Japan Set to Raise Interest Rates on Loans to Nepal

As Nepal moves toward graduating from the least developed country (LDC) category, donors are gradually increasing interest rates on loans extended to the country.

The World Bank has already doubled the interest rate on its loans to Nepal from 0.75 percent to 1.5 percent effective from July. The Asian Development Bank (ADB) is currently lending at 1.5 percent interest.

Now, Japan has also indicated plans to raise interest rates on loans provided through the Japan International Cooperation Agency (JICA), according to officials at the Ministry of Finance.

“We have been informed that JICA will increase the interest rate on its loan portfolio. This means Nepal will have to pay higher interest on new loans from JICA,” a senior official at the ministry told New Business Age on condition of anonymity.

At present, Nepal has been receiving loans from JICA at a negligible interest rate. In 2022, Japan approved a 10 billion yen policy loan for Nepal at an interest rate of just 0.01 percent. Similarly, in 2015, it sanctioned a 16 billion yen loan for the Nagdhunga tunnel project at 1 percent interest, while a 2013 loan worth 15.13 billion yen for the Tanahu Hydropower Project carried an interest rate of only 0.01 percent. The repayment period for these loans is 40 years.

However, sources say JICA has now proposed raising the interest rate to 2 percent starting 2026. The revised rate will apply only to new loan agreements and not to loans that have already been committed. Currently, Nepal pays less than 2 percent interest on average for loans from foreign donors.

The move comes as Nepal’s per capita income has surpassed the threshold for low-income countries, prompting lenders to revise their concessional lending terms. Japan reviews its interest rates for foreign aid every April and October. In its April review, it set the minimum rate for “least developed and low-income countries” at 0.65 percent for loans with a 30-year repayment term. Countries with a per capita income below USD 1,145 fall into this category.

For the next tier, Japan provides loans at 1.2 percent for 30 years, while another subcategory of LDCs can borrow at 1.9 percent. For lower middle-income countries (per capita income of USD 1,146–4,515), the standard rate is 2.3 percent for 30-year repayment terms, with the option of lower rates for shorter repayment periods.

A JICA official in Nepal confirmed that the rates will be determined in line with the Japanese government’s policy. “The interest rates are reviewed twice a year, in April and October, and are published on the government’s website,” the official said.

Why did the World Bank increase its rates?

According to the Ministry of Finance, the World Bank, Nepal’s largest donor, raised its interest rate because Nepal’s per capita income has exceeded USD 1,335 for three consecutive years. “With the increase in Nepal’s economic status, we no longer qualify for loans at the previous concessional rate,” a senior government official explained.

Previously, Nepal received World Bank loans at 0.75 percent interest for 40 years when its per capita income was below USD 1,300. Now, the country will get loans at 1.5 percent for a 30-year repayment period. The World Bank reclassified Nepal from a low-income to a lower middle-income country in July 2020.

Finance ministry officials clarified that the rate hike is linked to the income threshold rather than Nepal’s planned graduation from the LDC category in November 2026. However, experts warn that Nepal is ill-prepared for the challenges that graduation will bring, including reduced access to grants and concessional financing.

“Nepal has yet to develop alternative funding mechanisms to offset the loss of LDC benefits,” said former Nepal Rastra Bank executive director Nar Bahadur Thapa. “Once the country graduates, we will face the risk of having to borrow at higher commercial rates.”

Bilateral donors cutting aid

Officials also expressed concern over the decline in grant assistance from bilateral donors in recent years. Following the Trump administration’s decision, the U.S. Agency for International Development (USAID), which was Nepal’s largest grant provider, has scaled back its programs.

The UK’s Foreign, Commonwealth and Development Office (FCDO) has been gradually reducing its aid and in February decided to cut its foreign assistance target from 0.5 percent of national income to 0.3 percent starting 2027.

Similarly, France has announced a 35 percent reduction in foreign aid, Belgium plans a 25 percent cut, and Switzerland has stated it will halt development aid to Albania, Bangladesh, and Zambia from 2028. The Netherlands has also decided to reduce its aid budget from 0.62 percent of national income to 0.44 percent starting 2027.