KATHMANDU, July 29: As Nepal continues to grapple with mounting public debt year after year, the financial burden is expected to grow even further in the coming year. Donors and development partners have begun raising interest rates on their loans, citing the country's rising per capita income as the reason for the shift.
According to the Ministry of Finance (MoF), the World Bank (WB) has doubled the interest rates to 1.5 percent annually from 0.75 percent. “The WB has increased the interest rate effective from July this year,” informed Dhani Ram Sharma, joint secretary at the International Economic Cooperation Coordination Division of MoF, at a program organized in the Capital on Monday.
Sharma said the maturity period of the WB’s loans has also been reduced to 30 years. Earlier, the multilateral donor organisation used to issue loans for 38 years to 40 years.
The MoF attributed the increased interest rates on multilateral loans to the increased economic status of the country. “We have upgraded from the list of the low economic status of poor countries,” said Sharma.
According to the Economic Survey 2025/26 unveiled by the MoF, the country’s per capita income has reached USD 1,517. Similarly, the country’s economy is estimated to have reached Rs 6.17 trillion. Likewise, Nepal is scheduled to graduate from its Least Developed Country status to a developing country by November 2026.
The WB has a total loan portfolio of US $2.4 billion in active investment projects in Nepal. Likewise, the Asian Development Bank has committed a total of USD 9.3 billion in loans, grants and technical assistance to the landlocked country. These two donors share around 80 percent of the development assistance to Nepal.
On the other hand, Japan International Cooperation Agency (JICA) has also increased the interest rates on concessional loans that it has been providing to Nepal. Since December 2024, JICA has raised the interest rate to 1.9 percent from 0.05 percent on the funded development projects to be implemented in the country.
Sharma claimed that the government has started to prudently select projects due to the increased interest rates by the donor agencies. He added that the MoF has implemented a project readiness filter in order to allow operation of only the projects with high returns. “Citing the issue, the government ministries might not be in a position to implement all the projects that they wish to implement as in the past.”
In recent years, Nepal’s public debt has surged significantly. Until fiscal year 2018/19, the total debt (internal and external) stood at Rs 1.05 trillion. But by the end of FY 2024/25, it rose to Rs 2.66 trillion, showing a sharp increase in borrowings in recent years. Of the total debt, Rs 1.267 trillion is internal debt and Rs 1.382 trillion is external debt.
The financial burden to the country has also been increasing along with a sharp rise in its public debts. The records with the Financial Comptroller General Office (FCGO) show that the government spent Rs 361.62 billion on public debt repayment in the last FY. For the current FY, the government has allocated Rs 375.24 billion for debt servicing, which makes up around 19.1 percent of the total budget.
The government has been borrowing to cover the gap between income and expenditure. In the last FY, the government’s total revenue and foreign grants amounted to Rs 1.197 trillion, while government expenditure reached Rs 1.523 trillion.
For the current FY, the government has announced a total budget of Rs 1.964 trillion, along with the revenue collection target of Rs 1.315 trillion. Citing its inability to meet the revenue target, the government has targeted to finance a resource gap of Rs 649 billion through grants and loans, out of which the borrowing limits of external debt has been set at Rs 233 billion.