Financial risks that have seen the government

Nepal’s Finance Ministry has unveiled a major report titled “Fiscal Risk and Strategy,” which identifies 11 key financial risks facing the nation and lays out 21 targeted strategies to address them. The comprehensive plan is designed to enhance Nepal’s fiscal resilience, transparency, and economic stability amid growing financial uncertainties.

Macroeconomic Risks: The Top Priority

The ministry has identified macroeconomic risks as the most significant threat. These include:

• GDP fluctuations: Changes in economic growth directly impact government revenue, expenditure, and debt.
• Inflationary pressure: Persistent inflation erodes purchasing power and increases government spending obligations.
• Interest rate volatility: This directly affects the cost of servicing public debt.
• Exchange rate instability: Fluctuations in the exchange rate increase the cost of foreign debt repayments and imports.
• Growing public debt: Although the debt-to-GDP ratio is currently considered low-risk, the report highlights the increasing debt in comparison to government revenue.

To combat these macroeconomic challenges, the government plans to implement a flexible monetary policy in coordination with the Nepal Rastra Bank. A key strategy for debt management is to limit domestic borrowing to 5.5% of GDP and prioritize foreign loans with concessional terms. The government will also focus on expanding the tax base, improving tax compliance, and establishing fiscal buffers and stabilization funds to prepare for economic shocks.

Specific Risks: Natural Disasters and Guarantees

The report also highlights specific risks with the potential for significant financial impact:

• Natural disasters: Nepal is highly vulnerable to earthquakes, floods, and landslides, which cause recurring and devastating economic damage.
• Government guarantees: These can create contingent liabilities if public institutions fail to meet their financial obligations.

In response, the government plans to develop an early warning system for natural disasters and create dedicated multi-tiered disaster funds at the federal, provincial, and local levels. The use of insurance mechanisms will also be explored to finance risk. To manage the risks from government guarantees, the report proposes a cap of 1% of GDP on public guarantees, the implementation of a risk assessment framework for all guarantees, and the allocation of funds to cover potential contingent liabilities.

Institutional Risks: Forecasting and Financial Controls

Institutional weaknesses are also a major concern, as they can exacerbate other financial vulnerabilities. The report identifies:

• Forecasting errors: The government has a history of overly optimistic revenue and budget projections, leading to implementation difficulties.
• Weak financial controls: This is particularly an issue at the provincial and local government levels, where there is a heavy reliance on federal transfers and poor monitoring of financial liabilities.

To mitigate these risks, the Ministry of Finance will strengthen financial monitoring and standardize reporting across all government tiers. It will also undertake reforms to improve public debt management and enhance transparency and accountability. Public institutions facing financial deficits will be restructured through measures like public-private partnerships (PPPs) and strategic equity partnerships to improve efficiency.