In the last week of March 2019, the KP Sharma Oli-led government held the second Nepal Investment Summit (NIS 2019), where international investors emphasised the need for a sovereign credit rating to assess the country’s creditworthiness. They argued that such a rating would attract more foreign investment by offering a clearer picture of the risks and returns associated with investing in Nepal.

While the government had acknowledged the need for a sovereign credit rating for the first time in the 2018/19 federal budget, the process gained momentum following NIS 2019. The government moved the process forward by forming a 'Country Rating Oversight Committee' under then Revenue Secretary Shishir Kumar Dhungana. The committee issued a public notice inviting global rating agencies to participate in the bidding. Although all three major agencies - Fitch, Moody’s and Standard & Poor’s - submitted applications, the government ultimately signed an agreement with Fitch Ratings for Nepal’s sovereign credit rating.

In addition, a separate agreement for technical assistance was signed with the then British International Cooperation Agency (DFID), now known as UK Aid. Standard Chartered Bank Nepal was appointed as the consultant for the rating process.

Although progress was made in the credit rating process following the agreement with Fitch, the Covid-19 pandemic in 2020 stalled the process. The government suspended the rating fearing that negative economic indicators might send an unfavourable message to the international community.

Since then, every federal budget has reiterated the commitment about a sovereign rating. However, this pledge has not been fulfilled, and despite repeated promises, Nepal remains without an official credit rating. This has affected the anticipated rise in foreign investment.

Five years later, the government hosted the third Nepal Investment Summit in 2024. In the run-up to the summit, top officials, including then-Finance Minister Dr Prakash Sharan Mahat, reaffirmed their commitment to securing a sovereign credit rating, stressing its importance for boosting investor confidence. However, the summit concluded without the rating in place, leading to renewed frustration among investors, who considered it crucial for evaluating Nepal’s investment potential. Barshaman Pun, who succeeded Mahat as Finance Minister, later revived the sovereign credit rating process.

(Finance Minister Bishnu Prasad Paudel with representative from Fitch Ratings at the Ministry of Finance in Singha Durbar, Kathmandu. Photo: MoF)

Following the third Nepal Investment Summit, the government renewed its efforts to secure a sovereign credit rating. In early September, a team from Fitch visited Nepal to initiate the process. The team met with officials from the Ministry of Finance to discuss key areas such as revenue mobilisation, capital expenditure, public debt and foreign aid management.

According to Mahesh Bhattarai, the spokesperson for the Ministry of Finance, the Fitch team, consisting of two experts, held multiple meetings with government officials and private sector representatives to assess Nepal's economic and political environment. He added that Fitch would need a few months to complete its assessment. To support the process, the government has implemented training programmes for its officials, focusing on preparing documentation and providing relevant information to the rating agency. The Fitch team also engaged with officials from the Ministry of Finance, National Planning Commission, Nepal Rastra Bank, and representatives from multinational companies, among others.

Fitch is currently reviewing Nepal’s macroeconomic trends over the past five to ten years. It aims to finalise the assessment within the next two months and is expected to release a preliminary report on Nepal’s economic standing soon.

Sovereign credit ratings are vital indicators of a nation’s financial stability and creditworthiness. They offer essential insights into the risk landscape, enabling foreign investors to assess the safety and attractiveness of investing in a country's bonds or infrastructure projects. Similar to corporate credit ratings, sovereign ratings evaluate a country’s overall risk profile.

Dr Govinda Raj Pokharel, former vice-chairperson of the National Planning Commission, expressed optimism that the government would finally complete the sovereign credit rating process, particularly now that the two largest parties - Nepali Congress and CPN-UML- have united to form the government. He added that securing a credit rating would send a positive signal to investors, enhancing Nepal’s credibility as an appealing investment destination.

The delay in obtaining a sovereign credit rating has largely been attributed to fears of a negative outcome. However, experts argue that avoiding the process only prolongs uncertainty and undermines investor confidence. While some banks, including a microfinance institution, have secured international loans - primarily from the International Finance Corporation (IFC) of the World Bank Group, and from countries such as Switzerland, Germany, the UAE and Singapore, Nepal has struggled to access commercial loans for large infrastructure projects due to the absence of a sovereign credit rating.

According to Pokharel, Nepal previously suspended the rating process out of concern for receiving an unfavourable assessment. “Political interests influenced this decision. However, with the backing of the two major parties, Nepal is now in a strong position to secure a rating,” he said. "As Nepal emerges from the pandemic, there is renewed momentum to complete the rating process and provide investors with a clearer picture of the country’s financial health.”

Radhesh Pant, a former CEO of Investment Board Nepal, said the rating process should be completed without further delay. “The credit rating would clarify Nepal's strengths and weaknesses, allowing the country to improve its financial standing," Pant added. "Even if Nepal receives a lower rating, such as B-, it could use that as a benchmark to identify areas for improvement and work towards achieving a higher rating.”

Pokharel also said that since Nepal cannot meet the aspirations of its people through internal resource mobilisation alone, attracting foreign investment is crucial to achieving national development goals.

Securing a sovereign credit rating would enable Nepal to access international capital markets by issuing bonds, a strategy the country has yet to explore. Pant suggested that Nepal could issue bonds such as the Sagarmatha Bond, Karnali Bond, or Lumbini Bond to attract investment from international investors.

“As Nepal aims to transition into a middle-income economy, achieve the Sustainable Development Goals (SDGs), and recover its economy post-Covid-19, it has struggled to attract the required level of investment. Domestic investment has been constrained by challenges such as inadequate infrastructure, bureaucratic inefficiencies and political instability, which have hindered private sector growth. Meanwhile, foreign investors remain cautious due to concerns over policy unpredictability, regulatory barriers, and an unwelcoming investment climate," Pant said. "There can be no hesitation from the government. The rating must be completed, regardless of the fear of receiving a negative assessment.”

Agencies like Fitch gather data on various political, social, economic, and other factors from international organisations such as the International Monetary Fund (IMF), The World Bank, Asian Development Bank (ADB), World Trade Organization (WTO), United Nations, Transparency International and Human Rights Watch, among others. The assessment also considers factors like the ease of doing business, consistency and continuity of economic policies, financial crime risks, political stability, rule of law, corruption, and overall governance quality.

The delay in completing the rating process has hindered Nepal's ability to secure commercial loans for large infrastructure projects. According to Pokharel, the loans Nepal currently receives are primarily soft loans. Nepal would be able to attract larger-scale commercial investments in its projects after a rating is obtained.

Sovereign credit rating is also essential for raising debt through issuance of bonds in the international market and attracting foreign investment. The world’s leading credit rating agencies assign ratings ranging from the highest 'AAA' (Triple A) to the lowest, typically 'C'. While their scales vary slightly, ratings above BBB- are considered investment-grade, while those below B- are classified as speculative or "junk" ratings. A rating below this threshold indicates high risk or potential default, which can deter investors.

Nepal is one of the few South Asian countries still without a sovereign credit rating. Neighbouring countries like India, Pakistan, Bangladesh and Sri Lanka already have such ratings. As a result, investors often prefer to invest in these countries where the investment climate is clearer.

Pokharel said it is urgent for Nepal to complete the rating process to remain competitive in the region and attract much-needed foreign investment.

Completing the sovereign credit rating would represent a significant milestone in Nepal's efforts to become an attractive destination for foreign investment. “It would enable the country to access international capital markets, raise funds at favourable rates and finance essential development projects critical for economic growth. The government must prioritise completing this long-overdue process to send a strong, positive signal to the global investment community and foster a conducive environment for sustainable growth and development,” say experts.

Nepal’s outstanding debt currently stands at 45% of its GDP, a relatively moderate level. “This indicates that Nepal has the capacity to generate funds for infrastructure development through the issuance of foreign bonds. Private investors feel more confident about the stability and reliability of returns on their investments in Nepal,” Pokharel added.

Commenting on Nepal's failure to attract pledged commitments, Pant said that the Investment Board Nepal (IBN) suffers from a lack of institutional memory. “The CEO is appointed for a four-year term, and most employees are consultants. When a new team arrives at the IBN, all the work done by the previous team is often forgotten,” he added.

Once Nepal receives its sovereign credit rating, even if it’s not initially favourable, it provides a foundation for improvement. “A rating, regardless of its level, serves as a clear benchmark reflecting the country's current economic health and brings transparency to potential investors. This allows Nepal to communicate to investors that it recognises the existing challenges and is actively working to improve its economic conditions,” said Pant.

According to Pant, this transparency builds a foundation of trust, demonstrating Nepal’s commitment to progress.

Pokharel echoed Pant and said that a sovereign rating places pressure on the government to address the issues identified by the rating agencies. “It acts as a catalyst for reform, with each year's rating serving as a report card highlighting areas that need attention. Knowing that international investors, financial institutions, and domestic stakeholders are closely monitoring the situation, the government would feel compelled to implement necessary policy changes, improve governance, strengthen fiscal discipline, and create a more conducive environment for business and investment,” he added.

Due to the absence of a sovereign credit rating, Nepal has been unable to secure commercial loans for large infrastructure projects from international development partners. Government officials believe that once a rating is established, the country’s credibility will improve, providing global investors with clear, comprehensive insights into Nepal's economic, business and political systems, as well as its investment climate. A sovereign rating would also offer a transparent assessment of Nepal's economic health, governance, and overall risk level, helping to boost investor confidence and highlight areas for improvement in the investment environment.

Nepal Rastra Bank permits Nepali firms, industries and organisations to attract foreign investment under the Foreign Investment and Technology Transfer Act (FITTA) 2019. Banks and financial institutions are also authorised to borrow from international sources within certain thresholds. Additionally, the private sector can collaborate with foreign entities to secure funding, particularly for infrastructure and construction projects. If short-term funding is needed during project implementation, companies are allowed to raise capital through their foreign parent companies.

Despite these provisions, the absence of a sovereign credit rating has posed significant challenges for the private sector. Business leaders say that without a credit rating they face stricter borrowing conditions, and interest rates on these loans are considerably higher.

"Foreign investors look for a country's credit rating. Without one, they impose numerous conditions that are difficult to meet," said one industrialist. "With a rating, the loans we are currently securing at around 4% could be obtained at a lower rate."

(The news article was originally publihsed in the   October, 2024 issue    of the New Business Age Magazine.)