In the context of Nepal, a study found that the relationship between external borrowing and economic growth leads to an increased burden with the importance of the size and magnitude of this debt.
Generally speaking, public debt is the debt that the government has incurred from internal and external sources which is a major method of financing the government. The objective of external borrowing is for the fund to be used correctly in the productive sectors so that the country’s economy recovers with increased investment, with a good exchange rate and controlled inflation. The relationship between external debt and economic growth is long-term in nature.
Emerging developing countries like Nigeria, Brazil and South Africa are taking on huge foreign debt to stimulate their economies. Some countries like Sri Lanka are facing debt crises and are unable to repay the debt. There has been a crowding out effect on private investment due to external government borrowing to make it readily available. Some researchers have found that foreign debt at a high interest rate can create a crisis in the economy. Another reason for the stalemate of the economy due to foreign debt is misuse of funds, poor planning and corruption.
In this context, the negative effects of foreign debt can occur in the economy. The impact of public debt on private investment in the context of the Sri Lankan perspective has translated into a long-term impact. The results show that there was a crowding-out effect of external debt on long-term private investment, indicating that the government stimulated the fund to the private sectors. A study found that foreign debt had no long-term positive effect on India’s economic growth. The negative impact of external borrowing on economic growth has been seen significantly in Oman. However, there was a significant positive relationship between gross fixed capital and economic growth.
Nepal’s external debt over the past five years is showing an upward trend as it stood at 21.75% of GDP in the financial year 2020/2021. There may be the possibility of a negative effect of external debt on performance.
The last five years show that the share of external debt is increasing. In the fiscal years 2015/16, it accounted for 14.91% of national income, a change of 13.25% from previous fiscal years of Rs 388.76 billion. The figure rose to Rs 928 billion in the financial years 2020/2021, or 21.75%. It has been estimated that this figure will be Rs 985 billion by mid-July.
In the context of Nepal, a study found that the relationship between external borrowing and economic growth leads to an increased burden with the importance of the size and magnitude of this debt. The effect of external debt on economic growth is positive. Another study concludes that if the external debt increases by one unit, GDP growth decreases by 0.61 units. Similarly, increasing domestic debt by one unit increases GDP growth by 1.05%. Therefore, policy makers should increase the share of domestic debt that is effective in the context of Nepalese public financing.
External debt should be discouraged, which could reduce GDP growth. The government should rethink the policy when formulating the budget so that there are easy sources of low interest external borrowing. Nepalese sources of finance should be expanded during budget preparation with appropriate plans, policies and implementation strategies to emphasize the proper use of public funds. Corruption should be taken with zero tolerance. The government should focus largely on reforms so that contingent liabilities are mitigated for the promotion of investments in treasury bills, pension funds and institutional financing.