KATHMANDU, Oct 1: The government has agreed in principle to allow international financial institutions (IFIs) having a strong credit rating to issue bonds in Nepal in local currency in a bid to mobilize locally available resources for financing big industrial and development projects through the private sector.
The positive response from the government to open local currency bond came when International Finance Corporation (IFC), the private sector lending arm of the World Bank Group, held meeting with the senior Ministry of Finance (MoF) officials last week.
“IFC´s proposal was to allow credible IFIs, including IFC, to issue local currency bond targeting the banks and financial institutions, among others. The IFIs will then lend the fund mobilized to the private sector for executing economically viable projects in various sectors,” said a senior MoF official.
Under the concept, which has not yet been practiced in the country, the bonds will be backed by the issuer IFIs, ensuring that the investments made by the BFIs among others remained safe. As the issue will be made in local currency, the issuer too will find itself free from the possible risks of foreign currency volatility.
“Apart from the IFC, the Asian Development Bank - one of the leading multilateral donor - too has shown interest to issue local currency bond,” the source told Republica.
The source disclosed that the MoF had received ADB´s expression of interest on local currency bond years ago -- long before the IFC approached it.
Though the ADB´s initiatives then did not gather any momentum, Juan Miranda, director-general of ADB´s South Asia Department, said a vice president of ADB was visiting Nepal soon to hold discussion with the government on the matter.
If things moved ahead smoothly, ADB officials said they would also issue local currency bonds in a bid to finance projects here.
Finance Secretary Krishna Hari Baskota said the government was positive about issuing local currency bond. “Though we are still discussing on its technical aspects, the talks are going on with the IFC in a positive manner,” said Baskota.
In the last week´s meeting, IFC officials had announced that IFC would jump into the business promptly, mobilize the resources locally offering a sound return to the investors, and invest the collections in turn to the private sector to execute highly feasible projects.
“The degree of feasibility of the project in such cases will be scrutinized and decided by the bond issuer,” said the source.
The IFC officials had also made a presentation on similar issue and investments that it has carried out in a number of countries in Africa and other developing countries.
Nepali officials believe that the local currency bond can be one good window to help Nepali private parties that have competence, but lack finances to implement hydropower and other infrastructure projects.
Most importantly, this scheme can help us implement built-own-operate-and-transfer (BOOT) model, which we promoted since long but are yet to see it materialize, said the source.
However, officials are skeptic over immediate implementation of such plan. “That is because we will need to effect numerous changes in the existing law and may even need to formulate new one to implement it,” said the source.
The changes in the laws are needed mainly because Nepali law still does not allow investors to repatriate income made through locally mobilized resources.
“Overseas investors that put their money in the country can repatriate their income, dividend and everything. But in this case we are talking about locally mobilized money. We need a clear policy decision to allow IFIs repatriate income they made from locally mobilized and invested fund,” said the source.
Apart from that, law will also be needed to enable local investors to dispose their bond holding through the secondary market. “This is a crucial cushion,” said the source, adding that a clear law will be needed also to guide the IFIs as some of them might not prefer secondary market transactions for their bonds.
Given such situation, the MoF has suggested IFC to come up with yet another proposal on how it plans to operate its bond in Nepal, and also how IFIs in general can be facilitated to issue local currency bond.