In recent years, Nepal has been making gradual efforts to position itself as a viable destination for foreign capital, recognizing that attracting investment is essential for its long-term economic growth and development, even though the process has been slow.
The government has implemented a range of reforms to improve the business environment, including liberalizing foreign investment policies and streamlining bureaucratic processes, among others. Key sectors like tourism, hydropower, infrastructure and agriculture have been identified as high-priority areas for foreign investment.
Initiatives such as investment and infrastructure summits, as well as the introduction of an automated approval system for foreign investments in specific sectors highlight Nepal’s commitment to attracting foreign capital.
Notably, in 2021, the government amended its Foreign Investment and Transfer of Technology Act (FITTA) to open primary sectors in agriculture to foreign investment, which was previously on the negative list. Despite some backlash, the government exempted large-scale industries that export at least 75% of their production from the negative list, covering sectors such as poultry farming, fisheries, beekeeping, fruits, vegetables, oilseeds, pulse seeds, dairy and other primary agriculture industries.
Similarly, the government reduced the minimum threshold for FDI to Rs 20 million from the previous 50 million rupees threshold in the fiscal year 2023/24, while including a provision to lift investment limits for the information technology (IT) sector. It also announced plans to review and potentially revise the sector-specific minimum investment requirements.
Meanwhile, the country’s credit rating had grown increasingly significant in reflecting its stability and prospects to global investors.
On Thursday, Nepal achieved a key milestone in its effort to attract foreign capital securing a BB- rating with a stable outlook for Long Term Foreign Currency Issuer Default Rating (LTFC IDR), based on the country’s economic structures, macroeconomic performance, public finance management and financial stability.
‘BB-’ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists that supports the servicing of financial commitments.
Although not an outstanding rating, this is the country’s first-ever credit rating, which signals a positive shift in mindset and provides clearer market insight to global investors. This newfound lucency is expected to boost private sector confidence and attract foreign capital.
| In the first quarter of the current fiscal year, Nepal received foreign direct investment (FDI) commitments totaling Rs 16.44 billion, as reported by the Department of Industry. Of this, Rs 15.42 billion was committed to 131 industries through the approval route, while Rs 1.01 billion was pledged to 73 industries through the automatic system. Tourism industries represented 64% of these commitments by value, followed by services at 24%, manufacturing at 7%, agriculture at 4%, and information technology at 1%. In the previous fiscal year (2023/24), Nepal attracted FDI commitments worth Rs 61.9 billion, although only Rs 8.5 billion was realized. |
Earlier this year the then Finance Minister Barshaman Pun announced that the country will conduct its rating under the ‘business environment reform’ strategy while announcing the budget for the fiscal year 2024/25. Reportedly, international investors who participated in the previous investment summits had recommended conducting the rating.
Fitch Rating, one of the ‘Big Three’ credit rating agencies [other two are Moody’s and Standard & Poor (S&P)], was assigned the task for Nepal’s rating. It provides credit ratings to issuers using the International Credit Rating Scale. This scale ranges from a maximum of ‘AAA’ indicating a high credit quality to a minimum of ‘D’ rating, signifying the state of financial default [see Annex 1 at the bottom of this article].
The score that the country received underscores that ‘it imposes no significant restrictions preventing the private sector from converting local currency into foreign currency or transferring funds to non-resident creditors for debt payments.
| Long Term Foreign Currency Issuer Default Rating The LTFC IDR here signifies the likelihood of a sovereign defaulting on its debt obligation in foreign currency to its private-sector creditors and public debt securities. |
| BB-credit rating: Speculative grade The BB rating signals a substantial default risk, especially during the period of economic downturn. Yet, there is enough financial flexibility to meet the obligation. However, the investor must tread carefully, knowing the potential for both risk and return. |
The rating is derived using two tools — Sovereign Rating Model (SRM) and Qualitative Overlays (QO). The SRM model analyzed 18 economic factors to give a baseline rating, which was a B+ rating, indicating higher risk but also the ability to meet the obligation. When models don’t tell the whole story, some adjustments are required. The QO adjusts the SRM score to account for any variables that the model couldn’t quantify.
Here is a rundown of some of the key metrics that contributed to the rating:
The ratings noted that Nepal has a low, stable and affordable debt position with highly concessional government and external debt, robust external liquidity, and strong growth prospects driven by its hydropower sector. However, these strengths are tempered by an underdeveloped economy that remains vulnerable to external shocks and natural disasters.
Nepal’s central government debt is estimated at 44% of GDP in FY24, below the ‘BB’ median. Debt is expected to remain stable, supported by growth and IMF-backed fiscal consolidation. Contingent liabilities are limited, and provinces have no debt. Most state-owned enterprise debt is on-lent from the government, with guarantees representing 1% of GDP.
Nepal’s debt affordability remains strong, with interest payments at 8% of revenue in FY24, slightly below the ‘BB’ median. While the debt-to-revenue ratio is high at 230%, over 40% of the debt is external and concessional, with low interest rates and long maturities.
The country presently benefits from a temporary external surplus with strong reserves expected to persist. The current account deficit is expected to widen to 4% of GDP due to stronger domestic demand and reduce the reserve coverage to about nine months, still healthy and above Fitch’s ‘BB’ median. There is a current account surplus of nearly 4% of GDP in FY24, a shift from a 13% deficit in FY22, driven by reduced imports, tourism recovery, and strong remittances. Foreign exchange reserves rose to over USD 13 billion, covering almost 12 months of external payments.
The fiscal deficit due to revenue shock nearly doubled in FY 23 due to a sharp decline in imports and related taxes. Policies to reduce the current account deficit, including spending cuts, higher interest rates, and import controls, were implemented while tourism revenue dropped and the economy overheated from COVID-19 stimulus measures, leading to an economic slowdown.
Nepal is a net external creditor, with a 10% GDP position in FY24, compared to the ‘BB’ median debtor position of 15%. Limited foreign direct investment and restrictive regulations have hindered global financial integration, but the government is working to address these issues.
Nepal’s banking sector is large and has limited system links with unregulated non-banking. Private sector credit at 86% of GDP, supported by a remittance-funded deposit base of 106% of GDP. Financial soundness is weakening but remains adequate. The IMF is focusing on improving regulation. Non-bank financial institutions, holding 10% of GDP in credit, are underregulated with limited system links.
The country is marked by frequent changes in political leadership with eight government changes since 2014, with ongoing power struggles and shifting alliances hindering long-term policymaking. Despite political instability, there is broad consensus on economic and fiscal management while the central bank’s operations have remained unaffected.
Additionally, Nepal’s participation in the Debt Service Suspension Initiative (DSSI), a global program set up by G20 allowed developing nations to delay debt payment during the pandemic period. However, this was reflected negatively in SRM, indicating delays like potential default. Fitch QO considered it and saw ratings need to be adjusted with +1.
The rating is significant for Nepal as it highlights its economic structure, financial capacity and enhances its ability to access concessional loans from the international market. So far, the government and private sector both have expressed optimism surrounding the rating it received.
As Nepal aims to graduate from Least Developing Country (LDC) status by 2026, this effort also demonstrates its commitment to enhancing economic transparency and credibility on the global stage, offering a clearer outlook for global investors who were previously cautious about committing capital to the country’s prominent economic sectors.
Annex 1:
| Rating Scale | Credit Quality | Significance |
| AAA | Highest Credit Quality | Exceptionally strong capacity to meet financial obligation with minimal default risk even in foreseeable challenges. |
| AA | Very High Credit Quality | Strong capacity to meet financial obligation with low default risk. |
| A | High Credit Quality | Strong capacity to meet the obligation with low default risk, but likely to be vulnerable to adverse economic situations compared to higher rating. |
| BBB | Good Credit Quality | Adequate capacity for meeting obligations with low default risk, but adverse economic situations can likely impair this capacity. |
| BB | Speculative | Elevated vulnerability to default risk due to adverse economic climate but can meet the obligation through financial flexibility. |
| B | Highly Speculative | Default risk is present with a margin of safety. |
| CCC | Substantial Credit Risk | Default risk is possible with low margin of safety. |
| CC | Very High Level of Credit Risk | Default risk is likely possible. |
| C | Near Default | Default or has entered the stage with impaired payment capacity |
| RD | Restrictive Default | Issuer is in payment default, while it is still operating and avoiding bankruptcy. |
| D | Default | Issuer has entered bankruptcy and liquidated. |
