The Ministry of Finance has begun the preparations for the transition strategy to be adopted when Nepal is upgraded from the Least Developed Country Group to a Developing Country status.
How does the World Bank determine interest rates?
If we think that the World Bank is a global central bank that determines interest rates for the world, that would be wrong. There is no global currency, so there is no global central bank to manage it and determine interest rates for it. The Washington, DC-based World Bank is a global financial assistance institution with membership of about 200 countries, whose objective is to carry out various activities, including poverty alleviation, by providing funds for capital investment.
Loan from the World Bank
The World Bank is an international financial institution that provides loans to countries around the world for capital projects. It consists of two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA). The World Bank is a component of the World Bank Group. The IBRD provides assistance to middle-income and poor but creditworthy countries, and it also acts as an umbrella for more specialized agencies under the World Bank.
The IBRD was the original arm of the World Bank responsible for the reconstruction of post-war Europe. Before becoming a member of its affiliated institutions (the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the International Center for Settlement of Investment Disputes), a country must be a member of the IBRD. As a least developed country, Nepal has long been receiving large amounts of official development assistance (ODA) and grants. This aid used to be free or at very low interest rates (concessional loans). Now, with the upgrade, the form of this assistance is likely to change dramatically.
This simply means that as a poor country, the money that is available at free or very low interest rates will now decrease. The interest rate on loans is likely to increase, meaning that the money needed for development may have to be paid at higher interest rates than before. Nepal’s public debt increased by Rs 231.8bn in the last fiscal year. Nepal’s public debt is now Rs 264.9bn. Of this, Rs 138.2bn is foreign debt. According to public data, the World Bank and the Asian Development Bank contribute 80 percent to Nepal’s development assistance.
As of June 2024, the government’s outstanding public debt was Rs 243.8bn. During this period, the appreciation of the US dollar against the Nepalese currency has been adding additional burden to public debt. There is also concern that this may increase Nepal's external debt burden. Similarly, Nepal will lose its access to special funds such as the Least Developed Countries Fund (LDCF). These funds have been playing an important role in climate change adaptation and various development projects. Now, the reduced availability of these funds is likely to make it more difficult for Nepal to raise financial resources for climate risk reduction and other development programs.
The reduction in the availability of grants and concessional loans will also put Nepal under increasing pressure to finance projects in key social sectors such as infrastructure development, education and health. As development partners are changing their development assistance policies, Nepal needs to find new sources of finance for its development. The International Development Association provides loans to the world’s poorest countries.
In Nepal, the World Bank has been providing loans to Nepal at an interest rate of 0.75 percent, but the Ministry of Finance recently has announced that it has now increased it to 1.5 percent. As the day of Nepal’s graduation from LDC is approaching, the possibility that the World Bank may have increased the interest rate on loans it provides cannot be ruled out. It is worth noting that Nepal is scheduled to formally graduate from LDC status in 2026. This is an initial indication that its impact is starting to be seen in the interest rate that Nepal has to pay on its foreign debt.
In this context, it seems that the World Bank has increased the interest rate on loans it has been providing to Nepal with effect from this July. The Asian Development Bank has also been charging 1.5 percent interest. However, this is considered a concessional loan. The World Bank has been charging the lowest interest rate on loans among development partners.
After the upgrade, loans will be available from donors only at a relatively high interest rate and this may put Nepal in the grip of additional debt, and it has come to light that the World Bank has increased the interest rate.
In addition, it has been made public that the World Bank has not only increased the interest rate but also reduced the loan repayment period. Nepal used to take loans to repay within 40 years. Now, it is said that the maturity period of the loan has also been reduced from 24 to 30 years by adding six more years.
Earlier, such periods were of two types, 40 and 38 years. Now, the Ministry of Finance has stated that it has been made for 30 years. It is also necessary to move forward in coordination with all parties, making the transitional strategy relevant to the time. Although it is estimated that the upgrade will have positive effects on Nepal's development and commercial investment, contribute to the development of new trade and economic partnerships, build a sustainable development, build a national image, and increase credibility, it is not that easy.
It is also expected to have an impact on sectors such as commodity exports, prices, and employment. Nepal is scheduled to graduate from LDC to developing country status in November 2026.
Key challenges and measures
After the upgrade, Nepal will lose some of the special benefits of LDC status, such as preferential market access for goods and services, flexibility in implementing World Trade Organization (WTO) rules, international development measures, and special financing. Nepal has embarked on a new journey after meeting the per capita Gross National Income (GNI) criteria and qualifying for development from a LDC. The United Nations Committee for Development Policy (UN CDP) had previously recommended the Himalayan nation for upgrade in its final assessment.
Graduation for Nepal is an important step towards realizing the national aspiration of a prosperous and developed Nepal. Nepal will continue to access all LDCs-specific assistance measures by 2026. Apart from Nepal, Bangladesh and the Lao People’s Democratic Republic have also been recommended for graduation by the CDP, which has been good for the country. ‘Developing’ is a relative term, a stage like a work in progress—a stage before something reaches its final state. Nepal in 2025 is certainly more developed than Nepal in 2010, which was more developed than Nepal in 2000. But looking at the global average trend, Nepal has not been able to keep pace with the development happening around the world.
So can Nepal be considered developing? No, not when compared to other countries, but when compared to Nepal in previous years. The majority of Nepalis are only concerned with survival, development is a long way off. It is necessary to dispel the illusion that the Nepali people as a society are still very uneducated, very deeply ‘superstitious’, rarely know the meaning of ‘human rights’ and have not yet reached the complexity and sophistication in thinking required to compete with other developing countries of the world.
Nepal must make proper use of the available resources. Peace and security must be maintained in the country. Since Nepal can commercially produce up to 43 thousand megawatts of hydropower, it should try to produce as much hydropower as possible from fast-flowing rivers. There is a risk of reversal at every graduation, mainly due to outflow shocks such as the impact of the Covid-19 pandemic, climate-induced disasters, and trade shocks, which are also major threats to the Nepalese economy.
Similarly, Nepal presents a unique case as it is the first country to be upgraded from the LDC category without meeting the Gross National Income (GNI) criteria. Due to the persistence of many problems, including low standards, it faces the difficult task of achieving sustainable economic growth to progress from the current low-middle income country to a high-income country. There are several economic implications of the upgrade. After upgrade, Nepal will lose some of the special benefits that come with LDC status, such as preferential market access for goods and services, flexibility in implementing WTO rules, international development measures, and special financing.
Although Nepal will be eligible for the Generalized System of Preferences (GSP) available to developing countries, it is much less generous than the duty-free, quota-free market access that many advanced economies offer to LDCs. Raising the necessary financial resources for the investments needed to put LDCs on a rapid growth path has been a major challenge in implementing the Doha Development Agenda, adopted by the United Nations to provide differential treatment that is closely aligned with the Sustainable Development Goals.
In addition, Nepal will lose access to Aid for Trade (AfT) under the Enhanced Integrated Framework (EIF) and the United Nations Capital Development Fund (UNCDF) five years after upgrade.
Additionally, once a country graduates from the Least Developed Country (LDC) category, the minimum grant element of Official Development Assistance (ODA) loans decreases until it is classified as a Low Income Country (LIC); however, Nepal has also become a ‘Low-Middle Income Country’ (LMIC), due to which the lending conditions have become relatively tighter. That being so, the coming years will be a period of both opportunities and challenges for Nepal to navigate its way from a LDC to a developing middle-income country. Consequently, a smooth, irreversible, inclusive, resilient, and sustainable transition is critical for an upgrade.
The country needs to make serious efforts towards poverty alleviation to develop its productive capacity, expand its export base, diversify its economy, and sustain its tertiary education levels in the long term. Engaging the private sector, civil society, and the international community is equally important as it pursues the Sustainable Graduates agenda. To foster innovation, job creation and economic diversification, it is important to provide incentives and technical support to micro, small and medium-sized enterprises (MSMEs).
This support could include e-commerce platforms, digitally enabled green innovations, and tools for digital and financial literacy. Public-Private Partnerships (PPP): Encouraging public-private partnerships, especially in infrastructure development, will leverage the capabilities of the private sector to deliver large projects.
