Kathmandu-Asian Development Bank (ADB) has decided not to raise lending rates for Nepal immediately, despite the World Bank and Japan increasing interest rates on their loans to the country.

The ADB could have raised its lending rates using the same criteria adopted by the World Bank, but it has assured the government that it will not do so for now.

According to Nepali officials, ADB representatives had already indicated during earlier discussions that the bank had no immediate plans to increase lending rates for Nepal. Officials at the Ministry of Finance said that although the ADB has the flexibility to raise rates, it is not currently inclined to do so.

The World Bank, Nepal's largest development partner, has doubled the interest rate on its concessional loans from 0.75 percent to 1.5 percent. The increase follows three consecutive years of improvement in Nepal's per capita income.

In addition to raising the interest rate, the World Bank has also tightened loan terms by reducing the repayment period to 30 years from the previous 40 years. As a result, Nepal will now have to repay future concessional loans within three decades instead of four.

Although the ADB could adopt a similar approach, it has decided against doing so for the time being. The decision offers some relief to the government, as the ADB is Nepal's second largest development partner.

The World Bank revises lending terms when a country's income level improves beyond certain thresholds. Nepal previously qualified for IDA-only financing, which is available to countries with a per capita income below the current threshold of US$1,435.

As one of the world's poorest countries, Nepal had long benefited from this highly concessional financing. However, countries whose per capita income remains above the threshold for three consecutive years become eligible for IDA Blend financing.

Since Nepal's per capita income has exceeded the cut off level for three straight years, the World Bank has reclassified the country and increased its lending rate.

The ADB also classifies borrowing countries into different categories. Nepal currently falls under the category of the poorest borrowing countries, which receive loans at a minimal interest rate with a one percent service charge. Government officials remain confident that the ADB will not immediately revise its lending terms. The ADB's effective interest rate currently stands at up to 1.5 percent, depending on the applicable grace period and repayment structure.

More than 80 percent of Nepal's total external debt comes from the World Bank and the ADB.

Although Nepal's improved income status has resulted in higher borrowing costs, the country has yet to generate corresponding economic returns from the loans it has received. Nepal failed to fully leverage years of access to low cost financing to significantly boost economic growth.

At the same time, pressure on public finances has increased and dependence on external borrowing has deepened. Around 60 percent of Nepal's capital expenditure is financed through foreign loans.

Higher interest rates are therefore expected to increase the cost of development projects and place additional strain on public finances.