PUBLIC DEBT SUSTAINABILITY IN NEPAL

Abstract

This paper estimates the public debt sustainability in Nepal. Using the yearly time series data for the period of forty-eight years ranging from 1974/75-2021/22, the study employs ARDL method to assess the country's debt sustainability framework, where the dependent variable is debt-to-GDP ratio whereas debt service ratio and primary balance to GDP ratio are independent variables under the study. The results of ADF show that all the variables used in this study are in I (0) and I (1) form. The computed F-statistic exceeds the critical upper bound values at conventional significance levels (i.e  5% or 10%), which confirms the presence of a long-run equilibrium relationship between the dependent and independent variables. The confirmation of co-integration implies that although individual fiscal indicators may fluctuate in the short term, they move together in the long run in a manner consistent with intertemporal budget constraints. This co-movement is a key criterion for debt sustainability. In technical terms, it suggests that the Nepalese government adjusts its fiscal policy over time to ensure that the present value of its primary balances is sufficient to offset its outstanding debt obligations. Therefore, the study’s findings—grounded in robust econometric testing—support the conclusion that Nepal’s public debt is sustainable in the long run, provided current fiscal behaviors and institutional responses remain consistent.