Developing countries have rarely found it easier to borrow, or harder to afford it. That is the paradox of the World Bank’s International Debt Report 2026. The external debt of low- and middle-income countries rose 5.5 per cent in 2025 to a record US$9.4 trillion. Yet debt service rose for a fifth consecutive year, and the poorest, IDA-eligible countries paid rates last seen in the late 1980s.
Nepal sits on the favourable side of most of these trends. Read alongside the latest data from the Public Debt Management Office (PDMO), Nepal Rastra Bank (NRB) and the IMF, however, the report points to risks that headline ratios understate.
Global picture: easier access, costlier terms
Cost. Countries eligible for the International Development Association (IDA), the World Bank’s concessional window, including Nepal, paid an average of 8.2 percent on new private loans in 2025. Their premium over official lenders widened from 3.4 percentage points in 2016 to 5.5 points.
Crowding-out. Median debt service in IDA countries rose from about 15 percent of government revenue in 2000 to more than 40 percent, driven mainly by domestic debt.
Valuation. The dollar’s steepest fall in five decades, in early 2025, explains at least 28.2 percent of the rise in developing countries’ public external debt, inflating loans in SDRs, yen or euros even when borrowers repay on schedule.
Nepal’s external debt: sound structure, rapid growth
The World Bank puts Nepal’s external debt at US$11.87 billion at the end of 2025, up 12.3 percent in a year, more than double the developing-country rate. The stock has almost tripled since 2015.
The structure is a strength. More than 90 percent of public external debt is owed to multilateral lenders, led by IDA (US$5.07 billion) and the Asian Development Bank (US$3.46 billion). Bilateral lenders hold US$967 million, mainly Japan (US$399 million) and India (US$257 million). Exposure to private creditors is negligible. New official loans in 2025 averaged 0.7 percent interest, a 33-year maturity and a six-year grace period.
One caveat: the World Bank reports all external debt in dollars by calendar year; the PDMO reports public debt in rupees by fiscal year. On the PDMO measure, external public debt was Rs 1,598.80 billion in mid-October 2026, or 24.22 percent of GDP. Servicing it in the first quarter of FY2026/27 cost Rs 16.13 billion, of which only Rs 3.49 billion was interest.
The pressure point is domestic
Total public debt reached Rs 3,009.11 billion, or 45.59 percent of GDP, by mid-October, more than four times its FY2016/17 level. The IMF, using a different GDP base, puts it at 49.6 percent.
About four-fifths of the Rs 386.22 billion spent on debt service in FY2025/26 went to domestic debt. The FY2026/27 budget allocates Rs 417.88 billion to debt service, close to the Rs 431.1 billion for capital expenditure. Most is principal that will be refinanced: Rs 245.89 billion of this year’s planned Rs 410 billion domestic borrowing repays maturing debt. Interest is rising; former National Planning Commission vice-chair Prakash Kumar Shrestha estimates it absorbs about Rs 100 billion of revenue a year. The bigger exposure is rollover risk: treasury bills and development bonds, the IMF notes, mature far faster than external loans.
Views differ. PDMO chief Gopi Krishna Koirala calls the position satisfactory apart from currency effects; economist Dilli Raj Khanal warns rising repayments will force deeper cuts to capital spending.
Currency matters too: Nepal services external debt in foreign currency but budgets in rupees, and PDMO data attribute about Rs 167.75 billion of the debt to exchange-rate movements. Execution is weak: NRB reports only about a third of the capital budget was spent in the first 11 months of FY2025/26, so borrowing increasingly finances recurrent spending and maturing debt rather than new capacity.
Remittances: the buffer the ratios miss
Nepal’s external debt equals 224 per cent of exports of goods, services and primary income. Joint World Bank–IMF debt sustainability analyses note that export-based ratios breach their thresholds under an export shock but keep Nepal at low risk because remittances are exceptionally high.
Remittances reached Rs 2.36 trillion (US$16.19 billion) in FY2025/26, up 37.1 per cent and more than that year’s federal budget. Part of the growth reflects a weaker rupee: in dollar terms, inflows rose 31.9 per cent in the first nine months. The IMF puts reserves at US$21.8 billion, about 12 months of imports.
Merchandise exports were Rs 315.29 billion against imports of Rs 2,096.37 billion, and refined soybean oil, processed from imported crude, made up about two-fifths of exports. Excluding China, the report finds, FDI in developing countries grew only 5.3 per cent between 2011 and 2025, while remittances more than doubled. Remittances sustain consumption; FDI builds the export capacity that services debt. The IMF lists Middle East war spillovers among near-term risks, a concern for inflows reliant on Gulf jobs.
Debt, food and shocks
The report also links debt to nutrition. In calm years, debt had little bearing on the share of people unable to afford a healthy diet. During the shocks of 2019–21 and 2021–23, a doubling of the debt-to-exports ratio was associated with a 1.6 to 1.8 percentage point worse change in that share. Higher debt also coincided with greater reliance on food imports and, for staples, fruits, vegetables and animal-source foods, fewer suppliers. The report treats these as associations, not causal effects.
For Nepal, the indicator to watch is debt relative to exports, not GDP. Nepal imports all its petroleum, and India supplied Rs 1,210.6 billion of its Rs 2,096 billion import bill in FY2025/26. At stake is real progress: in lower-middle-income economies, healthy-diet unaffordability fell from 58.5 to 45.2 percent between 2017 and 2025.
Policy priorities for Kathmandu
The government’s Rs 2.124 trillion FY2026/27 budget bets on capital spending and tax reform, and the IMF projects growth recovering from 3.0 to 5.3 percent. Sustaining that without a heavier debt burden requires five choices.
- Treat concessional finance as a scarce asset. Any commercial loan or first international bond should be weighed against the 0.7 percent Nepal now pays.
- Fix execution before borrowing more. Strengthen public investment management and enforce the National Project Bank guidelines, as the IMF advises.
- Manage domestic debt actively. Longer maturities, a deeper bond market and a published borrowing plan would cut rollover risk.
- Raise revenue, not just spending. Implement the Domestic Revenue Mobilization Strategy and rationalise tax expenditures.
- Build buffers and disclose fully. The report cites evidence that disaster losses are larger where public debt exceeds 50 percent of GDP, a level the IMF estimate for Nepal now approaches. It also urges full disclosure of state-owned enterprise debt and guarantees.
The UN has extended Nepal’s least developed country graduation period to November 2029. That buys time on trade support, not on fiscal arithmetic. Nepal is not in a debt crisis, but debt that has quadrupled in nine years, increasingly serviced through domestic borrowing, leaves less room than headline ratios suggest. The goal is not more debt but better financing: affordable, transparent and invested in growth.
