Kathmandu- The government has proposed amendments to the Public Debt Management Act, 2022, allowing foreign individuals and institutions to invest in government bonds.

Under the amendment drafted by the Ministry of Finance, the government would be able to issue sovereign bonds that can be purchased by both domestic and foreign investors in either Nepali or foreign currency, through auctions or other approved mechanisms.

The existing Section 10 of the Act authorises the Public Debt Management Office to issue government securities after determining the investment criteria and eligibility. The proposed amendment expands this provision to allow both domestic and foreign individuals and entities to purchase such securities through competitive bidding or other methods.

The amendment also proposes allowing the government to issue sovereign bonds that can be listed on either domestic or international markets, opening the door to raising funds directly from foreign investors.
The move comes as Nepal faces shrinking access to concessional financing while its demand for capital continues to rise. The government is therefore seeking to establish a legal framework that would enable it to gradually raise funds from international capital markets.

However, borrowing through foreign currency denominated bonds at market interest rates could expose Nepal to greater financial risks. Even concessional foreign loans have become more expensive because of currency depreciation, which has increased the government's debt servicing costs.

To address this risk, the proposed amendment includes provisions allowing the government to use hedging instruments to reduce the impact of exchange rate fluctuations on foreign debt, particularly if the Nepali rupee continues to depreciate.

Although concessional loans carry relatively low interest rates, currency depreciation has pushed the effective borrowing cost above 6 to 7 percent in some cases. This raises the overall debt burden and increases fiscal risks.

During the past 10 months alone, Nepal's external debt liability increased by Rs 167 billion solely because of currency depreciation. Of the total Rs 300 billion increase in external debt during the period, Rs 167 billion resulted from exchange rate losses.

Given that borrowing from international markets at commercial rates could further increase such risks, the government is seeking to create a legal basis for using hedging instruments as part of its debt management strategy.

The amendment states that hedging transactions and secondary market trading of government securities will be governed by the relevant laws and regulations.

The Indian rupee has been weakening steadily against the US dollar in recent months. Since the Nepali rupee is pegged to the Indian currency, any further depreciation of the Indian rupee would also weaken the Nepali rupee, potentially increasing the exchange rate risk associated with future foreign currency borrowing at market rates.