ADB assures Nepal: No immediate interest rate hike despite LDC graduation

KATHMANDU: The Asian Development Bank (ADB) has clarified that it will not immediately increase interest rates on loans provided to Nepal, despite the country’s graduation from the Least Developed Country (LDC) category being on the horizon.

Arnaud Cauchois, ADB’s Country Director for Nepal, stated that any shift in concessional loan terms will be gradual and subject to comprehensive assessment and dialogue.

“Graduation is not an automatic process. It’s not as if in 2026 it just flips. There will be pressure from member states, but it will be more of a dialogue than a deadline. I’m not expecting this to happen next year,” Cauchois told Fiscal Nepal.

He emphasized that ADB will closely monitor Nepal’s economic indicators before taking any action. “We will evaluate the sustainability of Nepal’s progress before making changes. It’s not immediate, and it certainly won’t be abrupt,” he added.

Gradual Graduation to Lower-Middle Income Status

He noted that while Nepal has crossed all three threshold indicators—gross national income per capita, human assets, and economic vulnerability—necessary for LDC graduation, the final reclassification process requires long-term stability and further development.

“Yes, Nepal is now fully above the criteria of a low-income country, which means that it has achieved significant progress. But we want to see how far they go before we take any decision on loan policy changes,” said Cauchois.

He also stressed that the graduation process should be viewed positively. “If it happens, it will be a good thing. It means Nepal will become a lower-middle-income country. We’ll continue our dialogue with the Government of Nepal and our member countries accordingly.”

Contrast With World Bank’s Position

The ADB’s statement comes in stark contrast to the World Bank’s recent policy shift, which already began impacting Nepal as of July this year. The World Bank doubled the interest rate on its loans to Nepal—from 0.75% to 1.5%—after acknowledging the country’s improved economic classification.

Dhaniram Sharma, Chief of the Foreign Aid Coordination Division at Nepal’s Ministry of Finance, confirmed this change.

“The World Bank increased the interest rate from this July. Previously, we had a repayment period of up to 40 years. Now it’s 30 years, with a 24-year base period and a six-year grace period,” Sharma said.

Sharma attributed the hike to Nepal’s improved global standing. “The concessionality of our loans has decreased because we’re no longer in the lowest category of poor countries. This is the natural outcome of progress,” he added.

The dominant role that ADB and World Bank play in Nepal’s development financing. Nearly 80 percent of Nepal’s foreign aid comes through these two institutions. That’s why aligning our projects with their frameworks is essential.

ADB’s Emphasis on Dialogue and Stability

Despite the World Bank’s more aggressive shift in policy, the ADB has taken a more cautious and supportive stance. Cauchois reiterated that no policy change would be enforced without thorough dialogue and analysis.

“We are in continuous dialogue with the government of Nepal. Our policy department will gradually assess how Nepal evolves under its new economic status. There’s no ‘bam’ moment. It’s a step-by-step process,” Cauchois said.

He further explained that comparisons with neighboring countries show that this is not a unique case. “Bangladesh, for instance, is already at a higher income status. We observe regional trends and tailor our approach accordingly,” he added.

What This Means for Nepal’s Development Financing

For Nepal, the divergent approaches between ADB and World Bank could create both opportunities and challenges. On one hand, ADB’s softer stance gives Nepal breathing room to manage its fiscal obligations and avoid abrupt shocks to development financing.

On the other, World Bank’s firmer stance means increased financial burdens are already taking effect, signaling potential risks if other lenders follow suit.