Kathmandu — The World Bank, Nepal’s largest donor agency, has increased its lending rate for Nepal starting this month.

According to the Ministry of Finance, the World Bank raised the interest rate after Nepal’s per capita income showed continuous improvement for the past three years. 

Dhaniram Sharma, head of the ministry’s International Relations Coordination Division, said that from this month, along with the interest rate, the World Bank has also shortened the loan maturity period.

Previously, the interest rate was 0.75 per cent, but the World Bank has now raised it to 1.5 per cent. 

Similarly, the loan repayment period, which was earlier up to 40 years, has now been reduced to 30 years, meaning Nepal must now repay the concessional loans within 30 years.

The World Bank currently has an active portfolio worth around Rs 400 billion in Nepal. With this increase in the interest rate, the cost of public development projects is expected to rise. 

A large share of Nepal’s capital investment comes from foreign loans, and among those, the World Bank remains the major lender. 

Together, the World Bank and the Asian Development Bank (ADB) account for over 80 per cent of Nepal’s total external debt.

The World Bank raises interest rates for countries once they cross a certain income threshold. 

Nepal had previously been receiving loans under the IDA-only category, which is reserved for countries with per capita income below USD 1,435.

As one of the world’s poorest countries, Nepal benefited from this category.

However, if a country’s per capita income remains above this threshold for three consecutive years, it moves into the IDA-blend category, where it gets a mix of concessional and costlier loans.

Nepal’s per capita income has exceeded this cut-off for three consecutive years, leading the World Bank Group to increase the rate.

From now on, Nepal will receive IDA-blend loans. These combine concessional loans with costlier ones, and Nepal will also become eligible for IBRD (International Bank for Reconstruction and Development) loans. 

Receiving IBRD loans signals economic stability and structural strength, which can encourage foreign investors. 

However, these loans are subject to market risks and generally come at a higher cost.