Nepal’s debt spiral: The hidden cost of growing reliance on foreign loans for development
Agency: Nestled beneath the towering peaks of the Himalayas, Nepal, a nation relentlessly pursuing prosperity and progress, finds itself increasingly bound by a growing external debt. For decades, foreign loans have been championed as the essential fuel for development, bridging crucial financial gaps and making ambitious infrastructure projects and vital social programs possible. Borrowing in foreign currency from non-resident creditors often seems appealing, promising less crowding-out of private investment and reduced inflationary pressures. Yet, beneath this seemingly beneficial surface, a complex and precarious reality is taking shape. Nepal’s increasing dependence on foreign loans, while appearing to propel it forward, carries hidden costs and insidious risks. These threats could ensnare the nation in a debilitating debt spiral, jeopardizing its hard-won economic gains and potentially eroding its future sovereignty.
Nepal has long been the recipient of substantial grants and official development assistance (ODA) due to its status as a least developed nation. These loans largely come from major international financial institutions like the World Bank and the Asian Development Bank, as well as bilateral partners such as China and India.
Rising loan pressure
Previously, this assistance was provided for free or at extremely low interest rates (concessional loans) as a part of Least Developed Country. It is important to remember that Nepal will officially leave the LDC category in 2026. With the improvement to Developing Country, this help’s shape is probably going to change significantly. This merely indicates that, as a nation, there will be less money available at zero or extremely low interest rates. The money required for development may have to be paid at higher interest rates than previously due to the anticipated increase in loan interest rates affecting development initiatives like climate risk mitigation. In addition, Nepal will face more pressure to fund initiatives in important social areas including infrastructure development, education, and health as grants and concessional loans become less available.
The Ministry of Finance has also declared that the interest rate on loans from the World Bank and Asian Developemnt Bank to Nepal has been raised to 1.5 percent from the previous 0.75 percent. With effect from this July, it appears that the World Bank has raised the interest rate on loans it has been making to Nepal. Furthermore, it has been made known that the World Bank has shortened the loan repayment period in addition to raising the interest rate. According to current reports, the loan’s maturity period has also been shortened from 24 to 30 years which was previously 40 and 38 years.
This accumulation isn’t just happening; it’s driven by several factors: ambitious development goals outlined in national plans, frequent cost overruns in large-scale projects due to inefficiencies or unforeseen challenges, inadequate project management, and unfavorable currency fluctuations, which automatically inflate the local currency value of foreign-denominated debt. Even without new borrowing, just a single percentage point depreciation of the Nepali Rupee against the US Dollar can add billions of rupees to the debt burden.
In the previous fiscal year, Nepal’s national debt rose by Rs 231.8 billion, now as per the data of June 2024 it has raised to 243.8 billion. The current national debt of Nepal is Rs 264.9 billion including a foreign debt of Rs 138.2 billion. This escalating debt accumulation poses several serious concerns for Nepal, creating a real risk of trapping the country in a self-reinforcing debt spiral. An ever-increasing share of the government’s annual revenue is now being redirected towards debt servicing—that is, paying off the principal and interest. This “crowding out” effect can significantly stunt domestic growth, as vital public investments are starved, and citizens inevitably face the consequences of underfunded services.
Looking at the trend of external debt servicing, it’s clear that resources that could have been used for developing social sectors are instead being consumed by debt repayments—a discouraging practice from a development standpoint. For instance, the amount spent on external debt servicing was Rs. 23 million in FY 1979/80, which then jumped to Rs. 1.12 billion in FY 1989/90, a substantial increase in just a decade. By FY 2000/01, this debt servicing had ballooned to Rs. 6.20 billion, nearly two hundred and seventy times the amount from FY 1979/80. This significant rise in the debt burden largely stems from the government’s increased investment needs for infrastructure building, macroeconomic adjustments, and structural reforms, which foreign creditors have eagerly supported, especially following the liberalized economic policies after the restoration of multiparty democracy in 1990.
