Kathmandu-The government’s reliance on annual revenue for recurrent spending and mandatory obligations necessitates foreign loans and grants for development projects and new initiatives.

This trend over the past few years has pushed existing donors close to their sectoral exposure limits. Nepal’s two largest donors, the World Bank and the Asian Development Bank, are nearing maximum limits in several sectors.

In this situation, the government faces two options for new projects: seek new donors or wait until existing projects are completed. The pressure to find new donors is particularly intense in the transport infrastructure sector.

The Asian Development Bank has an active portfolio of approximately USD 2 billion, while the World Bank holds a similar amount. Nepal remains heavily dependent on these two institutions because their interest rates are significantly lower than market rates.

Recently, the World Bank raised its interest rate to around two percent on US dollar loans, which has reduced the level of concessionality Nepal previously enjoyed. The Asian Development Bank has so far maintained its earlier concessional rates.

Beyond interest rates, both banks are shifting their priorities toward areas such as climate change. At the same time, large physical infrastructure projects have shown relatively low success rates, making donors more cautious.

Another option for Nepal is the Asian Infrastructure Investment Bank, established under Chinese leadership. However, Nepal has not advanced any major new projects in the past five years.

Finance Ministry officials indicate that launching new projects now requires testing new donors in specific sectors. While loan procedures and conditions at the World Bank and ADB are similar, Nepal now needs to explore new institutions and funding sources.

An official stated, ‘This is our compulsion. We must look for new donors and sources. Large infrastructure projects cannot move forward solely on domestic borrowing.’

Nepal, a founding member of the Asia Infrastructure Investment Bank (AIIB), has faced challenges in securing loans for significant projects.

While it has received some grants and a small loan for the Karnali power transmission project, progress has been limited due to high interest rates.

Nepal has consistently requested concessional rates at annual meetings and bilateral talks. However, AIIB rates remain higher than those offered by the Export-Import Bank of India (Exim Bank), which has deterred Nepal from borrowing. Despite the bank’s encouragement, Nepal has refrained from borrowing due to unfavorable terms.

Nepal is now seeking lower interest rates and more flexible repayment periods, particularly for loans in US dollars. In contrast, loans in Chinese or Japanese currencies can have interest rates below two percent. Officials suggest that Nepal may need to consider borrowing in non-dollar currencies to advance its cooperation with the AIIB.