KATHMANDU, March 20: The National Natural Resources and Finance Commission (NNRFC) has set the ceiling on internal loans that the federal, provincial and local levels can take for the upcoming fiscal year 2027/28.
Based on the macro economic situation, revenue trends, expenditure pressures, and the condition of the financial market, the NNRFC has emphasised on maintaining discipline in debt management and has formally recommended it to all three levels of government.
According to the recommendation made by the NNRFC to the government on March 11, the federal government will be allowed to mobilise internal debt up to a maximum of 5.5 percent of the total gross domestic product in the coming fiscal year.
This limit has been set to maintain overall stability and ensure the sustainability of debt. In the case of provincial governments, the right to raise internal debt is bound by certain conditions.
The NNRFC has recommended that the provincial government be allowed to take internal loans up to a maximum of 12 percent of the total revenue collected from the revenue shared by the Government of Nepal and its own internal sources. It is required that the necessary legal, structural, and procedural framework be completed, and prior approval from the Government of Nepal is mandatory for this.
Fiscal Commission sets criteria for internal borrowing
A similar type of ceiling has also been set for the local level. According to the NNRFC, local governments can raise internal loans up to a maximum of 12 percent of the total of revenue shared from the federal and provincial governments and income received 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 disbursed through specialised institutions established by the Government of Nepal for infrastructure development in local levels. The NNRFC has also provided detailed recommendations for the effective and sustainable use of internal loans.
It has been stated that when taking a loan, it is mandatory to evaluate the cost-benefit analysis of the project, the net present value, and the internal rate of return.
Particular emphasis has been placed on investing the internal borrowings only in commercial projects where the internal rate of return exceeds the investment capital and in social sector projects with high economic returns.
Similarly, the NNRFC suggested ensuring that the returns from the projects and programme, operated from loan investment, could cover principal and interest payments.
It shared that loans should be mobilized in the projects that contribute in production growth, employment creation, income growth, infrastructure development and capital formation.
As per the provision of Intergovernmental Fiscal Arrangement Act, 2074, the arrangement of mentioning internal debt as the source in the budget by provincial and local government only after getting approval from the Government of Nepal should be strictly implemented, reads the report.
Likewise, it was suggested to mandatorily mention international debt in source-based details in every project and programme while formulating budget. The NNRFC pointed out the need of developing an integrated digital information system to maintain transparency and increase coordination in public debt management.
The NNRFC also recommended that internal loans could not be used in current and administrative expenditure. It also proposed to make an arrangement of raising loans through short-term loan instruments at a time when interest-rate is low in the market and the renewal of such instruments should be included as new loans in the budget and be approved by the parliament.
All three tiers of government should regularly provide accurate details of revenue and expenditure, added the report. Arrangement should be made to submit to the NNRFC the details of estimated and actual mobilization of internal debt categorized by region, project, heading and source at the end of every fiscal year.
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