Kathmandu-The government is exploring ways to reduce risks from external borrowing if the Nepali currency continues to depreciate.

The Ministry of Finance has started initial discussions on available tools to manage debt risk.

Even though many foreign loans come at concessional interest rates, currency depreciation is pushing the effective cost above 6 to 7 percent. This is increasing the overall debt burden.

In the past 10 months, currency depreciation has added 167 billion rupees to the country’s external debt liability. During the same period, total new borrowing stood at 300 billion rupees. More than half of the increase came from exchange rate losses.

Debt liability is calculated based on the difference between the exchange rate at the time of borrowing and the current rate. The pressure is not immediate for the full amount, but repayment obligations for the current fiscal year are affected.

The government borrows from various countries and institutions at low interest rates, often below 2 percent. However, repayment is in US dollars, which increases costs when the rupee weakens.

One option under discussion is currency hedging. Officials are studying whether hedging costs would be lower than losses caused by depreciation. Hedging premiums depend on market conditions and expected currency movements.

Officials say no final decision has been made. But if depreciation continues at the current pace, the government may have no choice but to adopt risk management tools like hedging.

An official at the ministry said donor agencies have also suggested exploring hedging options if currency pressure continues.

The Indian rupee has also been weakening against the US dollar, which affects the Nepali rupee due to its peg with the Indian currency.