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A potential public debt crisis is building in Nepal. The risks stem from the government’s increased use of debt without adequate focus on policy reforms or productive investments, which are essential for long-term growth.

There isn’t much that donors can do directly about government’s domestic borrowing. But on external debt, donors, particularly the World Bank and the Asian Development Bank, Nepal’s largest lenders, must do more to hold the government to account on policy reforms, and ensure that debt is correctly deployed to enhance productivity and competitiveness.   

Nepal has had plenty of one-off reasons to borrow in recent years: rebuilding after the devastating earthquake, financing the federal structure, and now the pandemic. All this in addition to its large ongoing needs for infrastructure and investments.

By the first half of the current fiscal, Nepal’s total public debt (domestic and external combined) had increased to Rs 1.5 trillion, approximately a three-fold increase over the past five years. Public debt-to-GDP ratio is projected to be around 43 percent by the end of the fiscal year.

Current projections suggest that debt-to-GDP could climb to about 49 percent by 2025, perhaps even marginally above 50 percent if economic growth turns out lower than expected. But these levels are well below Nepal’s benchmark debt carrying capacity of about 70 percent debt-to-GDP that the International Monetary Fund (IMF) set in April 2020. The IMF concluded that Nepal remained at low risk of debt distress, well below their indicative threshold values, even under stress tests.

Nepal’s robust debt carrying capacity masks a vulnerable darker side.

The growth in public debt has not correspondingly resulted in policy reforms that enhance domestic productivity, competitiveness, and economic growth. Over the first half of the fiscal, for example, approximately 85 percent of development assistance (loans and grants) were allocated to roads, governance, and energy. Across these segments, it is hard to find meaningful reforms.

On roads, for instance, increased expenditures have not translated into kilometres on the ground. Transport costs and connectivity constraints continue to impair trade and commerce. On governance, the nexus between the state and contractors has hardened. Accountability, and transparency have degenerated. A large part of road construction budget goes to local governments, where planning, design, oversight, and fiduciary control nearly absent. Nepal’s marquee road project, the fast track, is being led by the army—really, what more is there to say!

The story about the energy sector is the same. Money has merely amplified the government’s monopoly in the sector. Donors have whitewashed the challenges in the sector, mistaking the government’s unrealistically ambitious plans as signs of opportunities. This is a sector is deep distress, where reform efforts to increase consumption, diversify energy sources, export electricity, enhance energy security, and integrate private sector have stalled.

Without policy reforms that enhance domestic productivity and competitiveness, how will Nepal repay its public debt? Its tax base is already heavily reliant on consumption expenditures, which accounts for approximately 60 percent of all revenues. The tax base growth is slowing down, declining from an annual growth of about 70 percent five years ago to near zero this year. All of this puts additional burden on remittances from Nepalis working abroad that are now the only real income source available to finance debt. The social costs of relying on remittances to repay debt and finance the economy are staggering. 

The government’s access to public debt, particularly external borrowing, without having to deliver on reforms has also magnified the importance of political power. The government is the only game in town. The nature of debt and development funding is, in part, enabling this. Appropriately 85 percent of development assistance (loans and grants) is now channelled through the government’s budget. In just two years, between 2018 and now, the portion of donors’ budgetary support doubled to 30 percent.

Channelling development investments almost entirely through government budgets would be fine if governments were selecting enough productive projects or undertaking meaningful reforms. But they are not. The ability to sustain patronage through projects financed by public debt has intensified political rivalry and marginalized change-makers seeking to build pressure for reforms.       

Even the wealthiest gamblers will eventually go broke if they continue to place senseless bets. Financing debt without adequate policy reforms is a bit like financing the gambler. Nepal’s external lenders must ensure that their loans are meaningfully employed to enhance productivity, competitiveness, and growth.

Views are personal. [email protected]

Last week, a Kathmandu-based Thai diplomat came to talk to me about BIMSTEC. He sought my views on the way forward for the organization, with Thailand now on the cusp of taking over its rotating chairmanship. I am by no means an expert on BIMSTEC, but then who in Nepal is? Compared to their knowledge on SAARC, even seasoned foreign policy analysts here know little about BIMSTEC, mostly out of choice. 

Nepali foreign policy establishment and analysts are reluctant to own up BIMSTEC, something they see as an Indian construct that is being promoted to isolate Pakistan, India’s arch-enemy. By contrast, they feel a kind of kinship towards SAARC, an outcome of collective effort of smaller countries in the region, mainly Nepal and Bangladesh. India is promoting BIMSTEC to secure its larger strategic interests, the thinking goes, while the interests of smaller South Asian states is best secured via the SAARC channels. 

BIMSTEC is getting a charter after over two decades of its formation, and India is pushing for its greater institutionalization. But it won’t make headway so long as smaller countries like Bangladesh, Bhutan, Nepal and Sri Lanka (all members of both SAARC and BIMSTEC) remain suspicious of Indian intent. It’s not just about intent either. Prior Indian commitments on connectivity projects and infrastructure development have been mostly unrealized. This is in contrast to the reputation of China as an actor that gets things done, and one which has a much bigger investment purse. 

This is also why many in Nepal believe BIMSTEC is all about minimizing China’s presence in the neighborhood, not the least because of the country’s unwavering support for Pakistan. India had grown increasingly suspicious of SAARC after Nepal and Pakistan started pushing for China’s inclusion as a full member. India, as even Indian commentator acknowledge, had to somehow take Pakistan out of the picture, and hence BIMSTEC.   

Conceptually, there is nothing wrong with any initiative that aims to lift people’s living standards through greater connectivity and trade. Historically, too, South Asia and South East Asia have since time immemorial exchanged people and ideas. Yet the hard reality today is that India has simply refused to open its territory for third-country trade. Nepal and Bangladesh are, at their closest, just 27 km apart. But trade between them remains miniscule partly owing to India’s reluctance to allow the two countries to open a passage via its ‘chicken neck’. This narrow piece of land connecting mainland India with its northeast territories has become an even more sensitive place—and thus more impervious to outsiders—following the recent India-China border tensions. 

If Nepal cannot freely trade with Bangladesh, can it realistically hope to do so with Myanmar and Thailand, either via land or rail routes? BIMSTEC is not just about cross-border trade. All kinds of other co-operations are envisioned in areas as diverse as fishery to climate change. Yet no regional grouping can today prosper without extensive exchange of goods and people, as is the case with more successful regional bodies like ASEAN and EU.  

As the fulcrum between the two regions and by far the biggest economic power in the grouping, the onus is on India to show it is serious about regional trade and connectivity. It must also do a better job of assuring smaller countries on delivery. SAARC has always been hobbled by India-Pakistan rivalry. BIMSTEC, on the other hand, has been hostage to India’s lack of strategic vision. One can only hope that the compulsions of economic revival after the Covid-19 pandemic will prompt a rethink in New Delhi. 

“Democracies do not always make societies more civil—but they do always mercilessly expose the health of the societies in which they operate.” — Robert Kaplan

The self-proclaimed democrats in the country never tire of defending our dysfunctional democracy with the oft-repeated lame argument that it’s not the system but the present set of leaders who are to blame for the mess we are in. The reality, however, is that democracy as a system has failed miserably in Nepal. One has to be high on something to be optimistic about Nepal’s future if the current system is to continue.

First, let turn to the argument that calls for patience, i.e., when we have a good set of leaders our democracy will deliver. If it's the leaders that are to be blamed for our present misery, then, maybe our society is not ready for or compatible with the kind of democracy we have today. When are we supposed to get the leaders who will make our system work? And where will these leaders come from? Because as things now stand, the next in succession, the so-called youth leaders who are already in their 50s, are no different to the old leaders we have today.

Those who are benefitting from the present mess further console us by saying democracy takes time to take root and your grandchildren will reap the democratic dividend. So be patient. They can afford to say that because they are either paid to be democratic, democracy is their career/profession, or they just want to fit in by appearing liberal. The mainstream press and a handful of those who write for it or those claiming to be public intellectuals and members of civil society and those who have successfully monopolized the debate and discourse and as a result the national narrative, have made other gullible wannabe liberals and democrats parrot the same view. Therefore, questioning the effectiveness of the system is tantamount to blasphemy. We have become a democratic theocracy in which only the select few ordained by foreign gods can preach and others have to obediently listen and not ask any question—no matter how ridiculous their preaching is.

And obediently we listen to all the crackpot theories and concepts that have been promoted in the past 30 years by our media and illiberal intellectuals to show the past rulers/system as illiberal and undemocratic. Questioning those, we are made to believe, would make us appear deranged and illiberal and feudal. Further, having an independent mind is not tolerated in democratic Nepal. That's why no one dares ask these intellectuals the validity of the crackpot theories and concepts they use all the time to dismiss their critics just to appear scholarly and to hide flaws in their arguments. Two such nonsensical concepts, the absolute darlings of our mainstream intellectuals (?) and media, are Bahunbaad and Mahendrian nationalism—the two concepts that have divided our society and weakened our nationalism, but no one dares say anything against those.

You question their assertion and provide counter arguments to the popular narrative that pits Bahuns against others and that wrongly blames them for Nepal’s underdevelopment and the plight of others while forgetting that the majority Bahuns and Khas-Aryas too are miserable like the rest. If you question this “sacrosanct” theory/concept, you are automatically labeled feudal and undemocratic. You question granting citizenships to foreigners married to Nepali nationals without any waiting period, or you argue for vigilance against foreign designs on Nepal and for adoption of a strong, independent foreign policy to resist undue foreign interference, be it political or cultural, and you are automatically labeled a Mahendrian nationalist.

Let's also ask what exactly have we achieved with the (il) liberal democracy in the past 30 years. Mob mentality has taken over, thanks to the state’s inability to control anything due to corruption. People have lost faith in the government and state institutions, so much so that they have resorted to punishing those accused of committing even prettiest of crimes themselves. The mob is the judge, the jury and the hangman in today's Nepal. Democracy was supposed to make us more tolerant and our institutions stronger, but the exact opposite is happening. And yet, we cannot question the system.

In terms of foreign relations, too, we are now reduced to being an extension of our neighbors. And our leaders openly ask and invite foreign interference in domestic politics. Yet the media pundits have us believe that there's absolutely nothing wrong with it. Those who dare criticize the system and ask about its ills are shunned by mainstream media. That's the way freedom of speech and expression is practiced in our democracy by the mainstream press that calls itself the bastion of democracy.

And some of you would be quick to dismiss my arguments too. My last name would work against me. A Bahun, hence, automatically feudal and illiberal. And some illiberal liberals may quote Churchill to prove me wrong: democracy is the worst form of government except all those other forms that have been tried. But as BBC correspondent Humphrey Hawksley writes in his book Democracy Kills, quoting Churchill no longer does the business. We all need to ask, what's so good about having the vote in societies with weak institutions? The answer is, nothing.

As Robert Kaplan argued in his 1999 essay, “Was democracy just a moment?”: “Democracy often weakens states by necessitating ineffectual compromises and fragile coalition governments in societies where bureaucratic institutions never functioned well to begin with. Because democracy neither forms states nor strengthens them initially, multi-party systems are best suited to nations that already have efficient bureaucracies and a middle class that pays income tax, and where primary issues such as borders and power-sharing have already been resolved, leaving politicians free to bicker about the budget and secondary matters.”

But we are yet to see a strong middle class and we have our own share of problems that make democracy ineffective in Nepal. We don't want to talk about them because the immoral leaders, with help from equally immoral, shortsighted and illiberal intellectuals, have “retreated to moral arguments only to justify democracy” and as such they have been successful in hoodwinking many of us into believing that democracy, the form we have today, is the only solution to Nepal’s problems. Of course, those who do not buy this humbug can't speak out against it because in today's democratic Nepal it would make them appear immoral and idiots instead.

With the critics silenced with the silly moral arguments, the immoral bunch is having a field day, and the country is suffering. As things stand now, the country will suffer for a long time. Democracy is indeed killing us and no good has come out of our right to vote.

Go ahead, give your moral arguments in support of democracy, but before you do, ask yourself: are you really happy and proud to be living in the current mess that is Nepal?

In a recent interview with nepalpress.com, an online news portal, Prime Minster KP Oli unconditionally condemned the bloody crackdown on Myanmar’s peaceful protests. He wished for swift restoration of the democratic process and the country’s return to normalcy. It was not Nepal’s official statement on a foreign country. But the statement of one country’s head of government on another country, wherever it is made, must be considered the position of his government.

This hasn’t stopped Nepali Congress and JSPN lawmakers from asking for a formal government statement on Myanmar, where the military has shot dead at least 500 people. Separately, a group of civil society members have called on Nepal to join international efforts to make the Burmese junta accountable for its murderous rampage. The high level of public and intellectual support in Nepal for Myanmar’s pro-democracy protestors partly owes to the large Nepali diaspora there. The presence of an estimated 300,000 Burmese of Nepali origin in Burma can be traced back to the Second World War when they fought there on behalf of the British.

Our earnest wishes aside, the country of 54 million that has always been under the shadow of its powerful military is unlikely to revert to democratic rule soon. Some smaller democracies in the region—especially the ones that don’t share a border with Myanmar—may speak out against the atrocities there. As will leading global liberal powers like the US and the EU. But the two countries that are best placed to effect change in Myanmar—China and India, in that order—will remain mum.

The largest democracy in the world has sealed its lips, nay, it even participated in an army parade in Naypyidaw on the bloodiest day of the military crackdown on unarmed people. As more and more countries turn inwards, strategic calculations have come to prevail over humanitarian ones even in liberal societies. India fears Myanmar could be slipping into complete control of China, which is already Myanmar’s largest trading partner as well as the biggest source of its FDI. An overt stand against the junta, India fears, could make the country tighten its embrace of China. Not to forget, the junta also has the power to foment unrest in the northeastern Indian states bordering Myanmar.   

China and the Burmese military are not the best of pals these days. Beijing believes the junta is placing unnecessary hurdles before crucial BRI projects, partly to prove its nationalist credentials. The Chinese will nonetheless be loath to let the international community dictate terms in Myanmar, even if it’s for the noblest cause. As Beijing sees it, what happens in Myanmar could be repeated in Taiwan or Hong Kong. So China, as well as Vladimir Putin’s anti-Western Russia— and another permanent member of the UN Security Council—won’t allow the Security Council to take strict measures against the junta.

Has the narrative of absolute national sovereignty gained such traction in global affairs that all possible humanitarian interventions abroad will look dubious from now on? Some Madhesi lawmakers in Nepal compared events in Myanmar today to what has happened in Madhes during its various uprisings. Is that a credible comparison, and will such comparisons help or hinder the cause of the Burmese people? The comparison also raises another important uncomfortable question: what should be the grounds for foreign intervention in Nepal on humanitarian grounds?