World Bank raises interest rate on loans to Nepal after graduation from LDC status

KATHMANDU: The World Bank has increased the interest rate on loans provided to Nepal starting this July, following the country’s graduation from the Least Developed Country (LDC) category. This change was confirmed by Dhaniram Sharma, Head of the Foreign Aid Coordination Division at the Ministry of Finance, during an orientation on foreign aid management jointly organized by the Nepalese Association of Financial Journalists (NAFIJ) and the ministry on Monday.

According to Sharma, the interest rate on World Bank loans has been doubled—from the previous 0.75 percent to 1.5 percent. “The World Bank increased the interest rate from this July. Previously, we had been receiving loans with a repayment period of up to 40 years. Now, the maturity has been adjusted to 30 years, with a base of 24 years and a six-year grace period,” he stated.

Sharma explained that the hike is a direct consequence of Nepal’s economic progress. “Why has the interest rate increased? Because we have graduated. We are no longer in the lowest category of poor countries. Our classification has improved, so the concessionality of loans has decreased,” he added.

Strategy Alignment with Donors
Sharma also highlighted that both the World Bank and the Asian Development Bank (ADB) have introduced new strategic frameworks for development cooperation with Nepal. The World Bank has issued a “Country Partnership Framework,” while the ADB has launched a “Country Partnership Strategy.” These documents, prepared in coordination with the Government of Nepal, define sectoral priorities for future aid commitments.

“Nearly 80 percent of Nepal’s development aid comes through these two institutions. Hence, our projects must align with the strategies they have outlined. Our role is to move ahead in synergy with their frameworks,” Sharma emphasized.

New Project Filter for Aid Utilization
To make development assistance more selective and impactful, Sharma announced that the government has introduced a Project Readiness Filter. This screening mechanism aims to prioritize high-quality and high-return projects. “In the past, some ministries used to flood donors with project proposals without proper evaluation. That won’t be possible anymore. This filter will put a brake on unplanned aid requests,” he said.

He further clarified that development assistance cannot be mobilized solely based on Nepal’s preferences. “We often hear complaints that our priorities are not reflected in aid programs. But aid is negotiated, not dictated. It requires mutual agreement between Nepal and the donor agencies,” Sharma explained.

Caution Over Aid Commitments and Implementation
During the event, Undersecretary Dolendra Sharma presented an overview of Nepal’s foreign aid mobilization practices. He noted that aid disbursements often fall short of commitments due to implementation challenges and political uncertainty. “Take the MCC grant for instance—this year we had allocated nearly NPR 7 billion for it. If MCC had not continued, this aid would not have been reflected in implementation figures,” he remarked.

Officials Prem Upadhyay and Bishesh Pradhan from the Ministry of Finance also shared updates on the ministry’s Development Finance Information System (DFIMS), which is being used to monitor and coordinate foreign aid flows more effectively.

Implications of Higher Loan Costs
The increase in interest rates from concessional lenders like the World Bank marks a significant shift for Nepal. As the country moves out of the LDC bracket, it will now access financing under terms that are closer to market rates. This transition may put upward pressure on debt servicing costs in the medium to long term, particularly as Nepal seeks to finance large infrastructure and energy projects.

While the graduation reflects Nepal’s economic progress, it also demands stronger institutional capacity to ensure efficient use of more expensive development financing.