Illustration: Katmandu Journal
Nepal’s bond market is saying nothing. The government borrows freely, yet interest rates do not twitch. For policymakers this might appear a blessing: deficit finance without penalty, expansion without constraint. But silence in the face of excess rarely signals health. More often, it reflects dysfunction (as we explain).
The case is laid out clearly. One study finds budget deficits have had no statistically significant effect on interest rates in Nepal over the last two decades. This defies economic orthodoxy. Classical models warn fiscal expansion in resource-constrained economies should push up borrowing costs, crowding out private investment. The empirical record in Nepal suggests no such trade-off. Deficits rise; debt grows; and the cost of capital dozes.
This fiscal calm is not without explanation. The financial sector is swimming in liquidity, thanks to massive inflows of remittances and limited credit demand, as well as underdeveloped capital markets. Government borrowing does not compete with private borrowers because few steps forward. Savings exceed investment opportunities; deficits fill the vacuum.
But this equilibrium is misleading. The absence of crowding out does not mean the presence of crowding in. Borrowed funds are not mobilising productivity. They are funding recurrent spending and servicing debt. Capital investment is anaemic, and execution rates for development projects are abysmal. When repayments exceed infrastructure outlays, as they now do, public borrowing ceases to be a tool of growth and becomes a cycle of maintenance.
Worse, the illusion of costless borrowing encourages complacency. Political incentives tilt towards largesse and symbolism: swollen budgets, under-executed programmes, unmet targets. No signal emerges from the market to force restraint or recalibration or reform. The consequence is fiscal theatre without economic substance.
This is not sustainable. Public debt, at over 40% of GDP, is still manageable. But amortisation costs are climbing, and domestic borrowing is increasing in frequency and volume. The capacity to borrow is not unlimited. If remittances falter or inflation stirs, the bond market may begin to wake—and not gently. A sudden shift in global interest rates would sharpen the pain.
Policy must respond before pressure mounts. Nepal needs fewer announcements and more implementation. Public investment should be scrutinised for efficiency rather than scale. Tax systems must broaden. Subnational fiscal transfers should be matched with accountability. Debt issuance should be tied to measurable returns.
Markets are not always right, but they are rarely irrelevant. When interest rates fall silent, something else should be speaking. The time to listen is now. ■
