CHAPTER – I
INTRODUCTION
1.1	Background of the Study
The topic of economic growth and public debt is very important as it directly concerns current taxpayers, future generations and seriously can affect expectations about the future. The more integrated the world becomes the more profound is the contagion effect of crisis such as the world financial crisis and the European debt issue. Those significant events seriously challenge the future growth prospects.
Public debt was originated in Great Britain in the 17th century. After the first and second world war, public debt became very popular for reconstruction and maintenance. Most of the countries in the world started future systematically and at present still borrowing to develop their economic at a faster rate. But in the modern times the growth of public debt is the result of changing economic and political situation of all countries. But in the context of Nepal, Nepalese government has not a very long history of budgeting started in 1951. After that, we have frequent experience of deficit budgeting. Public debt has been an important tool of the Nepalese fiscal policy. However, public debt in Nepal was taken after 11 years of initiation of budgetary practice. (Aacharya, 1968) Thus, our history of public debt is not so long. Government started to take domestic loan in 1962 where as it started to take foreign loan in 1963. The first foreign creditors of Nepal were former USSR and UK after that government budget.  
Government of a country gets income from two sources, namely Government revenue and public debt. Generally public debt refers to loans raised by a government within or outside the. Every government like individual has to barrow when its expenditure exceeds its revenue. But it is not a source of revenue like taxes. Taxes; revenue obtained with no obligation to pay it back. Public debt (borrowing): revenue obtained with obligation to pay it back at some future date.  The amount barrowed by government during any given years constitutes the income of that year. So we may call public debt as revenue of the government. Further the term public revenue covers all types of income in a wider sense. So public revenue includes the money borrowed by a government also. It is to be noted that public debt refer to the methods or process of securing funds by the government public debt refers to the amount the government has an obligation to repay. 
Thus public borrowing is a process; public debt is the outcome of that process. Public debts or loans are collected by the treasury or government from banks, institutions and individuals. 
Public debt (also known as government interest, government debt) is the debt owned by a government. By contest the annual “government deficit” refers to the difference between government receipts and spending in a single year. Generally there are two sources of public debt, one is Internal sources: central bank, commercial bank, general public etc. and second one is external sources; foreign currency, Bilateral, Multilateral, Regional institution, International institution. In wider sense there are six types of public debt like, Internal and external debt, Productive and unproductive debt, Redeemable and irredeemable debt, Founded and unfounded debt, short term and long term debt, Marketable and non-marketable debt. 
Public debt plays vital role to economic development of any nation rather than developed country. Public debt is one of the important sources of generating income of the Government of developing countries like Nepal. It is one of the useful resources for economic development of underdeveloped countries. It helps to achieve targeted economic growth and also helps to narrow down the gap between expenditure and revenue, saving and investment required for a targeted growth rate. Especially in developing countries like Nepal, institutional backwardness makes the functioning of economic development a complicated business. In order to remove such obstacles in the economy public debt can be used as an inevitable tool. Thus, public debt is the most important sources of income for the economic development of Nepal. 
In this study the author conducts l empirical tests as well uses descriptive statistics to draw inference about the growth-debt nexus. A big part of the economic growth literature has taken the growth-debt nexus as a one-sided phenomenon. The study has tried to see the impact of debt on economic growth, assuming that the causality goes in that direction. This paper looks to investigate this particular causality link and evaluate the effect of deficits, causing debt and in turn the effect on economic growth and investments.
The thesis is structured in a way as to allow the reader to gain key understanding about the interrelationships between deficits, debt, economic growth, investments, interest rates, current account balances, exports and imports, etc. Initially descriptive statistics are presented and analyzed in relation to Nepal. Next the theoretical framework for economic growth and public debt analysis is established. The following chapters test one by one our hypotheses. First we establish the direction of causality between debt and growth. Further several regressions are performed on public debt, economic growth and investments. The author carefully analyses each one of these key sections and discusses the results of the empirical testing.
1.2	Statement of the Problem
Least developing countries have lowest public debt to GDP ratio because of they get more amount of grant than loan. Least- developed countries like Nepal are always facing the problem of resource gap. It needs huge level of investment to fill the resource gap. It is possible when government borrows from internal and external sources. External borrowing has been increasing more rapidly in each and every year than internal borrowing.
In the context of Nepal the increasing size of public debt to maintain fiscal deficit is challenging proposition. So, public debt in Nepal is a matter of concern. In the underdeveloped countries like Nepal, domestic sources are inadequate to meet the financial requirement for the economic development due to low income, low saving and low capital formation. So it creates the low internal debt in Nepal. Thus, Nepal is more dependent on external debt than internal one. This ever increasing trend of debt servicing of the country creates a great problem for debt management and becoming a major challenging issue of our country.  
The main concentration of this study is analysis of public debt of in Nepal. The research questions of Research paper are as follows: 
1.	What is the role of public debt in economic growth of Nepal?
2.	What is the relationship between public debt and economic growth of Nepal?

1.3	Objectives of the Study
The general objective of this study is to focus on the role of public debt in economic development of Nepal. The specific objectives of this study are as follows. 
1.	To examine the role of public debt in economic growth of Nepal.
2.	To analyze the relationship between public debt and economic growth of Nepal. 
1.4	Significance of the Study
Nepal is rich in natural resource but still poor and underdeveloped. Nepalese people are living under the vicious circle of poverty. In modern era, planning is taken as the main instrument for economic development. During the planning for development, various objectives are made. To meet the objectives, public debt is necessary due to low level of tax payable capacity of the people, mostly in developing countries. Needs are increasing and resources are limited, in such situation public debt is common and reliable sources for resource mobilization. Similarly, to break the vicious circle of poverty and to improve social condition of the people, there is greater need of public debt or government borrowing. So government borrowing has been necessary for developing countries like Nepal.        
Public debt is the most important to develop the country, when government expenditure exceeds than government revenue, to avoid this gap public debt is necessary. If the government doesn’t take loan, it is required to increase tax for fulfillment of this gap. So public debt plays vital role in economic development like -to curb inflation, -to build up infrastructure, -for capital formation, -to fight depression, war and natural disaster, -to control cyclical fluctuation, -to finance economic infrastructure etc. 
This study is especially focused on actual scenario of public debt in Nepal. So this study is efficient for those who want to know about the government borrowing in Nepal. This study will provide several information of in Nepalese public debts to them who are interested to know about it. This study will also be useful for policy makers, general students and researcher. This study gives some useful information related to our budgetary system.
 
1.5	Limitations of the Study
The limitations of the study are as follows: 
I.	This study is fully based on the secondary data and information and the outcome of the study depends upon the validity of secondary data.
II.	This research study covers only data from FY1997/1998 to 2017/18 due to the non -availability of data of dependent variables in the earlier year as Nepal was not that much open to the world economy and the ratio of debt to GDP is not that much considerable.
1.6	Organization of the Study
This study is going to be divided into five different chapters. The first chapter is concerned on the introductory part of the study with background, statement of the problems, objectives, significance and limitations of the study. The second chapter reviews some literatures with theoretical, empirical, internal and external. The chapter three describes about the research methodology with research design, nature and sources of data, tools and data collection, data organization, research matrix (in proposal). The chapter four is related with the data analysis, presentation and interpretation of the study analyzing the role of public debt in Nepal. The chapter five shows summary of findings, conclusion and recommendations. 

CHAPTER – II
REVIEW OF LITERATURE
2.1	International Context
Theoretical Review
Buchanan (1958) has suggested that the incurrence of domestic debt results in the postponement of tax liability from current to future generations. This shift from current to future taxation could imply a shifting of tax burden from current to future generations. 
Taylor (1961) has analyzed the nature and the burden of public debt upon the economy upon which fiscal policy must stand without it the financing of public emergencies would be impossible. Public debt is desirable, no matter what its burden when incurred for the purpose of securing benefits which outweigh the burden. In this sense debt is a necessary evil like cost of production: if the benefits could be secured with fewer burdens the alternative would be preferable. The burden of public debt is represented by the economic hardship which it imposes. This hardship may take the form of waste of productive efficiency for the economy as whole or undesirable economic burdens imposed upon particular class. The possibility of inflation resulting from the form of borrowing constitutes another element of burden. 
Gurley & Shaw (1955) have studied about the maintenance of balance between the expenditure and revenue for financing economic development, since developed pr developing countries always face the problem of fund, which is reflected in a large extent and as ever increasing financial resource gap in government budgetary. Therefore the selection of appropriate method for financing development is very important for the success of a development plan. Various methods to be adopted mobilizing financial resources and their implication for the economy are among the leading issues in economic development. Finance aspects are as important as the other aspect of economic development and their study should be received proper attention.
Chelliah (1961)   has observed that if revenue will meet subsides, other transfers, interest payments and the greater the part of current expenditure: debt finance will be used for meeting the government’s non- remunerative capital formation: and the total domestic borrowing will be determined in such a way that  given the rate of domestic saving, the non- government sector will be able to obtain a due share of saving and that there will be no need to borrow from the central bank more that the correct amount of seignior age, it is the ideal situation for borrowing. It can be presented in another ways also:
The level of government borrowing is the function of ability and willingness of person and business to lend and the government’s power and intention to tax. Maximum level of debt can be expressed in terms of the following equation: 

Where,
 D= maximum sustainable national debt 
O= Constant expenditure of ordinary government operation
t= maximum rate of tax receipts to national income (Y) and
 r = contractual interest rate of government debt. However, the burden of debt depends upon the nature of investments, productive or unproductive. If it is productive, there will not be a burden because of creation of real asset in the economy which further generates income of the people thereby increasing national income. If it is unproductive, the situation will naturally be burden to the government.        
Goode (1984) has observed that borrowed money when used to finance public investment causes no such reduction. All that will happen is the change in the consumption of capital formation. The inference is that failure to restrict borrowing to the investment will retard economic growth. A weakness of the argument is that not all outlays classifies as investment actually contribute to growth, while some expenditure usually as government consumption promote growth.
Chenery and Strout (1966) explained that the fundamental reason why developing and emerging countries amass external debt is lack of saving and investment. Countries with insufficient savings will approach the local or international debt market to borrow money for consumption smoothing and maintaining economic growth. Moreover, low government revenue, low levels of investment, and balanced budget deficits are additional reasons why developing countries approach the debt market.
Barro (1978) argued that the shift from current to future taxation implied by debt issue does not involve a burden on later generations due to the phenomenon of operative intergenerational transfers The assumption of infinite lives and other assumptions, like the timing of taxation, public debt and capitalized future taxes are perfect substitutes and the imperfections in the capital market, are discussed in Barro.
Krugman (1989) showed the debt relief Laffer curve (with the shape of an inverted U), where the nominal value of debt of a country and its actual expected payment is related. On the upward segment of the curve, debt and expected payments increase because the risk of default is low; in the descending segment, the level of debt increases but expected payments begin to descend because the risk of default is very high. He concludes that when a country is on the descending segment of the curve, the country suffers from debt overhang.1 In this situation of debt overhang, external debt obligations act as a tax obligation acts as a tax on investment.
Reinhart, Rogoff, & Savastano(2003) focused on the emerging economies and found that that emerging markets are not able to manage a certain level of external debt, while developed countries can manage the same level of external debt under the same circumstances. It is concluded that the economic impact of the level of external debt varies between countries, depending mainly on their history. They suspect that a default is detrimental for the trust in the institutions of a country, which makes future defaults more likely.
Cohen (1993) has extended the model of endogenous growth of Cohen and Sachs (1986) to formalize the relationship between external-indebtedness and investment. Consequently, Cohen presented and compared three economic scenarios. In the first one, there is free access to the global financial market, and the rate of investment (and production) is greater than with financial autarky. In the second scenario, there is a credit restriction with soft repayment, and the investment rate is lower than the free access case but higher than the financial autarky case. In the third scenario a credit restriction with forced repayment, and the investment rate is lower than with financial autarky. Therefore, the investment rate rises in the first scenario, before falling in the second and third scenarios. Thus, the relationship between external debt and investment (and growth) is non-linear. In addition, Cohen concluded that the third scenario would correspond to the concept of debt overhang, where external debt acts as a tax on investment, hurting economic growth.
 Saint-Paul (1992) has shown an endogenous growth model with overlapping generations, where an increase in public debt reduces the growth rate of the economy.
Jalan (1996) has opined that heavy growth of the borrowing is dangerous for the economy for two reasons: Firstly growth of debt ratio may lead crowding of public investment; Secondly, government spending out of borrowed funds might be unproductive.  They observed that the part of public debt which is burdensome and that servicing falls entirely or mostly on tax revenue. If its servicing does not fall entirely on tax revenue, it is not burdensome rather it is productive.  Because it itself generate resources for its debt service besides income, employment and output. Therefore all debt are not burdensome. 
Buiter (2001) has observed that the government borrows only to finance public sector formation cannot be easily rationalized in terms of generally accepted economic principles. At worst it could become a strait jacket on the fiscal and financial strategy. It also risks inducing a misplaced sense of complacency about the accumulation of public investment related to public debt. Debt must be serviced through future higher current revenues or lower public spending regardless of what motivated its issuance.
Adam and Bevan (2005) developed a model of endogenous growth with individuals who live two periods. They studied various ways to finance public deficits. An increase in domestic public debt slows growth, while an increase in external public debt, financed in concessional terms, but rationed, helps growth.
Kletzer and Pinto (2007) showed a model of endogenous growth with restrictions in tax revenues and public debt. In general, they find that the higher the public debt the lower the growth.
Aizenman (2007) found that, ceteris paribus, a country with a lower debt-to-GDP ratio will have a higher balanced growth rate. Yet, in the path towards the steady-state, the effects of the debt limit on economic growth depend on the nature of the externality associated with public goods spending. If debt finances productive investment in the stock of public infra- structure and public sector capital is an essential input for aggregate GDP, then the growth rate in the transition towards (a lower) steady state can increase.
In the same vein, the endogenous growth model proposed by Aschauer (2000) in which public capital has a non-linear impact on economic growth can be extended to cover the impact of public debt. 
Assuming that government debt is used at least partly to finance productive public capital, an increase in debt would have positive effects up to a certain threshold and negative effects beyond it.
Adam and Bevan (2005) have found interaction effects between deficits and debt stocks, with high debt stocks exacerbating the adverse consequences of high deficits. In a simple theoretical model integrating the government budget constraint and debt financing, they find that an increase in productive government expenditure, financed out of a rise in the tax rate, will be growth- enhancing only if the level of (domestic) public debt is sufficiently low. 
Checherita-Westphal, Hallett and Rother (2014) presented a growth model with public capital and debt, where the public deficit is equal to public investment. In their model, the relationship between debt and growth is nonlinear. So, in the steady state, the optimal debt to GDP ratio can be determined where growth is maximized.
In the Ricardian view, government debt is considered as equivalent to future taxes. Barro (1974) maintained the opinion that considering that consumers are rational and forward looking, the discounted sum of future taxes is equivalent to the current deficit. Thus, the shift between taxes and deficits does not generate aggregate wealth effects. The increase in government debt does not affect consumption. The rational consumer facing current deficits saves for future rise in taxes and therefore total savings in the economy are not affected. A decrease in government dissaving is matched by increase in private savings. In view of unchanged total savings, investment and interest rates are also unaffected and so also the national income. 
Singh (1991) in article mentioned that Michael Posner has pointed out that growth in the debt ratio causes alarm for two reasons. First, growth in debt ratio might lead to crowing out of private investment. Second, and more important, is the assumption that government spending out of borrowed funds might be unproductive. The argument is not sustainable. In fact, that part of public debt is burdensome whose servicing falls entirely or mostly on tax revenues. 
Hence, these theories posit that higher debt levels crowd out economic growth because of increased government internal borrowing. This increase in borrowing will, in turn, increase the interest rate, which makes the cost of borrowing for both investment and consumption more expensive, which is called a crowding effect. Moreover, poor management in developing countries has resulted in borrowing having a negative impact on both the economic growth and financial sustainability of these countries. It is important to use the borrowed money to finance productive investments that will generate future income. The key risk associated with accruing external debt is that the external debt may exceed a sustainable level in comparison to national repayment capabilities. 
Hence, the main cost associated with foreign borrowings is the debt service cost, which is an expensive tax bill that developing countries must pay from their future income. It represents fixed contractual charges on savings, income, and foreign reserves.
Babu et al (2015) mentioned the external debt of the government is the debt owed to holders of government securities such as treasury bills, treasury notes, and treasury bonds. The government borrows by issuing bills, notes, bonds, and securities. The following are the two principal reasons for government borrowing: (1) expected government revenue falling short of expected expenditure and (2) paying off maturing government debt 
The developing countries' economic experience had an important role in the rise of the New Growth Theories (NGT). Paul Romer (1994) identified the absence of convergence in large samples of countries (that include developing countries) as one of the two origins of NGT. Given this genesis, it is quite appropriate to ask what developing countries can learn from NGT. Several researchers have raised this question earlier in different ways. Bardhan (1995) also provided a very perceptive discussion focusing in particular on the NGT views regarding the role of trade in growth. Ruttan (1997) discussed the relationship between NGT and development economics and argues that there is not much in NGT that was not already there in development economics. Krugman (1993, 1994b) has expressed the view that although many of the NGT ideas were available in development economics, the fact that these ideas are now more rigorously formulated represents qualitative progress. Others who have also commented on the relationship between NGT and development problems include Pack (1994), Romer himself (1993a, 1993b), Nelson (1997, 1998), Srinivason (1993, 1995).
The Solow model (1956) that was developed based on the popular Cobb-Douglas production function. The growth model is still used as one of the primary frameworks for analyzing differences in cross-country economic growth patterns and convergence. It takes into account technology, labor and capital. Based on these factors it is argued that differences in growth could arise from two separate channels: differences in total factor productivity (e.g. workers' efficiency and technological state) and differing levels of capital per worker in the various countries. The underlying assumptions behind the model are that savings and technological progress are exogenously given and that technological state is labor augmenting (Harrod – neutral). Furthermore, Solow stated that the only way a country can be on a sustainable growth pattern is by only investing in research & development and education. Presumably this would have an exogenous increase in the technological level of the country and result in higher output per worker through improved effectiveness and innovation. In his work the researcher argues that sooner or later a country reaches a steady state (no change in capital per person from one period to another) unless there is a positive exogenous change in the technology. This basically implies that an increase in the savings/ investment rate of a country would only move further the steady state capital per person but will not secure long-term sustained growth as the effect of capital accumulation is diminishing on output. 
Furthermore the economic literature has been enriched by the contribution of Conlisk (1967), who augmented the classical growth model by changing the technological state of the economy to endogenous. Additionally, it was found that the saving rate does have an effect on long-term growth - something that was previously seen as inconsistent within the classical growth model. 
Notable contributions to the mainstream growth economic theory have been made by Lucas (1988) who augmented even further the neoclassical Solow model by adding human capital to it. This addition is very important as it catches the effect of education and acquired skills of workers on output. Previously this factor was ignored and there was no distinction among agents in the labor force with respect to human capital. For that reason, Lucas argues that there are two types of capital: physical capital in the form of machines, buildings and resources and human capital in form of highly skilled and educated workers. Another influential economist proposed alternative view on economic growth and its sources. 
Paul Romer (1986) launched the idea that technological advancement; education and research & development may be all that is needed to sustain long-term growth. 
In other words, he adopts the idea of endogenous growth of the economy, namely that economic advancement can occur from within the economy without the need of an external factor. By combining physical capital stock with human capital in a better and more effective way, an economy may find itself on a sustainable long-term growth path. The inclusion of human capital as an important factor into the growth model has been empirically tested by Romer, Mankiw and Weil. They proved that this augmented version of the Solow model fits better with the data. In his version of the growth model Solow assumed that labor increasing technological change is exogenous and strongly outlined the key role of capital accumulation in economic progress.
Influenced by the neoclassical arguments of economic growth, Stiglitz and Hoff (2000) supported the fact that the Solow model incorporates key determinants of economic growth. Their research augments even further the potential list of factors having effect on growth and convergence among countries. The researchers focus on constructs such as: historical background of the country, institutions, culture, government and rule of law. They argue that law enforcement, information access and non - market institutions can have pretty much the same influence on economic outcomes as limited technological advancement possibilities. Deeply rooted causes such as cultural background, working behavior, style and corruption levels can all have a significant impact on the economic performance of countries. One can summarize those factors as being fixed, since they do not change rapidly.
The debt can have influence on economic growth through the channel of Total Factor Productivity (TFP). Patillo (2004) and several other scholars have expressed such ideas. The theory connects external debt and growth which states that as a country funds its deficits by foreign external debt, it dedicates a larger fraction of the future output to foreign entities. This might reduce the incentives for higher productivity as people will not be motivated to innovate and become more efficient because foreign investors would benefit most. Higher level of debt might decrease investments and uncertainty increases. This would bring change in expectations that might bring structural change in investments, which becomes short-term rather than the long term. Those changes have a negative effect on the capital accumulation since the investment bear a higher risk and uncertainty. Therefore, no investor would like to invest a big portion that may be proved risky. This might have a negative effect on productivity in the economy. An attempt has been made to incorporate debt in the Solow model for an open economy by Villanueva. The finding is that in the long run the debt-to-gdp ratio can vary substantially based on differing levels of savings, investments, depreciation and exogenous factors such as perceived risk and required risk premiums from lenders. Under this model, they assumed that in the long term projection the equilibrium debt-to gdp ratio is fixed but it can be altered through the above mentioned factors.
As a summary of this literature review, one can see the link between economic growth and public debt. There are several channels through which growth of GDP and debt affect each other. One of the main points of this thesis is to determine those channels and in what way does the causality go. This is an important question. Furthermore, capital accumulation, research and development, human capital and efficiency affect economic development. In turn budget deficits lead to an increase in the debt stock, higher debt service obligations and increased uncertainty which, in conclusion, affects investments. From here one can see how the loop closes and what the relationship between the two key topics of economic growth and public debt is. Those logical links will be analyzed in detail in the thesis. 
 Empirical review
Musgrave (1959) viewed that Self-liquidating projects may be defined narrowly as investment in public enterprises that provide a fee or sales income sufficient to service the debt incurred in their financing, or they may be defined broadly as expenditure projects that increase future income and the tax base. Such projects permit servicing (interest and amortization) of the debt incurred in their financing without requiring an increase in the future level of tax rates. 
Lerner (1982) mentioned the view that the government may also borrow from the central bank to retire the debt held by the public. Thus the desirability or otherwise of public borrowing should be judged in term of its effects on aggregate demand and the government should not be disturbed over the size of the debt. Debt servicing poses no problem since it is always open to government to barrow from the central bank or take resources to the printing press to pay interest charges and repay the principal as it matures.
Levy and Chowdhury (1993) have concluded that an increase in the public and publicly guaranteed external debt may indirectly depress the level of GNP by discouraging capital formation and encouraging capital flight due to tax increase expectations.
Cunningham (1993) found that debt burden has a negative effect on economic growth because of the impact on the productivity of labour and capital. In another study Sawada (1994), finds that heavily indebted countries (HICs) have debt overhang problems.
Ford & Laxton(1999) concluded that that the net Debt/GDP-ratio rose from 19% to 43% between 1978 and 1997 in the OECD-countries. This increase has a significant effect on the real interest rates in these countries. The increase in government debt would have led to an increase of the real interest rate of about 4%.
 Chowdhury (2001), Siddiqui and Malik (2001), Easterly (1999, 2001 and 2002) and Sen, et al. (2007) came to the same conclusion that external debt negatively affects economic growth. Patillio, et al. (2004) poised that Impact of high debt on growth appears to operate through both a strong negative effect on physical-capital accumulation and on total factor productivity (TFP) growth. In addition, neither TFP nor private savings rates are affected by external debt levels. Fosu (1996) argued that GDP growth is negatively influenced via diminishing marginal productivity of capital. It was also estimated that on average a high debt country faces about one percentage reductions in GDP growth rate annually. Latter on Fosu (1999), reached to the conclusion that negative relationship between economic growth and debt might be due to a poor performance of recipient country.
Smyth and Hsing (1995) found that in early 1980, debt ratios rose but it was below 38.4, and debt-financing have stimulated the economic growth. On the other hand, during 1986-93, debt ratio rose from 40.7 percent to 50.9 percent. This ratio is above the (38.4) optimal debt ratio and it is expected to adversely affect the economic growth. In another very comprehensive study Patillo (2002) indicated that on average, external debt is growth enhancing up to about 160 percent of export to debt level, and growth-reducing thereafter (i.e. the debt overhang range). Furthermore study suggests that the debt overhang mechanism works through the productivity of investment as much as it does through the volume of investment. However, Maghyereh, et al. (2002) came to the conclusion that in Jordon, external debt below the threshold level of 53 percent of GDP has a positive relationship with GDP and thereafter the relationship turns to be negative. 
Blavy (2006) found that 'threshold level of debt' is 21 percent of GDP, below that level, debt is positively associated with productivity, but the coefficient for the "above threshold debt" becomes negative and significant. The total effect of high debt is significantly negative. It found that doubling of public debt would reduce productivity growth of about 1.5 percent.
Jeanne & Guscian (2006) have collected data on emerging economy public debt, with details on the jurisdiction of issuance, maturity, currency and indexation. The data cover 19 emerging economies during 1980-2002 and were compiled mainly from official publications, supplemented by information from questionnaires to country authorities and IMF data.
Jaimovich & Panizza (2010) have collected central government debt information for 100 countries, covering a diverse set of advanced, emerging transition a sub- Saharan African countries over the period 1970-2005. They relied on a range of source san definitions with the goal of analyzing the residual term indebt dynamics not explained by overall deficit.
Reinhart and Rogoff (2010) analysed (through simple correlation statistics) the developments of public (gross central government) debt and the real GDP growth rate in a sample of 20 developed countries over a period spanning about two centuries (1790-2009). It finds that: (i) the relationship between government debt and long-term growth is weak for debt-to-GDP ratios below a threshold of 90% of GDP; (ii) above 90%, the median growth rate falls by one percent and the average by considerably more.
Rother and Westphal (2011) found out the public debt threshold of 90- 1 00% of GDP is an average for the ( 12-country) euro area and its statistical confidence may go as low as 70% of GDP. This suggests that for many countries current debt levels already may have a detrimental impact on GDP growth, given that the euro area average debt-to-GDP ratio is already above the lower threshold. This evidence constitutes an additional warning signal for policy-makers (this time from a long-term growth perspective).
Presbitero (2013) found that industrialized countries are better than developing countries at using debt in a productive way. Hence, developed countries are better at managing the side effects of large debt such as (1) crowding-out effects, (2) disincentive environment to investment, (3) market and policy volatility, and (4) capital moving out of the country due to concerns over currency devaluation. External debt has negative consequences due to poor management in developing countries, and these negative consequences are likely to offset any possible benefits from utilizing debt in more productive projects that will add value to the economy. Moreover, Presbitero (2012) found that public debt has a negative impact on economic growth when the debt is more than 90% of the GDP. His study was based on a sample of 114 developing countries over the period 1980-2004.
Reinhart and Rogoff (2010) analyzed financial and economic data for 44 countries, spanning across 200 years. Their main findings were that different debt levels have varying effects on economic growth. In particular, they found out that there is a weak relationship between debt accumulation and GDP growth for debt-to-gdp ratios below 90%. One very important assumption on which they build their arguments is that high debt levels lead to a lower economic growth. This underlines the causality direction from debt to growth. However, this important precondition and causality direction deserve further investigation. 
As a result this is the first hypotheses being tested. Furthermore, their research suggests that advanced and emerging economies have a similar threshold for public debt. Their analysis produced evidence that debt-to-gdp ratio of 60% leads to a decline in growth of around 2% p.a. Another important hypothesis which they developed is related to "debt intolerance" and the fragility of some economies as foreign borrowers, highly dependent on their previous default history. 
Warner (1992) suggested that the reasons behind the decline of investment in many of the heavily indebted countries are declining exports prices, high world interest rates, and sluggish growth. These shocks could have directly caused investment to decline. It was argued that debt failed to have a negative coefficient as the debt theories predict. These finding were criticized by Rockerbie (1994) and it was argued that these shortcomings may have caused investment to be biased and unreliable testing method. Deshpande (1997) has also come to the conclusion that relationship between external debt and investment is negative.
Metwally (1994) found that capital inflows have a significant impact on the growth in Algeria, Egypt and Morocco. In a study on Kenyan economy, Maureen (2001) also found out that current debt flows, stimulate investment while past debt accumulation discourages investment. 
This confirms the existence of a debt overhang problem in Kenya. It has also been found that 'crowding out' of current investment as a result of servicing relatively large amounts of external debt so debt servicing does not appear to affect growth adversely but has some crowding out effects on private investment.
Abbas (2004) found that there was a significant positive growth payoff to debt, even at the very high levels, 93 percent of GDP. Analysis presented quite a complex picture of the relationship between debt and growth, and domestic debt and growth. On one hand, the results seemed to affirm conventional wisdom that the decision to switch the source of budgetary finance from external to domestic debt would be fraught with difficulties. On the other, the study obtained quite robust results on the growth payoff of domestic debt issuance in more developed financial systems. However the overall relationship remained negative. Abbas (2007) has extended its previous work; and finds the evidence that above a ratio of 35 percent of bank deposits domestic debt undermines economic growth.
Anwar (2004) concluded that if exports remain stagnant, then devaluation has directly increased foreign debt in rupee and results in dramatic increase in debt service burden, lower Economic growth and higher poverty level. Study argues that it is crucial to address basic reasons that caused debt build-up and subsequent adverse effects on economic growth and poverty levels while designing a debt reduction strategy. Policy of tax reforms, expanding the production and export base and creating diversification in exports can be handy in tackling problem.
Waheed (2006) concluded that there is primary deficit so it has to be filled out by domestic debt. The only way to stop the process of debt accumulation is to reduce the primary deficit by continued fiscal adjustment. This adjustment should not be achieved on the cost of cut in development expenditure rather there is need for serious efforts to increase domestic tax revenue.
Bordo and Christopher (2006) studied the relationship between foreign currency debt and the financial crises in the nineteenth and twentieth century; they found that exposure to foreign currency debt does not always generate a higher likelihood of financial crisis. They found that exposure to foreign currency debt does not lead to an increased risk of financial crisis. These include a sound fiscal, monetary and financial policies, and regulatory framework and strong institutions.
Aizenman & Marion (2009) first concluded that the Debt/GDP-ratio was 108% in de U.S. in the year 1946. Inflation eroded this Debt/GDP-ratio with about 40% in a single decade. Second, they designed a framework for determining the impact of a large debt on the temptation to induce inflation. This framework suggests that if the GDP growth in the U.S. stagnates the high Debt/GDP-ratio may trigger an increase in inflation of about 5%. This additional inflation would erode the U.S. Debt/GDP ratio.
CPB (2013) has opined that the public expenditures are also a mechanism that can affect both debt and GDP. If the government decides that they do not want to raise the taxes, but nevertheless want to reduce debt, they have to spend less. That results in lower public expenditures and lower public investment. A rising debt could also lead to uncertainty and gloomy expectations among the country’s inhabitants. A high public debt can lead to uncertainty among the citizen about the economic outlook, and especially the future economic policy. They might expect tax increases and spending cuts and anticipate on these expectations. All this could have a negative impact on the economic growth. Also taxes are important. The government has to pay more interest as the amount of debt increases. Besides, the government will attempt to pay off a part of the debt. For both these payments the government needs money, resulting in higher taxes
Calderón and Fuentes (2013) in Latin America revealed the negative impact of external debt on economic growth over the period 1970-2010.
The Economist (2014) mentioned in their article that the risk of decline of the solvency of a country with the ultimate consequence of a default. A high public debt can lead to skeptical investors. Investors will wonder whether a country will be able to pay the interest and to pay off its debts (sovereign default). This uncertainty will lead to higher interest rates. Investors want to be compensated for that risk. At a very high interest rate, it is almost impossible for a country to borrow money on the capital market (sudden stop), for example Greece between 2010 and 2014
Ozurumba & Kanu (2014) have studied about domestic debt and economic growth in Nigeria. The study applied time series from 1980-2011 with multiple regression technique. This research revealed that not all components of our domestic debt profile are contributing positively to the economic growth of Nigeria, both in the sort and long run. This calls for caution and rethink on the burgeoning level of our domestic debt profile. Government should not be seen as borrowing money for the sake of it. Domestic loans should only be called for, when it is absolutely necessary.
Tchereni et al. (2013) discerned a negative but statistically insignificant relationship between economic growth and foreign debt for Malawi for the 1975-2003 period using time series analysis. Hence, they suggested that the government should provide more incentives to local producers to help them compete in the local and the international markets rather than relying on borrowing to expand their economy. Moreover, another study in Jamaica showed a negative relationship between total public debt and productivity growth.
Barik (2012) has observed that government debt has made a significant contribution to the economic growth not only directly but also indirectly. The finding of the paper shows that  public debt all being equal would appear to induce investment over time and in turn indirectly enhance growth in real output. Regression results showed public debt positively affects the economic growth controlling for other determinants of growth. On average, one percent increase in debt is associated with an increase in real GDP of around 0.08 percent per year. It appears that resources generated through public debt are basically used in a productive manner.
Chongo (2013) has studied that the relationship between public debt and the economic growth over the period 1980-2008. The aim of the study was to analyze the growth of public debt stock as well as its empirical impact on empirical economic growth. In order to understand the extent of the burden, the study has also analyzed the impact of a rising public debt stock on debt service. Results of the analysis confirm a long- run relationship between public debt and economic growth.
Iyoha (1996) found the inverse relationship between external debt and economic growth in sub-Saharan African countries due to the same crowding-out effect. Akram (2011) and Rais and Anwar (2012) also came to a similar conclusion for Pakistan for the 1972-2009 period and for the 1972~2010 period, respectively. Hence, huge public debt led to poor social and economic conditions. Isu (2010) and Chikuba (2003) found the same results for Nigeria and Zambia, respectively. Umaru et al. (2013) and Mbah et al. (2016) also supported this stance based on the results of their studies in Nigeria, finding negative impacts of debt on economic performance for the 1970-2011 and the 1970-2013 periods, respectively.
Moreover, other evidence has suggested that external debt in any form is dangerous if mismanaged. Jayaraman (2009) studied six pacific island major countries, including Tonga, Samoa, Fiji, Solomon Island, Vanuatu and Papua New Guinea. This study concluded that there is a positive relationship between external debt and real GDP; and inverse relationship between higher fiscal deficit and GDP growth.
Al kharusi( 2018) concluded  in his study of external debt and economic growth in the case of emerging economy like Oman, there exists a negative and significant influence of external debt on economic growth. Further, gross fixed capital was found to be positively significant in determining growth performance in Oman. The study, recommends a more productive use of the external debt fund in order to affect positive growth.
2.2	 National contexts
Theoretical Review
Adhikari (1996) has analyzed the foreign debt – servicing problem in Nepal. She found that substantial increasing in foreign between the periods of F/Y 1974/75 to F/Y 1993/94. She prescribed effective implementation of liberalization policy in area of investment. This can bring a great relief to the country by creating capacity for foreign exchange earning which can reduce burden of debt servicing substantially in the years to come.
Krishna (1998) has studied that if a country borrows from abroad then it has to repay the principal and interest. The capacity to pay the debt service cost should be realized by investing the borrowed funds into increased production activity. The increase in production and consumption would also increase exports. Only then a country can find funds to pay the debt service cost. He emphasized mostly on productively used of available public debt then only it helps to raise national income and GDP. Hence borrowing can increase economic welfare in both lending and borrowing countries.
Pant (2008) mentioned the deficiency of revenue in Nepalese economy. He has mentioned the importance of public debt in the developing countries like Nepal to support the budgetary deficit. It has suggested adopting the administration with effective tax policy. It has been recommended that the government should give emphasis to macroeconomic stability while accepting short line or long time loan. The government should pay attention in all the sectors of the economy with high economic growth rate by reducing excessive external dependency and internal resource mobilization.
Koirala (2002) has stated that debt is a useful resource for economic development, several inverse consequences were found by it’s over use. The debt crisis of nineties eighties is widely known as the result of over use. The World Bank has established Multilateral Insurance Guarantee agency (MIGA) and the international monetary fund has minted Special Drawing Right (SDRs) to cubs the crisis in the third world. He further opines that we have only two options; either mobilize more foreign debt to invest for economic development or put the hand on hand doing nothing. The government debt has a simple relationship with the government deficit, the increase in the government debt over a given year is equal to the budget deficit, the increase in the government debt crisis over a given year or equal to the budget deficit of a higher economic growth requires a higher level of investment that is not possible simply from taxation so that government seeks public borrowing.
Poudyal (2005) has examined that borrowed fund from external resources produce expectable items and there should be constituted a committee to supervise and narrator and to control unnecessary foreign borrowing. The role of government is dominating private sector in all sectors of the economy in Nepal. Thus the government should adopt appropriate economic policy. The government should give attention in all sectors of the economy with high economic growth rate by reducing excessive external dependency and internal resource mobilization by reducing excessive external dependency and internal resource mobilization For the development purpose and the economy will be capable to move in a self-sustaining growth path. 
Neupane (2007) examined that government borrowing has been increasingly unlikely and financed mostly on the unproductive sector including uncertainties, high expenditure. Hence, government always has lack of resources then borrows the new loans to previous ones. So, the public debt and its interest mounting rapidly, but addressing capacity for redemption of the debt is not increasing the same way.
IMF (2017) suggested Nepal’s risk of debt distress remains low, taking into account the important role of remittances. Strong revenue growth and subdued capital spending have kept the budget in surplus for the past four years. As a result, public debt has been on a declining path. The indicators of the public external debt stock and public debt service ratios continue to stay comfortably within the policy dependent indicative thresholds, even when applying standard stress tests, due to the projected continued high level of concessionality of official borrowing.
CEID Nepal (2012) studied the situation of overall debt structure in Nepal. It analyzed the high stock of debt, slow growth rate of economy and outflow of considerable amount of resources in the form of debt servicing have raised questions of debt servicing raised questions of debt sustainability and also whether foreign or domestic borrowing on current terms is beneficial for our economy or not. 
IMF (2017) mentioned that Weak budget execution has contributed to fiscal surpluses in each of the past four years. In recent months there has been a pickup in government spending and a large number of households affected by the 2015 earthquakes have received the first installment of housing grants provided to assist in rebuilding structures that were destroyed by the earthquakes. The government also intends to raise capital spending to address infrastructure bottlenecks and boost growth. On this basis, the baseline macroeconomic projections underlying this DSA assume a pickup in government spending and the fiscal balance turning to a small deficit. However, Nepal’s risk of debt distress is expected to remain low in view of the assumed continued high level of concessionality of official borrowing and limited scaling up of capital spending due to weak implementation capacity over the medium term. 
Under the baseline macroeconomic scenario, the indicators of the public external debt stock and public debt service ratios remain well below the policy-dependent indicative thresholds, even under stress tests, due to the assumed continued high level of concessionality of official borrowing
Empirical Review
Rana (1988) has analyzed the fiscal system of Nepal during the period of F/Y 1964/65 to F/Y 1986/67. With his study he has concluded that there has been the constant increasing trend in revenue expenditure. The trend of regular and development expenditure have created a continuous deficit has compelled the government to rely excessively upon the foreign aids. The amount of deficit has increased rapidly because of rapid increase in the volume of regular and development expenditure. During the period under review, regular expenditure has increased to NRs. 117.94 million to NRs. 4,307.1 million in F/Y 1986/87. Similarly, development expenditure has also increased from NRs. 239.91 million to NRs. 8,745.5 million in 1986/87. Total expenditure taken altogether has increased from NRs. 349.85 million in 1964/65 to NRs. 13,052.6 million in F/Y 1986/87. Consequently, a rapid increase in the volume of deficit has been recorded amount into NRs. 157.51 million in F/Y 1964/65 to NRs. 7,177.5 million in F/Y 1986/87.
Basyal (1994) has carried out a research about growth of development expenditure of Nepal in different time periods and source of financing fit. He has underscored the dominance of foreign capital in Nepal’s plan financing. During the fifth (1796-1980), the sixth (1981-1985) and the seventh (1986-1990) plan periods, foreign grants and loan financed the total development expenditure of the extent of 47.3 percent, 48.1 percent and 59.5 percent respectively. This has clarified an upward trend in the reliance on foreign resources and consequently, the down share of the revenue surplus in meeting the development expenditure.
Bista (2011) has analyzed that public external debt has a negative and significant relationship with per capita GDP an investment both in the short run and in the long run in Pakistan for period 1972-2009. It develops a hybrid model that explicitly incorporates the role of public debt in growth equations. Auto regression Distributed Lag (ADRL) technique has been applied to estimate the model.
Subedi (2009) has analyzed the impact of public debt in the economic development of Nepal.  Subedi took data 1985\6 to 2006\7 and he had studied as whole, stock of internal, external and total debt has not caused negative impact on GDP growth of Nepal. That is why it is better to take the loan for the economic development but it should be proper utilized on productive sectors otherwise debt trap drag us to the path of difficult situation from where we cannot escape from it.
Subedi (2004) has tried to study the trend and structure of Debt in Nepal. He found that the burden of interest payment is higher than the burden of principal payment in Nepal.   Nepal is going on indebted and it will fall in debt crisis of the strong obligation and commitments are not made. Growth rate of external debt in Nepal is faster than the growth rate of export earnings. Finally he has concluded that due to the depreciation of Nepalese currency via the convertible foreign currency, the burden of debt servicing has been increasing year by year.
Gurughararana (1996) presented the share of outstanding public debt in GDP at factor cost and of foreign debt servicing in regular expenditure. He pointed out that although foreign loan is relatively much softer terms for Nepal compared to India and China, the very low rate of return and increasing share of loan in foreign aid imply that aid slowly pushing Nepal toward in the debt crisis in the coming years.
Pyakural (2004) has claimed the inadequacy of Nepal’s revenue surplus to finance the development expenditure. Government expenditure and revenue pattern have shown that the economy has lost its productive capacity to respond to the sustained growth. The ratio of regular government expenditure to GDP in F/Y 1996/97 was 8.6 percent but increased to 11.5 percent in F/Y 2001/02. The revenue during the same period decreased from 7.3 percent in F/Y 1996/97 to 7 percent in F/Y 2001/02. Development expenditure also declined from 9.5 to 7.5 during the same period. Nepal’s debt service position, though within sustainable limit, has consuming quite of significant chunk of fresh resources, which could otherwise use for productive purposes. Its debt service ratio during 1990s remained around one third of annual regular expenditure. With the dominance of the loan portions in the foreign assistance and the maturity of the debt incumbent upon the nation, to have advocated the necessity of a caution approach to proper management of the variable external resources.
Singh (1977) has analyzed the consistency between fiscal policy of Nepal and targeted growth rate from the time series data over the period of F/Y 1954/55 to F/Y 1974/75. He also analyzed the trend of revenue and expenditure during the same period, found a substantial change in the ratio of total public expenditure to GDP. He found that the ratio of total expenditure to GDP was just 2.44 percent in the F/Y 1954/55 which increased to high as of 10.57 percent in the F/Y 1974/75. He also found that development expenditure ratio to GDP increasing from 4.07 percent in F/Y 1965/66 to 6.75 percent in F/Y 1974/75. The growth rate of regular expenditure was quite slower registering 2.13 percent in 1965/66 to 3.82 percent in F/Y 1974/75.
Regmi (2008) has found that Nepal is in critical phase of managing public finance because of inadequacy of internal resources. Fiscal deficit is widening every year. In order to finance the deficit, the government is borrowing internal and domestic debt. In the F/Y 1986/87, the domestic debt accounted for 37.2 percent of the total debt while its share was 28.6 percent in F/Y 2005/06. Likewise the share of external loans increased to 71.4 percent in F/Y 2005/06 up from 62.8 percent in F/Y 1986/87, reflecting growing dependency of Nepal on foreign loan.
Bhandari (2015) stated that the average growth rate of public debt is 18.86 percent. The average share of external loan is greater than that of internal loan. However, in the latter period, the share of internal loan is significantly greater than that of external loan. The growth rate of economy seems to be relatively low. Low rate of economic growth and high rate of inflation is one of the major problems of Nepalese economy. So, the efforts should be accelerating the growth rate so that more employment opportunities can be generated and income of the people can be increased.
Thapa (2015) observed although Nepal’s debt burden and its servicing should not be called as excessive on the basis of development, it is quite burdensome. Debt burden high growth path so far and once it takes it will require enormous amount of investment and that investment will have to be made through borrowing from both domestic as well as the external sources. At that time Nepal will have to borrow an unlimited amount of financial 13 resources. Therefore, until growth takes momentum, we should be extremely judicious while borrowing to finance the budget deficits.
IMF (2017) suggested Nepal’s risk of debt distress remains low, taking into account the important role of remittances. Strong revenue growth and subdued capital spending have kept the budget in surplus for the past four years. As a result, public debt has been on a declining path. The indicators of the public external debt stock and public debt service ratios continue to stay comfortably within the policy dependent indicative thresholds, even when applying standard stress tests, due to the projected continued high level of concessionality of official borrowing.
Silwal (2017) presented multilateral external loan dominated the bilateral external loan. Also the increasing trend of direct loan showed the increasing external debt born. Also the share of external loan in GDP was higher than internal loan. Per capita burden of both external and internal loans are increasing. Internal debt service ratio showed that Nepalese government is compelled to cut down development expenditure to cover recurrent expenditure, which is most. Also the external debt service ratio showed significant amount of export earning is used to pay principal and interest of external loans.
Neupane (2018) has expressed the effect of increasing trend of government barrowing on economic development. After the established of the republication system government need huge amount of the money to finish the peace process, transition era and to do election. On the other hand, by promulgating new constitution, Nepal has adopted federal governance system with seven provinces as well as completed the three level elections. The government expenditure has increased more rapidly than government revenue, increasing pattern of barrowing crates a great problem for the debt management and becoming major challenging issue for the country. The debt money is unlikely financed on the non-monetized and unproductive sectors of the economy which in turn burden for the nation.  
Banjade (2008) stated that positive role of government borrowing for the stand economic growth and prosperity on a hand and on the other hand he has alarmed the state not to disburse the debt unproductively.
KC (2007) has analyzed the trend and structure of public debt in Nepal. In the work, he has expressed the view that the increased government borrowing has been in financing on the unproductive sectors mostly that has uncertainties, lack of well-trained civil services, corruption, high current expenditure and hence government always lacks the resources than borrows ones. The average annual growth rate of GDP of revenue is considerably low as compared with that of debt of GDP of revenue. So, effective program is not set with time to carry to out for debt financing, the economy would be entrapped into vicious circle of debt trap.  
The World Bank’s 2014 Debt Management Performance Assessment found that several areas of debt management have been gradually improved, including cash flow forecasting and cash balance management, the better alignment of public debt management with macro policy, as well as the creation of separate open market committees for public debt management and monetary management at the NRB. Nevertheless, the managerial oversight on the debt management functions could be more effective. One entity should be made responsible for the preparation of a comprehensive debt management strategy, analyze the cost and risks of the debt portfolio—including analysis of sensitivity to variability in the exchange rate, and make debt service forecasts more robust. Over the course of 2016, the World Bank has been engaged with the Nepali authorities to undertake training programs geared toward building capacity to formulate and update a consistent debt management strategy.
2.3 Research Gap
In context of our developing country Nepal, there are so many studies which focus on debt growth nexus. Past studies have also conflicting problem in research results. The past studies have objectives and methodologies of the present study are different from those of aforementioned reviewed studies and articles. So this study intends to link and fill gaps in the literature of the past at academic level covering large span of time series annual data. 
Past researches are based in the classical theories and different time frame. But now days, day to day comes new thoughts, dimensions, approaches, objectives, methodology and new  data presentation so that this study is going to be some gap with past research through differ objectives, methodology and provide the new data (currently data) of overall public debt in Nepal. 
One of the main points of this thesis is to determine those channels and in what way does the causality go. This is an important question. Furthermore, capital accumulation, research and development, human capital and efficiency affect economic development. In turn budget deficits lead to an increase in the debt stock, higher debt service obligations and increased uncertainty which, in conclusion, affects investments. From here one can see how the loop closes and what the relationship between the two key topics of economic growth and public debt is. Those logical links have analyzed in detail in the thesis. Similarly this study will make an attempt to analyze the current structure and trend of public debt of Nepal. This research tries to analyze the impact of public debt. Import –export gap and other variables on the economic growth of Nepal.

CHAPTER – III
RESEARCH METHODOLOGY
3.1 Research Design
The research design followed in the historical, explanatory and descriptive. The study adopted a descriptive research design This study has been prepared by collecting information from different publish and unpublished theses, articles, journals, publications, books, and through the internet and other information. This research design is designed to show the role of public debt in economic development in Nepal. Descriptive research design is more appropriate because the study seeks to build a profile about the relationship between domestic debt and economic growth.
3.2 Nature and Sources of Data
This study specially based on secondary data which collected from Ministry of  Finance, Ministry of Industry Commerce and Supply, National Planning Commission, Nepal Rastra Bank, Central Bureau of Statistic and published and unpublished books, reports, thesis, dissertations available   the Central  Library of T U, Newspapers, articles on different journals and magazines  Internet, e- mail. The study used annual data because Government Budgets are drawn annually and the deficits and surplus which are key determinants of borrowing are then developed accordingly.
3.3 Tools and Method of Data Collection: 
This study is totally based on secondary sources of data.it has been analyzing through the simple tools such as relationship between economic growth and public debt with variable as well as to meet research objectives find out to exact result through various mathematical and statistical tools and techniques and Microsoft Excel, Eviews, SPSS computer programmer will be used in this research.
3.4 Tools and Method of Data Analysis 
In this research, analysis and presentation of the collect data of the research work. In the process of data analysis, data are present with the help of tables; bar diagrams other simple linear regression model which presents the relationship between the public debt and economic development and hypothesis testing like-test, f-test and chi-square test. The analysis is at 0.05 level of significance. In order to determine the relationship between public debt and economic growth in Nepal, the researcher conducted a multiple regression analysis.
3.5 Hypotheses testing 
(Bhusal, 2016)  The computed value of the sample statistic may differ from the hypothetical value, which has made on population due to the fluctuation of sampling. The main goal of testing of hypothesis is to test the characteristics of hypothesis population parameter based on sample and sample static is significant or not.
t-test (Test hypothesis for small sample)
In order to test the significance of partial regression coefficient t test can applied. The null hypothesis is set as H0; β1 = 0 against H1; not H0   
                    
Where, 
; Sample mean
µ; population mean 
n; sample size 		
S; unbiased estimate of the population standard deviation
b.	F-test:- 
The F – statistic is used to test whether the two independent estimates of the research universe variance are significantly different or not. It will also be used to test whether the two samples have come from the same population having common variance. 

The formula is: - 
F =                            
Which follows F- distribution with (U1, U2) degree of freedom.
In order to answer the research question and achieve the research objectives the following hypothesis stated in null from shall test.
a.	Null hypothesis (H0): = 0 i.e. there is no significant relationship between the public debt and actual economic growth.
b.	Alternative hypothesis H1: ≠0  i.e. there exists significance relationship between public debt and actual economic growth
3.6 Regression Equation 
The main idea behind the study is to see the impact of public debt on GDP. The variables that were added to the model next to debt and annual GDP Growth were: inflation, import and export, tax revenue and government expenditure. In the section ‘related literature’ is explained why and how these variables could have an important role by the impact from public debt on GDP based on literature, policy advice, research and theory. The regression can be shown as the following:

Where,
 is GDP growth rate
 is the constant                            
 is Log(Debt) with coefficient    
 is inflation with coefficient      
 is the log( import) with coefficient                                                  
is Log(export) with coefficient             
 is Log(revenue) with coefficient                                          
 is log( expenditure) with coefficient      
is the error term
Revenue, Debt and Expenditure were added in the regression as a logarithm. In this way, the results are easier to interpret. The coefficient predicts how much the annual GDP growth will change when the respective variable increases/decreases with 1%. Additionally, the logarithm solves the problem of large differences in the real numbers of the Revenue, Debt and Expenditure.
Annual GDP growth rather than GPD was chosen as the independent variable.  Similarly, variables such as debt, revenue, inflation, import and export or expenditure are taken as dependent variables.
In order to test the significance of the model in measuring the relationship between public debt and economic performance, this study will conduct test in Eviews. On extracting the result the researcher will look at the significance value. The study will be tested at 95 percent confidence level and 5 percent significant level. If the significance number found is less than the critical value ( ) then the conclusion will be that the model is significant in explaining the relationship.

CHAPTER-IV
PRESENTATION AND ECONOMETRIC ANALYSIS OF DATA
Public borrowing plays a vital role in under-developed countries like Nepal. It also helps in the financing of economic development through the mobilization of resources. In Nepal, sources of revenue are inadequate and insufficient for the economic development due to low level of income and saving capacity of people. Similarly income is low, but the propensity to consume is high as it is LDC, thus voluntary savings are at a very low level. In spite of these problems expenditure of the government is going on rapidly in order to achieve rapid economic development, mobilize unutilized resources. Government receives revenue through internal sources which are not enough in maximization of resources available to the government. Since internal borrowing is very low because of poor tax payable capacity of external borrowing remains alternative sources for development economics. Under developed countries like Nepal is suffering from vicious circle of poverty. To escape out of such circle, capital formation is regarded as a prime mover of development which is necessary in Nepal 
4.1 Resource Gap 
Resource gap is the difference between total expenditure and total revenue of the government of a country. If any public expenditure that is in excess of current public revenue, it will create resource gap. Nepal is LDC country which does not have sufficient private investment due to various social, economic and institutional factors. Therefore, the government is forced to take the responsibility of taking public debt that might augment the rate of net investment in the country. The resource gap in the country can be estimated by analyzing budget and other financial documents of the country. The expenditure made by the government can be divided into current expenditure, capital expenditure and principal repayment expenditure. The revenue includes – revenue generated from tax, non-tax, foreign aid, debt. In order to finance the resource gap, government is forced to take the public debt. Generally the deficits are on revenue side. The government may cover the deficit by taking public debt.

Table 4.1 Different Scenarios of Resource Gap.
F/Y	Government Revenue	Annual Growth rate of Govt. Revenue	Total Expenditure	Annual Growth rate of Government Expenditure 	Revenue Expenditure Gap	GDP	Revenue as percent of GDP	Expenditure as percent of GDP	Revenue Expenditure Gap as percent of GDP	
1997/98	32937.9	-	   56118.3	-	23180.4	289798	 11.37	    19.36	   8.0	
1998/99	371251	13.09	  59579.0	6.17	223328.0	330018	  11.29	18.05	 6.77	
1999/00	472893.8	15.15	   66272.5	11.29	22378.7	366251	 11.71	 18.09	 6.38	
2000/01	48893.6	14	79835.1	20.5	30941.5	394052	12.4	20.3	7.9	
2001/02	50445.5	3.2	80072.2	0.3	29626.5	425454	11.9	18.8	7	
2002/03	56229.8	11.5	84006.1	4.9	27776.3	444052	12.7	18.9	6.3	
2003/04	63331	10.9	89442.6	6.5	27111.6	473545	13.2	18.9	507	
2004/05	70122.7	12.5	102560	14.7	32437.7	517993	13.5	19.8	6.3	
2005/06	72282.7	3.1	110889	8.1	38607.1	630300	11.5	17.6	6.1	
2006/07	87712.1	21.3	133605	20.5	45892.5	696989	12.6	19.2	6.6	
2007/08	107623	22.7	163000	22	55377.3	781262	13.7	20.8	7	
2008/09	143475	33.3	201966	34.7	76187.5	938671	15.3	23.4	8.1	
2009/10	179946	25.4	259689	18.2	79743.3	1096038	16.4	23.7	7.3	
2010/11	199819	11.1	295363	13.7	95544.4	1369431	14.5	21.5	6.9	
2011/12	244374	22.3	339168	14.83	94794	1527344	15.91	22.2	6.2	
2012/13	296021	21.1	358638	5.74	62617	1692643	17.48	21.18	3.69	
2013/14	356620	20.5	435050	21.3	78430	1941624	18.36	22.4	4.03	
2014/15	45043	21.99	531558.0	22.18	81145.0	2130150	21.14	24.95	3.81	
2015/16	531411.0	17.98	601016	13.07	696050	2253163	23.59	26.67	3.09	
2016/17	64747.0	21.84	837248.0	39.31	189778.0	2642595	24.50	31.68	7.18	
2017/18	770000.0	21.70	1083000	29.4	313000	3060307	25.16	35.38	10.22	
Source: Economic Survey, Various Issues from FY 1997/1998 to 2017/18, MOF, Government of Nepal. 

Figure 4.1 Different Scenarios of Resource Gap

Source: Based on the table 4.1 
In the Table 4.1 and Figure 4.1, the second column and the fourth column shows the trend in revenue and expenditure in Nepal. The sixth column shows the revenue expenditure gap in which we can see the increasing tendency mainly because of increasing volume of total expenditure than revenue. The amount of total expenditure was NRs. 56118.3 million in F/Y 1997/98 has gone up to NRs. 1083000 million in F/Y 2013/14 ; whereas total revenue has increased from NRs. 32937.9 million in F/Y 1997/98 to NRs. 770000 million in F/Y 2017/118. This shows the public expenditure has dominated to government revenue. Thus, the revenue- expenditure gap is NRs.  313000 million in F/Y 2017/18. This gap is increasing continuously increasing in each FY. This indicates that the resource gap is serious problem in Nepal
The annual growth rate of government revenue and total expenditure is 13 percent and 6.17 percent in F/Y 1998/99 respectively but the annual growth rate of government revenue and total expenditure is 21.74 percent and 29.4 percent respectively in F/Y 2017/18. This indicates that there is considerable improvement in the allocation of government   revenue as compared to F/Y 1998/99.
The tenth column shows the resource gap as percentage of GDP. GDP has been increasing continuously from F/Y 1997/98 to F/Y 2017/18. GDP is the main indicator of the economic development that is why analysis of resource gap as percentage of GDP is more important. The revenue expenditure gap has been increased from 8 percent in F/Y 1997/98 to 10.22 percent in F/Y 2017/18. Average annual growth rate of revenue expenditure gap as percentage of GDP is 6.41 percent. Similarly the data can be shown in the line graph as a figure 4.1.
4.2 Growth Trend in Government Debt 
Nepal being one of the poor countries in the world, the rate of domestic savings and investment are low. It lacks woefully in economic and social overhead capital and basic and key industries. The scope of government has been increasing and investing more, so the government expenditure is increasing. The reliance on taxation is not possible in view of the large amount of financial resources required for government expenditure. So, Nepal is facing large and growing financial resource gap in the budgetary resource.  In this context, the government borrowing   both external and internal is needed for supplementing the resource gap. The government has to borrow large amount of loans to meet the fiscal deficit, which is shown   in the following table: 

Table 4.2 Percentage of Debt in GDP
F/Y	Internal Debt (ID)	External Debt (ED)	Total Debt (TD)	% share of ID in TD	% share of ED in TD	GDP	ID as % of GDP	ED as % of GDP	TD as % of GDP	
1997/98	3400	11054.4	14454.4	23.5	76.5	289798	1.17	3.81	4.98	
1998/99	4710	11852.4	16562.4	28.43	71.56	330018	1.42	3.59	5.01	
1999/00	5500	11812.2	17312.2	31.76	68.24	366251	1.50	3.22	4.72	
2000/01	7000	12044	19044	36.8	63.2	441519	1.58	2.72	4.3	
2001/02	8000	7698.7	15698.7	51	49	459443	1.74	1.67	3.41	
2002/03	8880	4546.4	13426.4	66.1	33.9	492231	1.80	0.92	2.72	
2003/04	5607.8	7629	13236.8	42.4	57.6	536790	1.04	1.42	2.46	
2004/05	8938.1	9266	18204.1	49.1	50.9	589412	1.51	1.57	3.08	
2005/06	11834.2	8214.4	20048.6	59	41	654084	1.80	1.25	3.05	
2006/07	17892.3	10053.5	27945.8	64	36	727995	2.45	1.38	3.83	
2007/08	20496.4	8979.9	29476.3	69.5	30.5	815658	2.51	1.10	3.61	
2008/09	18417.1	9968.9	28386	64.9	35.1	988272	1.86	1.00	2.86	
2009/10	29914	11223.5	41137.4	72.7	27.3	1192774	2.50	1.02	3.52	
2010/11	42515.8	12075.6	54591.6	77.8	22.1	1366954	3.1	0.94	4.04	
2011/12	36418.7	11083	47502	76.66	23.33	1527344	2.38	0.73	3.11	
2012/13	19043	11969.1	31012	61.4	38.6	1695011	1.12	0.71	1.83	
2013/14	19983	17998.8	41110	48.6	51.4	1964540	1.02	0.91	2.11	
2014/15 	42423	25615.8	68038.8	62.4	37.6	2130150	1.96	1.20	3.35	
2015/16	87775	33228.3	121003.3	72.53	27.4	2253163	3.89	1.47	5.36	
2016/17	88338	59022	147360.2	59.94	40.06	2642595	3.34	2.23	5.57	
2017/18	110171	69499.025	179670.025	61.31	38.69	3060307	3.6	2.29	5.89	
Source: Economic Survey, Various Issues from FY 1997/1998 to 2017/18, MOF, Government of Nepal. 
Figure 4.2 Percentage of Debt in GDP

   Source: Based on the table 4.2

According to the Table 4.2 and Figure 4.2, there is the fluctuating trend of total public debt of Nepal during the review period.  The total debt was Rs. 14454.50 million in FY 1997/98 and Rs 179670.025 million in FY 2017/18. After the earthquake of 2015 there is sharp increase in both internal and external debt. 
4.3 Outstanding Public Debt in Nepal
Nepal started to take domestic loan in 1962 where as it started to take foreign loan in 1963. From the very beginning of borrowing, it has kept the vital supporting role to meet the public expenditure. Nowadays the fiscal deficit of country has been ever growing. The result is increment in the volume of outstanding public debt. To meet the financial resources gap, the government has to borrow a large amount of loan. There is ever increasing trend of financial resource gap to fill the needs loan from external and internal sources. Internal debt plays an important role on cash flow management and to support the expenditure for development activities. Government is receiving internal debt from various sources by means of treasury bills, development bonds, national saving certificates and special bonds.

Table 4.3 Outstanding Public Debt in Nepal
F/Y	Outstanding ID	Outstanding ED	Total Outstanding Debt	GDP	Internal Debt as % of GDP	External Debt as % of GDP	Total Debt as % of GDP	
1997/98	38406.7	161208.0	199614.7	289798	13.25	57.6	68.9	
1998/99	49669.7	169465.9	219135.6	330018	15.05	51.4	66.4	
1999/00	54257.0	190691.2	244948.2	366251	14.81	52.1	59	
2000/01	54357	200404	255908	441519	13.8	50.9	64.9	
2001/02	60043.7	220126	280169	459443	14.1	51.7	65.9	
2002/03	73620.7	223433	297054	492231	16.6	50.3	66.9	
2003/04	84645.3	232779	317425	536790	17.9	49.2	67.1	
2004/05	86133.7	219642	305776	589412	16.6	42.4	59	
2005/06	87564.2	233969	321533	654084	13.9	37.1	51	
2006/07	93031.9	216201	309233	727995	13.3	31	44.4	
2007/08	111239	242061	353300	815658	14.2	30.9	45.1	
2008/09	121241	277040	398281	988272	12.9	29.5	42.4	
2009/10	142933	256243	399176	1192774	13	23.4	36.4	
2010/11	179569	262252	441821	1366954	13.1	19.1	32.2	
2011/12	214000	309300	523200	1527344	14	20.2	34.3	
2012/13	211900	333400	545300	1695011	12.5	19.7	32.2	
2013/14	206700	346800	553500	1964540	10.5	17.9	28.5	
2014/15	196786	343276	40061	2130150	9.2	16.1	25.4	
2015/16	234158	387957	622115	2253163	10.39	17.2	27.6	
2016/17	283711	413173	696884	2642595	10.73	15.6	26.4	
2017/18	309373	435297	843000	3060307	10.2	14.22	24.6	
Source: Economic Survey, Various Issues from FY 1997/1998 to 2017/18, MOF, Government of Nepal.
Figure 4.3 Outstanding Public Debts in Nepal

Source: Based on the table 4.3 
Table 4.3 and Figure 4.3, shows the net outstanding public debt. Both net outstanding internal and external public debt are increasing in each FY. In F/Y 1997/98, net outstanding internal and external debt is NRs. 38,406.7 million and NRs. 161,208 million respectively. In F/Y 2017/18, net outstanding internal and external debt has been increased to NRs. 309373 million and NRs. 435297 million respectively.
4.4 Public Debt as Percentage of Fiscal Deficit 
In Fiscal system of Nepal, the fiscal deficit is financed through both internal and external borrowing. Since the government expenditure is rapidly increasing which is unable to raise revenue accordingly. Thus, accumulation of debt is mainly for financing the deficit. The internal and external debt a percentage of fiscal deficits is shown in table.

Table 4.4 Percentage of Debt in Fiscal Deficit (NRs. In Million)
F/Y	Internal Debt (ID)	External Debt (ED)	Total Debt (TD)	Fiscal Deficit	ID as percent of Deficit	ED as percent of Deficit	
1997/98	3400	11054.4	14454.4	23180.4	14.66	47.6	
1998/99	4710	11852.4	16562.4	22328	21.09	53.08	
1999/00	5500	11812.2	17312.2	22378.7	24.57	52.78	
2000/01	7000	12044	19044	30941.45	22.64	38.92	
2001/02	8000	7698.7	15698.7	29626.7	27	25.98	
2002/03	8880	4546.4	13426.4	27776.3	31.96	38.9	
2003/04	5607.8	7629	13236.8	27111.6	20.68	26	
2004/05	8938.1	9266	18204.1	32437.7	32	16.4	
2005/06	11834.2	8214.4	20048.6	38607.1	20.7	28.1	
2006/07	17892.3	10053.5	27945.8	45892.4	27.6	28.6	
2007/08	20496.4	8979.9	29476.3	53727	30.7	21.3	
2008/09	18417.1	9968.9	28386	76187.5	39	21.9	
2009/10	29914	11223.5	41137.4	79743.3	62.8	34.7	
2010/11	42515.8	12075.6	54591.6	95544.4	36.9	20	
2011/12	36418.7	11083	47502	94516.1	72.6	27.2	
2012/13	19043	11969.1	31012	59706.9	87.3	24.8	
2013/14	19983	17998.8	41110	65824.3	71.2	21.7	
2014/15	42423	25615.8	68038.8	81145	77.1	48.4	
2015/16	87775	33228.3	121003.3	69605	52.4	55.4	
2016/17	88338	59022	147360.2	1889778	46.74	31.23	
2017/18	110171	69499.025	182776.9	2518662.5	43.74	27.59	
Source: Economic Survey, Various Issues from FY 1997/1998 to 2017/18, MOF, Government of Nepal. 
Figure 4.4 Percentage of Debt in Fiscal Deficit (NRs. In Million)

Source: Based on the table 4.4
Table 4.4 and Figure 4.4, depicts the raising of total public debt. Total public debt in F/Y 1997/08 is NRs.144, 5.44 million which has been increased to NRs. 182276.9 million in F/Y 2017/18. In F/Y 2017/18 both internal and external debt are increased to NRs. 110171 million and NRs. 69499.025 million respectively. The fiscal deficit has been increased to NRs. 23180.4 million from NRs. 2518662.5 million. 
The internal debt has occupied 14.6 percent of deficit whereas the external debt has occupied 47.6 percent of fiscal deficit in F/Y 1997/08. But in F/Y 2017/18 the internal debt has occupied 43.74 percent of fiscal deficit whereas the external debt has occupied 27.59 percent of fiscal deficit
The scenario indicates that the government’s growing reliance on external loan for meeting ever increasing fiscal deficit.
4.5 Export and Import Gap
In Nepalese economy, Export-import gap is one of the major economic problems. Being developing country Nepal exports limited goods such as garments, carpets etc. Main exportable goods are raw materials and food grains but it imports final goods as well as capital goods. Importation of capital goods, improved technology, raw material etc. will help industrialize the economy. Import of goods will also help the shortage of supply in the domestic market. This will keep price stable.
However, if external resources are miss-used of unproductively used, it will impose a burden on the economy. Payment of interest and refunding of the principal would cause a drain of hard-earned foreign exchange. Since the amount of import is greater than export, which makes negative balance in current account. The major factor of increase in external debt is the gap between export and import.

Table 4.5 Pattern of Export – Import Gap
F/Y	Export(E)	Growth rate of Export (%)	Import (I)	Growth rate of Import (%)	Export-Import gap	Growth rate of E-I gap (%)	
1997/98	27513.5	-	89002	-	-61489	-	
1998/99	35676.3	29.67	87525.3	-1.66	-51849	-15.68	
1999/00	49822.7	39.65	108504.9	23.97	-58682	13.18	
2000/01	55654.1	11.7	115687.2	6.62	-60033	2.3	
2001/02	46944.8	-15.65	107389	-7.17	-60444	0.68	
2002/03	49930.6	6.36	124352.1	15.8	-74422	23.12	
2003/04	53910.7	7.97	136277.1	9.59	-82366	10.68	
2004/05	58705.7	8.89	149473.6	9.68	-90768	10.2	
2005/06	60234.1	2.6	173780.3	16.26	-113546	25.1	
2006/07	59383.1	-1.41	194694.6	12.03	-135312	19.17	
2007/08	59266.5	-0.2	221937.8	13.99	-162671	20.22	
2008/09	67697.5	14.23	284469.6	28.18	-216772	33.26	
2009/10	60824	-10.15	374335.2	31.59	-313511	44.63	
2010/11	64338.5	5.78	396175.5	5.83	-331837	5.85	
2011/12	74261	15.42	41667.7	16.53	-387407	16.75	
2012/13	76917.1	3.58	556740.2	20.59	-479823	23.86	
2013/14	91991.4	19.60	714365.9	28.31	-622375	29.71	
2014/15	85319.1	-7.25	774684.1	8.44	-689365	10.76	
2015/16	70117	-17.82	773599	-0.14	-703482	2.05	
2016/17	73049	4.18	990113	27.99	-917064	30.36	
2017/18	80938.292	10.8	1208927.973	22.1	-1127989.381	23.00	
Source: Economic Survey, Various Issues from FY 1997/1998 to 2017/18, MOF, Government of Nepal. 
Figure 4.5 Pattern of Export – Import Gap

Source: Based on the table 4.5 
The trend of export-import in the given period shows that, in FY 1997/98 the export was Rs.27513.5 million and import was Rs.89002.0 million whereas the export gap (X-M) in the same year was Rs. 61489 million. The pattern of export has been increasing and became Rs.80938.292 million in FY 2017/18 and the import also has been increasing and drastically became Rs.1208927.973 million in FY 2017/18, whereas the export-import gap (X-M) has been increasing each and every year and became Rs. -1127989.381 million in FY 2017/18. Due to the massive earthquake and Indian unofficial blocked, import has decreased in FY 2015/16. The growth rate of export-import gap has been fluctuating in the beginning of review periods, it was -15.68 percent and became 0.68 percent in FY 2002/03 and reached 23.0 percent in FY 2017/18.
4.6 Situation of Debt Trap in Nepal
The condition of debt trap is the great challenge for developing countries like Nepal. When the country loses principal payment capacity and interest payment capacity, there arise a situation that whole- borrowed money will be used for debt obligation payment. Nepal faces the problem of fiscal deficit. Nepal is facing over increasing problem of resource gap. It has such situation due to following conditions:
•	Productivity is very low
•	Less contribution by annually ever growing labor force
•	Low quality of human resource available
•	A traditional nature in tax administration
•	The inflow of easy money through various channels
•	Sluggish change in the traditional economic structure
4.7 The Role of Public Debt in Economic Growth of Nepal
The first objective of the study tried to examine the pattern of public debt along with trade gap, resources gap, deficit financing and other important elements in the study. Public debt is important for LDC country like Nepal. A successful public borrowing can be a useful tool of economic development by diverting resources from unproductive channels to productive channels. Public borrowing is resorted to for specific development projects like power generation, irrigation words, roads, etc. Thus it is a useful method of financing development projects.
The role of public debt in the economic growth has been examined by looking at various aspects. The study has looked upon various data obtained from various sources. The first important factor, the study has looked upon is the resource gap. Resource gap is the difference between total expenditure and total revenue of the government of a country. If any public expenditure that is in excess of current public revenue, it will create resource gap. Nepal is LDC country which does not have sufficient private investment due to various social, economic and institutional factors. Therefore, the responsibility to augmenting the rate of net investment in the economy lies on the government. On the account of the lack of sufficient resources to finance public investment, government has to resort to the method of deficit financing. Public debt is one of the most important instruments of deficit financing.
Similarly the pattern of public debt has been analyzed. Nepal being a poor country, its rates of domestic savings and investment are low. To accelerate the rate of economic development, it borrow to import capital goods, raw materials technology etc. Besides, it also borrows to finance consumer goods to meet the requirements of the growing population. For a country like Nepal public debt is better than the taxation. Taxation implies forced savings; borrowing is voluntary. The tax payer is never happy in paying tax. Moreover, in Nepal the revenue generated from taxation is less. Also borrowing does not adversely affect incentives to save and invest. 
However in Nepal the scope of public saving is limited due to low levels of income, low savings and high propensity to consume of the masses. The few rich are not likely to be attracted by government loans which are not so lucrative as investment in other sectors. The government is not in the position to borrow much due to the absence of organized money and capital markets. The banking and financial institution are few and bonds or securities are not so much popular. Lastly, popular confidence may be lacking in the financial and political stability of the government. Domestic borrowing can, however, increase as development gains momentum whereby income and savings tend to rise. 
In addition, the exports of Nepal are limited to a few primary products, it also borrows to supplement and increase the domestic resources. These lead to huge current account balance of payments (BOP) deficit.  This can lead to inflationary pressures leading to high costs and prices, and a large external deficit which acts as a drag on its export. To finance its BOP deficit, Nepal borrows by selling bonds, commercial banks, from international financial institutions like IMF, World Bank, ADB, IFC etc., and from private foreign firms. In all such cases, the country accumulates external debt which it has to repay abroad in the future in the form of interest and principal.
Similarly, the study has also presented the trend of outstanding public debt in Nepal. Both net outstanding internal and external public debt are increasing in each FY.  The study also shows that since the government expenditure is rapidly increasing which is unable to raise revenue accordingly. Thus, accumulation of debt is mainly for financing the deficit.  
Public Borrowing and Economic Development 
Under-developed countries are suffering from poverty, unemployment, low level of income, low tax payable capacity, economic instability etc. To get rid of this above mentioned problem, economic development is necessary to accelerate economy. Economic development helps to transform the traditional society into modern society. So economic development is the main goal of developing countries but there are resource constraints to achieve such goal. Since other sources of revenue are limited public borrowing becomes useful resource for development. Most of the under-developed countries are conformed to rapid population growth low human capital development inadequate infrastructural problems and repressive regions. More importantly the inappropriate domestic policies fiscal policy, monetary policy, liberalization, investment policy and taxation policy pursued by the country have contributes to this weak and disappointing overall growth performance.  In such situation, public debt can vital role for economic development. Nepal being a least developed country has the potential for development. There is low rate of saving, investment, income and low living standard due to the low per capita income and poverty, dualistic economy, mass poverty, unutilized natural resources, lower health and education condition of the people, deficiency for capital in under developed countries. 
Resources gap is a burning problem of such under developed country due to deficiency of capital. So that public debt is only one solution to cross the resource constraint. Nepal is facing the deficiency of capital in relation to their production and natural resources due to low tax payable capacity of the people causes low income which creates low saving. Nepal is also suffering from vicious circle of poverty. To break vicious circle and uplift country with a self sustaining growth, a large amount of initial investment is necessary. Thus, the government of such under-developed country should emphasize to stimulate and accelerates capital formation. There is need of heavy investment to fulfill the objectives of economic development .Since it is not possible through the persons, there is need of government finance, such finance is not possible through government also because of poor tax payable capacity of the people in under-developed countries  like Nepal. At this critical juncture, public debt becomes important source to collect information small potentiality of saving and low level of tax payable capacity finally hampers economic development which can be removed by using borrowing and a nation becomes prosperous. In conclusion public borrowing is regarded as a basic tool for development in developing countries. Without public debt the adequate mobilization of internal resources could not have been made in order to accelerate the rate of economic development. Public borrowing proceeds regular channel for investment and also helps in the strengthening the money and capital markets which in turn accelerate development and price stability. As a fiscal measure it is a source of revenue to the government as it channels saving from the public to expansion of the productive capacity .So borrowing as a method of financing for development is quite suitable as it has less expansionary effect on the money supply than  deficit financing.
4.8 The Relationship between Public Debt and Economic Growth of Nepal 
The study of public debt is significant in the case of country like Nepal. Nepal is a poor country which depends heavily on inflows of capital from abroad to finance its development needs. It lacks in economic and social overhead capital and basic and key industries. Thus, it needs to take debt as an important role in the acceleration of the rate of economic development. Similarly trade related policies of Nepal also led to the growth of external debt of Nepal. With the continuous fall in the prices of its primary commodities, the terms of trade has deteriorated. The trade deficit is widening every year. Similarly it has been the victim of discriminatory policies pursued by WTO which falls heavily on LDC like Nepal. Thus, the adoption of trade reforms to boost exports and the inflow of private capital through international banks further increases its external debt.
The second objective of the study is to make a quantitative study concerning the role of public debt in the economic growth of Nepal. The influence of debt on annual GDP growth is examined. Tax revenues, government expenditure, inflation, trade gap are taken into account. This is done for a panel data from the time period from 1997/98 to 2017/18. The simple OLS regression is carried out in order to determine the impact of public debt on the economic growth of the country. The rate of economic growth is considered as the dependent variable. The variables such as revenue, expenditure, import, export and debt are considered as the major independent variables. The hypothesis is set to determine the impact of public debt on the economic growth rate. The general conclusion is that based on this study states that debt has a significant impact on the annual GDP growth. All other added variables have a regression coefficient which is expected based on economic theory. 
Nepal is characterized by extreme inequalities of income and wealth. Expenditure on education, public health and medical facilities help in the human capital formation. As a result, the earning power of the working population is enhanced. As economic development proceeds rapidly the barriers to upward mobility are removed. Moreover, industrialization tends to increase the share of wages and decrease the share of profits in national income in the share of national income in the long run, and the gap between higher and lower income is narrowed.
In the case of Nepal, public debt can be made effective by discouraging savings being spent in the unproductive channels. The masses should be encouraged to save more, which can be done by education, propaganda and persuasion. Similarly, there must be network of intermediate agencies to attract savings from the people. The establishment of saving banks, commercial banks, insurance companies, unit trusts, social security institutions, etc., can induce people to save more. In addition to that a well-organized bill market should be established to facilitate marketability. Finally, the success of public borrowing programmer will depend on the extent of the confidence of the people have in the political and financial stability of the government. A rising level of real income with no threat of inflation will go a long way in making government borrowing success. 
The reason why this subject/study was chosen for this thesis was the worldwide commotion. Many political leaders have a strong opinion about the appropriate level of the government debt as do a lot of economist while there seems to be lack of consensus. Thus this study provides evidence in the part of LDC country like Nepal, where public debt plays a significant role in the economic growth. 
Problems of Borrowing in under developed Countries
Nepal is facing several problems or constraints in reflecting its borrowing programs. The main characteristic of Nepal are low saving, low investment, low level of income, dualistic economy, under-developed industrial sector, illiteracy, technological constraints, unorganized money and capital markets etc. Poverty is the growing phenomenon. Due to all these reasons, financial sectors are also under developed. The rural sectors of such developing country appear the largest sector and a substantial volume of saving may originate in this sector. But it is not reality, since most of the financial and banking institutions are city oriented. So these are problem of rural saving. There is also existence of barer economy in rural areas so that people have no capacity and willingness to save due to poverty and illiteracy. Financial sectors are not well organized for rural saving and investment activities. Mobilization of rural income has not any contributive impact on the economy. Due to lack of appropriate financial and banking sector in rural areas, large part of money expenses in unproductive purpose. Values and institutions have also negative impact for the development of physical and financial sectors. 
Domestic resources are inadequate to meet the financial requirement for economic development. In such condition government is bound to take external loan. But Nepal has less economic and political relation with developed countries for the external borrowing and has less capacity to pay the dues on the other. This is because the most part of the expenses used for productive purpose which decreased the trust and further providing of borrowing is less possible. Then factors like political stability, low level of debt servicing capacity, unproductive expense, corruption etc. decrease the intention of donors for providing loan and grants. To conclude, development of finance sectors is essential to strengthen the economy. Money and capital markets are the main indicators of development which can play major role for government borrowing as a short term or long term.
The scope of public debt is limited in the case of Nepal, due to low levels of income, low savings and high propensity to consume of the masses. The rich are not generally attracted by government loans which are not so lucrative as investment in other sectors. The government is not in position to borrow much due to the absence of organized money and capital markets. Lastly, popular confidence may be lacking in the financial and political stability of the government. Therefore, government should discourage savings being spent in the unproductive channel. There should be network of intermediate agencies to attract savings by establishing banks, insurance companies. A well-organized bill must be established that provides variety of government bonds which provide better marketability and competitive rates. Finally, the success of public borrowing programme will depend on the extent of confidence people have in the political and financial stability of the government. 
4.9 Econometric Analysis and Result
This study uses data for time period is 1997-2018. The econometric used in the study is as follow:

Where,
 is GDP growth rate         ,                                                   
 is the constant                            
 is Log(Debt) with coefficient                               
 is inflation with coefficient        
 is the log( import) with coefficient                                
is Log(export) with coefficient             
 is Log(revenue) with coefficient                          
 is log( expenditure) with coefficient      
is the error term
The variables used in the regressions are of economic nature. The variable    measures the total debt of the country. Similarly, variable  measures the inflation rate of Nepal for a given time period.  The variables, ,  and   measures the import, export, revenue and expenditure of the Nepal for the time period as stated as above. The independent variables except inflation appear in logarthims.  The economic variables used in the regression have both positive and negative relation with the growth rate.
The estimation of the given model is obtained by using software package Eviews. The study has used simple OLS regression model. There are 20 observation made from 1997-2018. The results of the estimations are as follows:
Model Summary	
R Square	Adjusted R Square	Sum of square residual	
0.786	0.775	430.3445	
Table 4.6: The Results
Variable	Coefficient	Std Error	t statistic	
Constant	47.82	35.02	6.983	
Debt	0.1164**	0.548	2.12	
Inflation	-0.298	0.225	-1.2	
Import	0.288***	0.115	6.32	
Export	0.727**	0.118	2.3	
Revenue	2.622***	0.44	-5.873	
Expenditure	-1.58***	0.35	-4.41	
Note: Three asterisk (***) denote significant at 1% level
           Two asterisk (**) denote significant at 5% level  
           The test are based on one tailed test
4.10 Interpretation of the Regression Equation
Results of the estimated model appear in the above table. The coefficients on the explanatory have both positive and negative signs which are as expected. The major concern is the magnitude and of level significance of the coefficients of the variables involved.
Debt
The estimated coefficients of the debt are positive and highly significant. The coefficients on the debt variable suggest that 1% increase in debt of the country results in the 0.1164% increase in the GDP. The fact that growth increases with the level of debt is verified in the case of Nepal. External public debt can have nonlinear impacts on economic growth. Thus, at low levels of indebtedness, an increase in the proportion of external public debt to GDP could promote economic growth; however, at high levels of indebtedness, an increase in this proportion could hurt economic growth. As far as the relationship between external debt and economic growth is concerned, a reasonable level of borrowing is likely to enhance economic growth, through capital accumulation and productivity growth. Because at early stages of development, countries have small stocks of capital and they have limited investment opportunities. External borrowing for productive investment creates macroeconomic stability.  It is also been seen as capital inflow having positive effect on domestic savings, investment and economic growth; it implies that foreign savings complement domestic savings to cater for investment. However, high level of accumulated debt has an adverse effect on rate of investment and economic growth.
Inflation
The estimated coefficients of the inflation are negative and highly significant. The coefficients on the inflation variable suggest that 1% increase in inflation rate of the country results in the 0.29 decrease in the growth rate. The fact that growth decreases with the level of inflation is verified in the case of Nepal. 
An increase in inflation means that prices have risen. With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and therefore GDP decreases. High inflation can make investments less desirable, since it creates uncertainty for the future and it can also affect the balance of payments because exports become more expensive. As a result, GDP is decreases further. So it appears that GDP is negatively related to inflation. However, there are studies indicating that there may also be a positive relationship. The Phillips curve, for example, shows that high inflation is consistent with low rates of unemployment, implying that there is a positive impact on economic growth. So there exist both positive and negative relations between these two. There is a huge literature behind the relationship between growth rate and inflation rate which is beyond the research of this study.
Import
The estimation shows that with the increase in import, growth rate is likely to increase by. Mathematically, this means country Nepal is likely to have increase in growth rate 28% more with the increase of 1% import. This is a unlikely result, however this may be due to the fact of comparative advantage theory of trade. 
Imports of goods and services represent the value of all goods and other market services received from the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees and other services such as communication, construction, financial, information, business, personal and government serviced. They exclude compensation of the employees and investment income and transfer payments. However the higher increase in import as compared to export is not a good sign to economy.
Export
The estimated coefficients of the inflation are positive and highly significant. The coefficients on the export variable suggest that 1% increase in export of the country results in the 72% increase in the growth rate. The fact that growth increases with the level of export is verified in the case of Nepal. Any country that has high degree of export mainly results in the high economic growth of the country.
When a country exports goods, it sells them to a foreign market, that is, to consumers, businesses, or governments in another country. Those exports bring money into the country, which increases the exporting nation's GDP. When a country imports goods, it buys them from foreign producers. The money spent on imports leaves the economy, and that decreases the importing nation's GDP.Net exports can be either positive or negative. When exports are greater than imports, net exports are positive. When exports are lower than imports, net exports are negative. If net exports are positive, the nation has a positive balance of trade. If they are negative, the nation has a negative trade balance. If exports are greater than imports, it means country is earning profit from its industrial sector, It is a also a source of income generation. if industrial sector is public. If industrial sector is privatized than country will earn by custom duties and tariffs. Higher level of exports generates revenue for country which helps in providing public goods and services as well as investments. Thus by exports country grows its GDP.
Revenue
The estimated coefficients of the revenue are positive. The coefficient of revenue is 2.622. That would mean that a 1% increase in revenue leads to a 2.622% increase in annual GDP growth. It is obvious that more income is correlated with high economic growth. Thus government must be concerned with the increase in the revenue of the country. This can be done with the increase in the industrial sector, modernization of agriculture, promotion of service sector, mobilization of remittance. Thus , it is required in the part of government to make plans and policies that promote the revenue of the government..
Expenditure
The final dependent variable used in the study is expenditure. The estimated coefficient of the expenditure is negative and highly significant. The coefficient of expenditure is -1.58. This suggests that with the increase in the expenditure, growth rate of country is like to go down. Mathematically, in case of Nepal, its growth rate is likely to go down by 1.58% with the increase in 1% of expenditure which is accepted.
This relation is also straight forward. The growth rate diminishes with the increase in the expenditure of the government. This does not mean that government must reduce its expenditure. In the developing countries like Nepal, government has especial role in the economy. So government has responsibilities of carrying out public expenditure. Thus, instead of reducing expenditures, the government should focus on increasing the revenue by enhancing production and trade.
.

CHAPTER-V
SUMMARY OF MAJOR FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Major Findings
There are many views among various economists regarding the question whether the public debt is necessary to bring the growth in the country. The debate goes from classical to neoclassical economists who were against the government intervention in the economy. Similarly, Keynesian economists are in the favor of government intervention in the economy. This study has tried to look at the trend of public debt in Nepalese context. Similarly it has also tried to look at the relationship between public debt and economic growth rate.
Public debt is the widely accepted measure for financing government expenditure. Nepal is in critical phase of managing public finance because of inadequacy of internal resources. The Fiscal deficit has been increasing in every fiscal year. The government borrows for financing the budgetary deficit and helps to achieve a higher growth rate of the economy. The government expenditure mainly regular expenditure is increasing rapidly but revenue is not increasing in the same rate. The landlocked nature and mountainous topography are the major constraints for development of Nepal. Economically, Nepal is backward and its economic performance is not satisfactory. Now Nepal is facing an acute resource gap problem which is also being expected to grow in coming years. Nepal is demanding more and more financial resources through public debt to bridge the growing resource gap in the budget.
Borrowing is taking from two sources internal and external. In the internal source treasury bills, development bonds, special bonds and national saving certificate are included. Similarly, in external sources Nepal is receiving borrowing in the form of bilateral and multilateral sources as ADB, UNDP, WB, WHO, IMF etc. For Nepal, both internal and external debt plays a significant role as a means of financing economic development. Public borrowing has to be undertaken within the country as well as abroad. Only through internal sources, it is not sufficient to promote the rapid development of the Nepalese economy. Thus, external debt financing contributes significantly to the external development of Nepal.
Nepal is indebted by both internal and external loans but highly indebted by external servicing. Thus, its proper management has been a challenging task for Nepal. So the government should be responsible to utilize the public debt in productive sector rather than unproductive sectors. The government regulates the better fiscal policy and concern in the proper implementation. Otherwise Nepal is going to face debt crisis in the future in which debt bearing obligations would become impediments to the balanced management of the economy.
The study has used the quantitative technique to analyze the trend and relationship of public debt with economic growth rate. The regression model used is OLS with growth rate as dependent variable and public debt, inflation rate, revenue, expenditure, import and expenditure considered as dependent variables.
Major findings are as follows:
•	In the study period from F/Y 1997/08 to F/Y 2017/18, the government revenue has increased from NRs. 32937.9million to NRs. 770000 million In the same period, the expenditure has increased from NRs. 56118.3million to NRs. 1083000million. But the growth rate of revenue is not sufficient for financing the increased government expenditure. 
•	In the study period from F/Y 1997/98 to F/Y 2017/18, the gap between revenue and expenditure has increased from NRs. 12905.5 million to NRs. 313000 million. The resource gap has been increasing in each year that shows there is excessive increase in government expenditure than government revenue which leads the resource gap.
•	The total public debt has increased from NRs 14454.5 million in F/Y 1997/98 to 292947.9 million in F/Y 2017/18. The internal and external debt as percentage of fiscal deficit was 14.67 percent and 47.69 percent respectively in F/Y 1997/98. The percentage share of internal debt to fiscal deficit has gone up to 46.55 percent in F/Y 2017/18.
•	Total external debt was NRs.12,044 million in F/Y 1997/98 in which NRs. 586.7 million was taken from bilateral and NRs. 11,457.3 million from multilateral sources. It has gone up to NRs. 21,130 million where NRs. 1,573.7 million from bilateral and NRs. 19,556.9 million from multilateral sources. In the study period the share of bilateral debt is 18.91 percent and the share of multilateral debt is 81.12 percent.
•	Average annual growth rate of total external debt as a percentage of GDP is 1.34 percent whereas the percentage hare of bilateral and multilateral debt is 0.21 and 1.16 percent respectively. This shows that the external debt is heavily dependent upon multilateral sources.
•	The fiscal deficit is increasing in each fiscal year. The average annual growth rate of fiscal deficit is 10.01 percent.
•	In the study period export-import gap has increased. Import is higher than export. In in F/Y 1997/98 export-import gap was Rs. 61489 million whereas Rs 1127989.3 million in 2017/18. This shows that there exists negative trade balance.
•	The empirical result of regression equation of growth rate on public debt, inflation, import, export, revenue and expenditure shows that there exists positive and strong relationship between public debt and growth rate. This study also shows that there exists strong relationship between growth rate and inflation, import, export, revenue and expenditure.
6.2 Conclusion
This study has analyzed the role, structure and trend of public debt on the economic development of Nepal. Similarly, it has also looked at the relationship between growth rate and various variables such as public debt, inflation, import, export, revenue, expenditure. The trend of government expenditure has increased more rapidly than government revenue because of the limited resources of revenue. So the government has borrowed from internal and external sources. The growing trend of borrowing creates a great problem for debt management and becoming a major challenge issue for the country. 
The condition of indebtedness of the external debt has increased, due to the poor- mobilization of internal resources, widening investment saving gap, export import gap, revenue expenditure gap and large amount of fiscal deficit. So there has been excessive flow of foreign loans to bridge up these gaps. Consequently, burden of debt and debt servicing obligation are increasing rapidly in each year but debt servicing capacity of the economy is not increasing the same pace.
In course of research, it was found that government borrowing has increased unlikely and financed mostly on the unproductive sectors and hence government always lacks resources then takes the new loan to pay the previous ones. Government has not been able to prioritize the productive sector  That’s why the public debt and it interest is mounting rapidly but addressing capacity for redemption the debt is not increasing in the same pace.
The study also finds the relationship between economic growth and public debt. In the OLS regression, rate of economic growth was taken as the dependent variable and public debt was considered as independent variable with other variables such as import, export, revenue and expenditure. The regression shows that there exists a positive relationship between growth rate and public debt. Therefore in case of Nepal, it is likely the case that increase in public debt leads to increase in the economic growth. However, it should be kept in mind that the burden of public debt is not good for economy in the long run for the country.
The empirical results confirm that stock of internal, external and total debt has not caused negative impacts on GDP growth of Nepal. However, country must focus on the improving balance of payment. Similarly the inflation rate of the country must be checked. It may be good to keep fiscal deficit less than 3% as advocated by WB and other IFS. Therefore, it is better to take the loan for the economic development but it should be properly utilized on productive sectors otherwise debt-trap will drag us to the path of difficult situation from where we cannot escape from it.
6.3 Recommendations
On the basis of above findings, the following are the purpose recommendations which can be helpful to address the problems of public debt financing in Nepal.
•	Government should maintain fiscal balance by applying strong fiscal and monetary policy.
The size of revenue collection is very low and expenditure is very high which creates fiscal imbalance. This has led to heavy borrowing from internal and the volume of borrowing and maximizing revenue collection government should adopt transparent and effective tax policy by improving tax administration. Government should maintain the strong fiscal discipline. It must set and implements the effective legal system to control the ever- increasing corruption, unnecessary expenses and improper allocation of resources. This might contribute to control growing unproductive and useless expenses in one side and increased revenue on the other side. Government efforts should be directed towards mobilizing internal resources and thus to reduce dependency on loans for financing development expenditure.
•	Government should try to receive more grants rather loans. 
The government should try to get the rants more and more as far as possible. There is more domination on bilateral grants. The government should maintain such external policy so that more grants should be received rather than the loans.
•	Government should increase the debt servicing capacity of the country.
To increase the Debt servicing capacity, Government should increase GDP growth, revenue growth and export earnings growth in sustainable path so that country will not trapped on the debt servicing problem Government should be conscious about   falling the country into debt trap. To prevent from debt trap, government should create new debt servicing capacity. The inflowing loan should be utilized as possible as in productive and currency earning areas.
•	Proper attention should be given to the macro- economic stability of the country
Nepal has so many under-developed areas, where the role of government is dominating. Government should maintain the balance between urban and rural areas, agricultural and industrial sectors, trades and non- traded sector.  The maintenance of such various unbalanced sectors of the economy should be done through control of unproductive expenditure, big push through capital and proper utilization of resources of the under-developed areas. And Government should reduce foreign dependency, various measures must be applied such as export promotion, tourist attraction and import substitution policy should be emphasized and import of capital goods should be increased for the productive purpose.
•	The internal borrowing for short term should be minimized and long term internal borrowing should be given priority.
•	The inflation rate of the country must be checked by applying appropriate monetary policy.
•	The government of Nepal must take initiative to promote export of the country. The gap between import and export is rising which shows gloomy picture for the future.
•	Government of Nepal should try to maintain low fiscal deficit which pressurizes government to curtail its spending in the future.
•	Government should discourage the spending of savings into the unproductive channels. The masses should be encouraged to save more through education, propaganda and persuasion
•	There should be a network of intermediate agencies to attract savings from the people. The establishment of savings banks, commercial banks, commercial banks and insurance companies can induce people to save more
•	•There should be a variety of government bonds which would provide marketability and competitive rates with private issues and through such features as ready convertibility to each, acceptance of government securities at par with gold for tax payment by masses.
•	Finally, the success of public borrowing will depend on the extent of the confidence people have in the political and financial stability of the government. A rising level of real income with no threat of inflation will go a long way in making government borrowing a success.
Nepal has so many under-developed areas, where the role of government is dominating. Government should maintain the balance between urban and rural areas, agricultural and industrial sectors, trades and non- traded sector.  The maintenance of such various unbalanced sectors of the economy should be done through control of unproductive expenditure, big push through capital and proper utilization of resources of the under-developed areas. And Government should reduce foreign dependency, various measures must be applied such as export promotion, tourist attraction and import substitution policy should be emphasized and import of capital goods should be increased for the productive purpose. It is not advisable for an underdeveloped country like Nepal to rely completely on the method of public debt for specific development projects and for a short period of time. The government should aim in stimulating the private enterprise through the establishment of state-owned financial and banking institutions. Thus the policy of public expenditure and public borrowing should go parallel to promote the economy of the country. 

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