Friday, August 17, 2012

Debt management office in the offing

KATHMANDU, Aug 15, 2012

The government has initiated the process of forming a Debt Management Office, which, among others, will be tasked with better managing public debt service operations, conducting market and risk analysis on debt, and creating consolidated reports on public debt by coordinating with other government agencies.

“This unit will be a branch of a separate division which will be created by splitting the Economic Operations and Policy Analysis Division (EOPAD) at the Ministry of Finance,” EOPAD Chief Baikuntha Aryal told Republica.

Although many are considering the unit to share the work of Nepal Rastra Bank (NRB) in issuing domestic bonds, Aryal flatly refuted such rumors.
“Its main responsibility will be to design debt management strategy and risk monitoring mechanism, compile statistics on debt and establish a network with other government bodies and departments that are doing similar work,” he said, stressing, “NRB will continue to remain issue manager of government bonds.”

He, however, said the work is still in initial stage and more research is needed before the concept is finalized.

One of the reasons for opening a different debt management office is the government´s traditional approach toward credit management despite continuous rise in debt burden which topped Rs 18,867 ($238) per person at the end of last fiscal year.

Although the figure may startle many in a country where per capita income is $742, debt is an integral component that supports the government´s deficit financing - a means that covers various state expenses and allows the government to conduct development activities. Without this no country can run its economy smoothly - albeit governments should be careful not to imitate practices of few European countries, like Greece, which are facing sovereign debt crisis due to over borrowing.

Nepal, which raised its first debt of a little over Rs 8 million from domestic and foreign sources in 1961/62, also borrows frequently from local market by issuing bonds and treasury bills, and from foreign governments and agencies, like the World Bank and the Asian Development Bank.

Yet the recent case of the government having no inkling of securing a loan from the Russian government exposed the weak debt management system maintained by the country.

In that particular case, Nepal had taken a soft loan of 3 million rubles in April 1978, which was never detected until few weeks ago due to weak bookkeeping practice. This has raised doubts on whether the country has maintained proper records on debts accumulated from different sources as different bodies are compiling their own data.

Currently, the central bank maintains database on domestic debt. At the same time, the Financial Comptroller General Office also keeps its own records on domestic debt. The Office, on the other hand, also keeps records of foreign debt, while the Foreign Aid Coordination Division at the finance ministry also has its own database on foreign debt.

“Once the new unit is formed, it will coordinate with all these government bodies to create a consolidated report on the situation of public debt,” Aryal said.

The new unit is also expected to forecast on the funds the country may need to raise at a future date by conducting thorough market researches. It will also conduct researches on the perception of the product that is being introduced to borrow cash from the market.

Such researches are necessary as market may respond coldly to the government´s attempt to raise funds, as in the case of five-year Foreign Employment Savings Bond.

Lately, the need for conducting thorough market researches has gained traction as the government is now planning to allow multilateral agencies to issue bonds in local currency.

So far, the Asian Development Bank and the International Finance Corporation, the World Bank´s private sector lending arm, have formally expressed interest to issue such bonds.

Although the government is yet to give them a final approval on the matter, sooner or later, they are expected to be players in the country´s bond market. Against such backdrop, inability to take correct decisions - especially on timings of floatation of such bonds - may create liquidity crisis in the country.

Source: Republica

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