

Projects/programs that achieve high marks based on priorities in line with the objectives and strategies of the current periodical plan and the medium-term expenditure structure,

High priority projects/programs of national importance,

Projects/programs on topics that Nepal has committed to by signing international treaties and conventions,

Projects/programs that immediately benefit the people,

Projects/programs proposed by the Ministries based on plan priority,

Projects/programs that contribute significantly to the growth of national income under the assistance received from donor agencies,

Projects/programs such as direct poverty alleviation, job creation, and maintaining regional balance,

Projects/programs with low cost and high returns,

Feasibility study completed projects/programs that are likely to immediately benefit the people economically and socially,

Possibility of wide public participation and mass mobilization.

3.11 Problems of Public Expenditure Management in Nepal

There is no policy provision to clarify the scope and activities of government spending,

Could not clarify the relationship between budget and financial management.

Due to a lack of performance indicators, there are difficulties in budget preparation and performance measurement,

The cost of establishing a relationship between the output and outcome cannot be managed,

The expenditure system is not complete, informative,or transparent,

Cost-effective communication has not been used,

Lack of regular monitoring of public expenditure due to lack of construction and management of well-functioning institutions to carry out budget and expenditure tasks,

Expenditure has been affected due to the lack of necessary reforms in the civil service, to make priorities effective between collective spending and programs,

Failure to maintain resource certainty in priority project programs,

The budget allocation and authorization work are not done on time and the flow of expenditure is not done on time due to the tendency to keep reserves at the centre,

Difficulties in timely implementation due to interference in the implementation of the program due to the nature of the program or project rather than the financial investment and resource allocation of the donor agencies,

Due to the lack of spending criteria, there are difficulties in budget formulation and spending,

Lack of system of operation of works and programs and budget allocation according to the source of expenditure and lack of financial discipline for budget and expenditure.

3.12 Way Forward to Improve Public Expenditure Management

To spend for long-term financial viability for overall sustainability,

To maintain the jurisdiction of the government only by confirming the justification or discretion of the government sector intervention in a particular area,

The public sector investment policy should be adopted only if it contributes to increasing efficiency and income distribution,

The government shall not do such a thing as long as there is a possibility of a utilization fee levied by the government to recover the cost of public expenditure,

The operational capacity of the government institutions should be taken into consideration keeping in view the potential of the government,

Determine the policy arrangement of expenditure for the efficiency and sustainability of public expenditure,

To spend only under the spirit and procedure of financial procedures and accountability and public procurement laws,

The existing structure of the National Planning Commission and the Ministry of Finance needs to be reformed to coordinate the bodies approving the budget and programs,

The National Planning Commission should act as the think tank and the Ministry of Finance should make arrangements for the approval of the budget and the program recommended by the NPC,

To implement public expenditure on time, make the expenditure system transparent and increase the productivity of expenditure under thespirit of the public procurement law,

To make public expenditure effective, institutional and structural arrangements related to expenditure should be ensured,

A system should be introduced to establish the relationship between the main achievement and performance indicators by establishing a system of regular monitoring of public expenditure which should be monitored based on information flow and support system of expenditure system,

Make effective the system of making full administrators (including accounting officers) fully responsible for the management of expenses,

For this,according to the current financial procedure law, their performance should be reviewed and necessary thinking and strategy should be decided,

To make the audit work of public expenditure effective, a separate institutional structure should be formed for the work of internal audit in case of implementation of a single account fund system,

The system of doing a regular audit in 2 months should be made effective,

The final audit work should also be made effective by introducing the system of concurrent audits based on selection,

Establish a system for implementation and monitoring of the policy and programs based on the result-oriented and policy-based budget preparation by the concerned bodies in coordination,

Make the concept of project bank mandatory in all three levels of government and establish and make effective the system of not allocating budget in projects or programs which are not included in the list,

Make effective the medium term expenditure structure mandatory while presenting the budget and income and expenditure,

To improve the budget system, determine the area and expenditure of the current marginalized budget,program budget, implement a budget system

based on performance and also implement a zero-based budget basedon

feasibility,

Prepare and implement an internal control system in each body and make effective the system of internal audit about the adequacy of that system,

Establish a system by which regulatory bodies and parliamentary committees reduce or exclude involvement in the process except in the area and time specified in the procedure of procurement and expenditure of public bodies,

Remove the involvement of the donor bodies up to the project level or reduce the involvement only in the program,

Modify the existing traditional procurement system design, bid and build and use PPP,EPC,BOOT,etc.systems in the infrastructure development sector with the involvement of the private sector in the specified area,

According to the Financial Procedure and Accountability Act 2076, punish the officials who do not prepare a plan, budget proposal, program, or project proposal on a legal and technical, and professional basis, procure or spend, pay on time,

Effective implementation of information technology software for budget, expenditure, disbursement, accounting, and reporting,

Integrate the above-mentioned systems and make the system effective and robust in coordinating the budget release, expenditure accounting, and reporting work without any hindrance.

4 Public Debt

4.1 Concept of Public Debt

> In the general sense, a debt taken by the government to be repaid in the future is called public debt.

Public debt is taken from individuals within the country, banks, non-bank financial institutions, foreign governments, and international institutions such as World Bank, ADB,IMF,etc.

Loans taken from individuals and entities within the country are called internal loans and loans taken from foreigngovernments and entities are called foreign loans.

Traditional economists believe that the role of government should be limited and that it would be unsuitable to take public loans as it favours a balanced budget.

The government imposes additional taxes on public debt repayment which harms people's savings, investment, and capital formation. At the same time, they were of the view that increasing the volume of the currency would lead to inflation if it tried to meet the deficit budget.

After the economic recession of 1930,the role of government was expanded.

Keynes introduced the concept of a deficit budget. He was of the view that its contribution would be more than the debt burden when it was met by taking the internal loan for capital expenditure.

Modern economists emphasize the management of public debt. At present, most countries in the world have adopted the concept of a deficit budget in one form or another. Public debt has been an important source of the budget deficit.

The budget in Nepal Started in 2008. Except for the Fiscal Year 2023/24, all the budgets so far have been presented as deficit budgets.

4.2 The Status of Public Debt in Nepal

>In FY 2073/74, the outstanding public debt stood at Rs. 698 billion or 22.7 Percent of GDP and increased by 250 Percent in FY 2077/78 to Rs. 17.29 trillion or 40.5 Percent of GDP.

Out of the total outstanding debt, Rs. 801 billion is internal debt and Rs. 928 billion is external debt.

In the Fiscal Year 2077/78, the internal debt of Rs. 224 billion and foreign debt of Rs.140 billion has been mobilized.

Despite the significant increase in public debt, the expected return on economic growth and development of the country has not been achieved.

Due to the increasing burden of public debt and its inability to maximize mobilization in the productive sector, there may be a lack of resources for future development and a high cost for development finance mobilization.

A high rate of internal debt mobilization is likely to harm the availability of financial resources for the private sector.

There is also a danger that a large portion of the revenue will have to be set aside for the repayment of principal and interest on the rising public debt.

4.3 Objectives of Public Debt

To bridge the gap between investment and resources,

To make the best use of natural and human resources,

Development and financial market stability,

Accelerate the pace of social and economic development through fixed capital formation,

Increasing public property and shifting the responsibility for that in a balanced way to present and future generations,

Building development infrastructure for future generations by ensuring the availability of public property,.

To bring effectiveness in the role of the public sector in development work in line with public aspirations,

Establishment of the public welfare state,

Provide social justice,

4.4 Need for Public Debt

To bridge the gap between government expenditure and public revenue,

To meet the deficit budget,

To achieve maximum returns by maximizing the natural and human resources available in the country,

To minimize the negative impact on the economy from the ups and downs of the economy from time to time,

To manage resources for immediate work during natural disasters,

To minimize the negative impact on the economy from internal conflict and external aggression

To manage resources for public welfare activities such as social protection, social security, social justice,

To create an investment environment, promote investment, increase production and productivity, create employment, create an equitable distribution of achievements through high, sustainable, wide, and inclusive growth, reduce poverty, improve the living standards of citizens, and to build in the long run, independent, prosperous, self-reliant, equitable, modern, prosperous and a socialist-oriented national economy.

4.5 Impact of Public Debt

1. Impact on Production

If it is used in capital expenditure, it can have a positive effect on productivity and growth and if used in current expenditure, it can have a negative effect.

2. Impact on Distribution

If there is a fair distribution without focusing on a limited number of people, it will have a positive effect otherwise it affects negatively.

3. Influence on Price

Increasing the budget by taking too many loans can lead to a price increase, creating a deficit budget, and having a distributive budget has a negative impact but if used with limited credit,positive change can be seen.

4. Impact on Economic Stability

If public debt is invested in productive sectors during the recession,there will be economic stability, and if there is an increase in distribution and recurrent expenditure, there will be a negativeimpact.

5. Impact on Employment

Investing in the productive sector has a positive effect and investing in the unproductive sector has a negative effect.

6. Impact on Savings

Spending on employment-oriented programs leads to pósitive growth in the economy through the mobilization of savings.

2.3.4.6 Classification of Public Debt

Internal debt and external debt

Productive and unproductive

Short term, long term,medium-term

Unconditional and conditional

Redeemable and unredeemable

With and without funds

With and without interest

4.6.1 Internal Debt

Internal debt is the debt raised by the central, provincial, and local governments from citizens and institutions in local currency.

According to Dalton,loans taken from individuals and institutions under the control of government officials are internal loans.

Internal debt is secured by individuals through savings certificates, commercial securities, non-bank financial institutions such as employee provident funds, citizen investment funds, government securities through treasury bills and development bonds, etc.

For Nepal, internal debt is not a debt but an obligation.Some scholars consider it to be an obligation only, while others say that it is an asset. This can be a source of controversy. However, the truth is that internal debt can never be a curse if it is invested in productive sectors. If the investment is made in unproductive sectors, it will only pass on the burden of debt to future generations.

The government publishes policies and programs through the budget every year and the resources required for that are estimated. The state of the low resource,the possibility of foreign loans and grants, the impact of domestic debt on the economy, and the amount of domestic debt to be raised each year are decided based on fiscal and monetary policy.

Internal debt consolidation is done through different bonds as per the target set at different times. Although it is said that the government does not provide collateral for investing in public sector enterprises, the practice ofproviding government collateral for some corporations should be discouraged.

4.6.2 External Debt

The loan taken by the government from friendly nations and bilateral and multilateral development partners is called a foreign loan.

The gradual decrease in the share of foreign debt in total debt as compared to previous years can be taken positively.

However, quantitatively, its size seems to be increasing.

As there is a high risk of the exchange rate in foreign loans, we have a challenge on how to reduce excessive dependence on it.

Even now, a large part of the development expenditure is being met from this, so it is necessary to pay attention to its management.

4.7 Public Debt Management

In the general sense, the management of internal and external debt is the management of public debt.

C.C.Abbot has taken the management of public debt as policy formulation and decision making regarding debt ratio, debt maturity, and structure of public debt.

The public debt management is concerned with the decisions regarding the terms of public debt, issued terms on which new bonds are sold, maturing debt is redeemed or refunded the proportion in which the different forms of public debt should be issued the pattern of maturities the debt and its ownership, etc.

As public debt management is closely related to currency mobilization, investment management, and monetary policy in the economy, it should not be limited to the amount of debt and its accounting.

It also covers the nature of the public debt, interest rates, and ownership.

In addition, debt management serves to minimize risk and coordinate monetary policy and fiscal policy.

Debt management guides the implementation of debt mobilization policies and programs to address natural disasters, immediateproblems,economic recession, and inflation, and to invest in large investment sectors that do not attract the private sector.

The role of public debt management is important in managing the effective use, impact, and burden of debt.

Its main objective is to fulfil the financial requirement and payment obligation of the government at minimum cost considering the amount of risk.

4.7.1 Public Debt Management in Nepal

The Ministry of Finance, NepalRastra Bank, Department of National Debt Management, Office of Debt Management and Office of the Financial Comptroller General have coordinating roles in debt management of Nepal.

The limit of public debt is determined through the budget.

After the National Debt Act is passed by the Parliament, the Open Market Steering Committee prepares the internal debt disbursement schedule by specifying the internal debt structure, period,etc.

After the approval by the Ministry of Finance, the issuance of internal debt securities is usually done based on the same amount throughout the year.

The payment schedule is prepared by Nepal Rastra Bank.

Accordingly,arrangements are made for payment of principal and interest.

The role of the Open Market Steering Committee is important in determining the interest rate of the loan and the service and conditions of the bonds.

All records of internal debt, including principal and interest payments, are kept by both the Nepal Rastra Bank,the Department of National Debt Management, and the Office of the Financial Comptroller General.

The responsibility of internal debt management of the Government of Nepal has also been legally handed over to Nepal Rastra Bank.

The objective of the National Debt Management is to facilitate the proper management of government finance for the economic development of the country and to encourage the mobilization of internal savings by maintaining harmony between the fiscal and monetary policies.

The limit of national debt that the Government of Nepal can raise to implement the financial proposals of the Government of Nepal for each fiscal year is as determined by law.

Due to the growing fiscal deficit of the Government of Nepal,increasing reliance on internal debt can also lead to economic and financial imbalances in the economy. For example, if a large portion of the internal debt is sought to be repaid by commercial banks, the share of financial resources from commercial banks to the private sector for productive purposes will be reduced and the access of the private sector to banks will be narrowed.

Therefore, it is equally necessary to establish appropriate and reasonable coordination between monetary policies and fiscal policy.

It has been argued that the central bank, which has taken the main responsibility of keeping interest rates desirable in the economy, has to manage the internal debt for the government, which could create a situation of objective contradiction.

It also means that the dual responsibility of monetary management and national debt management should not be given to the same body and in some countries,the responsibility of debt management of the government has beer transferred to a separate Debt Management Office outside the Central Bank Realizing the need for such an arrangement even in the case of Nepal, the Deb Management Office has been established.

The Foreign Aid Coordination Division of the Ministry of Finance,Nepal Rastr Bank, and the Office of the Financial Comptroller General have a significar role to play in the management of foreign debt.

4.7.2 Problems/Issues of Public Debt Management

Lack of clear basis for the internal debt ceiling,

Excess treasury bills in total domestic debt,

Debt operating costs appear to be high,

Lack of coordination among agencies directly involved in public de management,

Lack of public awareness,

Failure to fully manage the computerized and avhived revorda,

Acts,rules,and policies cannot be changed and modified according to time,

Weakening of the government's eritical ability in mobilizing and utilizing foreign aid.

▶Unable to operate through a full foreign aid budget.

Lack of proper coordination between donors, government, andI stakeholders in aid management.

Expenditure of foreign debt is high in total debt liability and there is a risk of foreign exchange.

4.7.3 Measures to Make Public Debt Effective

To mobilize public debt towards controlling, recurrent expenditure and increasing capital expenditure,

To mobilize internal debt without discouraging private sector investment,

Do not mobilize a large amount of public debt to increase the size of the budget and price unnaturally,

Focus on loans for high priority national pride projects,

Focus in soft loan than a commercial loan as much as possible,

Be aware of the negative impact of debt mobilization on various aspects of the economy such as production, consumption, employment, etc.,

Mobilize the loan by analyzing the ability to repay the loan,

Non-acceptance of unnecessarily difficult terms of development partners while negotiating foreign loans,

Mobilize foreign loans by analyzing the trends and potentials of the economy and taking into account foreign exchange risks,

Public debt should be mobilized in the direction of achieving the goal of socialism by building an independent, prosperous, and modern economy,

The internal debt ceiling should be set in a way that does not adversely affect macroeconomic stability and encourages existing liquidity and savings in the economy,

Government expenditure, income, level of GDP,deficit finance situation, etc. should be analyzed based on study analysis and forecast accordingly.Loan should be kept within the required limits.

Even if the internal debt does not have an immediate effect on the economny,the debt burden on future generations is likely to increasein the long run. Therefore, in the productive sector, where the return on government investment exceeds the fixed exchange rate, only the loan is required for investment. Internal loans should not be taken only to cover the budget deficit.

Estimates of internal debt should include a detailed analysis of aspects such as financial stability,private sector investment potential, cost and returns, cash flow trends, and types of bonds.

Institutional arrangements should be made to make the monitoring of foreign loans effective.

There should be meaningful coordination between monetary policy and public debt management.

Concessional foreign loans should be mobilized only for the high-yielding productive sector, human development, and construction of essential infrastructure. Its use should be discouraged from being used in study tours, foreign expert consultancy services, etc.

Emphasis should be placed on grants rather than foreign loans by enhancing the ability to negotiate.

All forms of foreign aid must be included in the national budget system,

Effective implementation of the Paris Declaration and Accra Action Plan shoul be done,

Aid management information systems should be regulated and managed well.

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