Nepal’s Rising Income Triggers Higher Interest on Foreign Loans

As Nepal’s economy improves and per capita income rises, the interest rates on foreign loans from international lenders are going up, making foreign-funded development projects more expensive.

According to the Ministry of Finance, the World Bank, Asian Development Bank (ADB), International Monetary Fund (IMF), and countries like China, Japan, and India adjust their loan interest rates based on a country's income level. With Nepal’s per capita income now above USD 1,135, the interest on concessional loans has doubled, from 0.75% to 1.5% starting this July.

The government chose fixed interest rates to avoid sudden hikes in future, but loans from ADB and Japan International Cooperation Agency (JICA) are also becoming more expensive for the same reason.

In the last decade, Nepal took over Rs 1.08 trillion in foreign loans. Out of that, around Rs 280 billion went into repaying old loans, while the rest supported infrastructure and development projects.

In fiscal year 2024/25, Nepal signed foreign loan deals worth Rs 215.54 billion, mainly with agencies like ADB and the World Bank. The money is aimed at projects in transport, agriculture, energy, disaster response, and climate change.

However, Nepal is struggling to spend these loans. Last fiscal year, the government used only Rs 111.23 billion of the available foreign aid, a sharp drop compared to Rs 209.43 billion in 2020/21. This underuse, combined with rising interest costs, raises concerns over Nepal’s ability to manage its growing debt burden.

For the current fiscal year, the government plans to mobilize Rs 233.66 billion in foreign loans. Experts warn that unless loan spending improves, Nepal could face difficulties maintaining debt sustainability.