Around 67 percent of the annual national budget is spent for meeting regular expenditure that includes mainly salary as well as allowance of government employee and 15 percent is used for paying loans of national and international financial institutions. And as a consequence, the remaining portion is invested in development of projects as capital expenditure; this amount is very minimal. It causes insufficiency of capital in various development programs that leads to delay in construction of infrastructure. Sikta Irrigation Project which is under construction with domestic investment can be cited here as an example. After the restoration of democracy in 1990, budget should have been allocated fairly to all constituencies in order to meet the growing economic aspiration of people. But the uneven allocation of the budget hampered the smooth development of mega projects because such projects required sufficient funds for several consecutive years and this did not happen. Therefore, Nepal needs to depend on foreign loans and foreign direct investments to run its development activities in the needed scale.
After the successful completion of second round of Constituent Assembly Elections, domestic as well as foreign investors are very much optimistic as it brings much needed political stability with policy level consistency. Such optimism was clearly observed in the recently concluded Nepal Economic Summit (NES) and Nepal Business Conclave (NBC). Over hundreds of possible investors participated in those events from all around the globe to invest in niche markets that would allow them reasonable return and further open new avenues for investment. Additionally, local currency bonds could be developed by triple ‘A’ rated international financial institutions which is used for investing in mega infrastructure projects such as hydropower, airports, cold storage and so on. The investment in these growth sectors would create the new job opportunity for all kinds of human resources ranging from unskilled to highly skilled. This could possibly stop the mass movement of Nepalese people to gulf nations and other countries like Malaysia, Macao and South Korea for employment opportunities. Furthermore, the creation of bond in local currency saves national economy from the risk of currency mismatch as it has better absorption capacity from external shocks. It gives commercial banks an opportunity to manage their liquidity and thus, making the capital market more vibrant. Realizing these importances, Ministry of Finance (MoF) has already prepared guidelines regarding issuing bond in Nepalese currency and international financial institutions such as International Finance Corporation (IFC) and Asian Development Bank (ADB) have shown keen interest in this. IFC has gone one step further by giving application in concerned ministry to seek permission. According to news published in various national dailies, it has planned to issue bond of around US$ 500 million within the time period of five years which would be used for long term financing.
Till now, Nepal Rastra Bank, the central monetary authority of Nepal has issued bond for Nepalese financial institutions mainly for maintaining liquidity in the money market. It has once issued bond targeting remittance receivers, but it could get good response because the coupon rate was not so attractive and Nepalese people were not familiar with this kind of new practice. However, with the involvement of globally renowned financial institutions such as IFC and ADB, the scenario would be much different as this would be starting point to developing the broader and longer tenure fixed income market.
In case of an emerging economy like Nepal, better economic policy with low level of inflation is required for successful operation of bond market in local currency. It also needs better legal framework with strong implementing institutions for attracting more investors. And formation of a new government with fairly comfortable majority and successful demilitarization of Maoist combatants give hope that all these prerequisites will be met even during the period of political transition.
(This article was originally published in Econity on 3rd April, 2014).
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