Nepal received its first-ever sovereign credit rating from Fitch just a few months ago, marking a significant milestone in its economic development. The rafting reflects the country’s economic structure, fiscal management and macroeconomic stability within the broader context of developing economies. While the speculative-grade BB- rating indicates a higher risk profile for investors compared to countries like India, which holds a BBB- rating, Nepal performed relatively well compared to other South Asian nations. Fitch's BB- rating indicates speculative-grade creditworthiness, reflecting elevated vulnerability to default risks, especially during adverse economic conditions. Often referred to as a "junk" bond rating, it highlights a higher likelihood of default but compensates investors with prospect of higher yields.

Nepal's strong foreign exchange reserves and improving economic stability are crucial as the country seeks to access international loans at lower interest rates and attract foreign investment. These efforts are a part of Nepal’s broader goal to graduate from its Least Developed Country (LDC) status by 2026.

Factors influencing Nepal’s rating include low debt levels, weak structural indicators, stable debt metrics, strong debt affordability, fiscal consolidation, external creditor position, political instability, banking sector resilience, growth recovery, and a temporary external surplus. Regardless, achieving a sovereign credit rating is a notable accomplishment for Nepal as it provides two key advantages: access to international borrowing facilities and increased exposure to foreign investors.

International Borrowing Facility

Although the central bank introduced External Commercial Borrowing (ECB) provisions in previous years, Nepal's BB- rating offers a crucial advantage by enabling borrowing at lower interest rates. Commercial banks, in particular, stand to benefit as international borrowing at rates approximately 1.5% lower than domestic options could significantly reduce financing costs. This reduction is especially valuable for funding developmental projects and improving public financial management.

While a BB- rating is speculative and reflects some default risk, it also signals Nepal’s financial flexibility to meet its obligations. This enhanced credibility positions Nepal as a more viable destination for international lending, encouraging global investors to engage with the country

Currently, Nepali banks rely on inter-bank lending and central bank facilities such as the Statutory Liquidity Facility (SLF), Overnight Liquidity Facility (OLF), Intraday Liquidity Facility (ILF) as well as Open Market Operations instruments like Repo and Outright Purchase to manage liquidity. With credit rating in place, banks can now explore international borrowing opportunities at more competitive rates, significantly broadening their funding options.

Foreign Investments

Nepal's BB- rating unlocks new opportunities for attracting foreign investment. This includes issuing international bonds denominated in foreign currency or boosting Foreign Direct Investment (FDI). By entering the global capital market, Nepal can introduce instruments like Everest Bonds or Lumbini Bonds to attract funding from international investors and financial institutions. Such measures could secure substantial capital for infrastructure and developmental initiatives.

Compared to regional neighbours such as Bangladesh (B+) or Pakistan (CCC+), Nepal’s BB- rating positions it as a more attractive investment destination. Key sectors like hydropower and tourism, which have historically drawn foreign interest, are particularly positioned to capitalise on this enhanced profile. Additionally, the improved rating creates opportunities for new business ventures to enter Nepal’s corporate landscape, enhancing the overall investment environment.

Although Nepal’s import-dependent economy and landlocked geography have posed challenges, they also present opportunities for investors seeking untapped potential. The credit rating increases Nepal’s global visibility and establishes it as a moderate-risk destination for investment. Simplifying processes, such as through the automatic approval of investments up to Rs 500 million under the Foreign Investment and Technology Transfer Act 2019 could further streamline decision-making and accelerate foreign inflows.

If Nepal's credit rating had been lower, the focus would have been on improving the score. However, with an already favorable BB- rating, Nepal should concentrate on maximising its benefits and remaining committed to retaining it. Rather than striving for a higher rating, the priority should be leveraging this milestone to unlock opportunities and drive economic growth.

The BB- rating enhances Nepal's appeal to foreign investors by offering a clearer economic profile and supporting streamlined investment processes. This achievement also aligns with Nepal’s aspirations to graduate from Least Developed Country (LDC) status, as it promotes economic transparency and credibility on the global stage. By providing international investors with a more reliable economic outlook, Nepal positions itself as a viable and trustworthy destination for global capital.

To fully capitalise on this opportunity, the government and the central bank must adopt a proactive approach, not only to maximise the benefits of the current credit rating but also to ensure its retention. Policies must also remain flexible to adapt to changing economic conditions, ensuring continued investor confidence.

Although the BB- rating may not be extraordinary on a global scale, it is a significant milestone for Nepal. Notably, apart from India, Nepal’s credit rating suprasses that of other South Asian countries, a source of pride for Nepali citizens. As the country’s first-ever sovereign credit rating, it symbolises a promising start to its economic journey. However, retaining this credit rating is a considerable challenge.

Nepal must seize this achievement by effectively communicating the significance of the rating to prospective investors. Strategic and timely messaging can attract foreign investments and maximise the benefits of the rating. At the same time, Nepal must address challenges highlighted by Fitch, such as increasing public finance and reducing dependence on external financial assistance, to ensure the sustainability of the rating. Rather than indulging in celebration, this is a moment for Nepal to focus on leveraging the opportunities created by the rating and laying the groundwork for long-term economic growth.

(Regmi is Deputy Manager at Rastriya Banijya Bank Ltd., currently working in the Treasury Department.)

(This opinion article was originally published in  January 2025 issue  of New Business Age Magazine.)