Nepal Debt Sustainability & Risk Rating: The World Bank–IMF DSA Explained

No. According to the most recent Joint World Bank–IMF Debt Sustainability Analysis (DSA) for Nepal, both external debt and overall public debt are assessed at a low risk of debt distress. This assessment has been repeated across successive reviews of Nepal's Extended Credit Facility (ECF) programme, including the sixth review completed by the IMF Executive Board on 1 October 2025 (Ashwin 2082 BS). Being at low risk means the ratios that measure Nepal's ability to carry and service its debt sit comfortably below the framework's warning levels, both in the baseline outlook and under most stress scenarios.

The DSA is a standardised, forward-looking exercise the World Bank and the International Monetary Fund (IMF) conduct jointly for low-income countries. It projects a country's debt and debt-service burden roughly ten years ahead and compares those projections against indicative thresholds. A rating can be low, moderate, high, or 'in debt distress'. Nepal's rating is at the safest end of that scale, which is why alarmist comparisons to a country in default do not fit the published evidence.

Two caveats matter and are stated openly in the DSA itself. First, the low rating rests on staff judgement: the mechanical model flags one indicator (external debt-to-exports) because Nepal exports very little, and analysts override that signal because remittances, not exports, are what actually pay Nepal's foreign bills. Second, 'low risk' is conditional. It assumes continued concessional borrowing, steady remittances, and gradual fiscal consolidation. Weaken those, and the rating could migrate upward.

The joint DSA for low-income countries (the LIC-DSF) does not use a single universal red line. Instead, it first classifies a country's 'debt-carrying capacity' as weak, medium, or strong, using a Composite Indicator (CI) that blends the World Bank's Country Policy and Institutional Assessment (CPIA) score, real GDP growth, remittances, international reserves, and world growth. Stronger performers are judged able to safely carry more debt, so they are measured against higher thresholds. In its recent DSA, Nepal is classified as a strong performer, with a Composite Indicator score around 3.14.

For a strong-capacity country like Nepal, four external debt-burden indicators are tracked against these thresholds: present value (PV) of external debt to GDP at 55 percent; PV of external debt to exports at 240 percent; external debt service to exports at 21 percent; and external debt service to revenue at 23 percent. Separately, total public debt (external plus domestic) is compared against a PV-of-public-debt-to-GDP benchmark of 70 percent. A projected breach of any threshold contributes to a higher risk rating.

Nepal's numbers sit well inside these limits. The DSA underpinning the 2025 reviews reported the PV of external public and publicly guaranteed (PPG) debt at about 13.8 percent of GDP in FY2023/24 (2080/81 BS) — a fraction of the 55 percent threshold. External debt service and public-debt ratios also stay below their benchmarks in the baseline and across most shock scenarios, which is the arithmetic behind the 'low risk' verdict.

Nepal's total public debt reached roughly NRs 2.72 trillion by mid-October 2025 (mid-Kartik 2082 BS), split fairly evenly between domestic borrowing and external loans. Measured against the size of the economy, public debt has been running in the mid-40s percent of GDP — about 44 to 45 percent — after standing near 47 percent in FY2022/23 (2079/80 BS). The IMF projects the ratio to peak at about 49.5 percent of GDP in FY2025/26 (2082/83 BS) and to decline gradually thereafter as the economy grows and fiscal deficits narrow.

That level is moderate by international standards and low relative to many peers. For context, a public-debt-to-GDP ratio below 50 percent is comfortably under the DSA's 70 percent benchmark for a strong-capacity country, and far below the ratios seen in economies that have faced sovereign-debt trouble. The debt built up notably after 2015: post-earthquake reconstruction, the COVID-19 response, and rising capital and recurrent spending all pushed borrowing higher over the past decade.

The composition matters as much as the level. Domestic debt is issued in Nepali rupees, mostly to banks and the pension/provident-fund system, and carries no exchange-rate risk. External debt is overwhelmingly concessional and long-dated. This structure is a core reason Nepal's headline debt number, while rising, does not translate into acute distress risk.

The 'Nepal vs Sri Lanka debt' comparison surges online during regional stress cycles, but the two cases are structurally different. Sri Lanka's 2022 default was driven by a large stock of expensive commercial debt — chiefly International Sovereign Bonds — that had to be rolled over at market interest rates and repaid in hard currency, combined with thin foreign-exchange reserves. When global rates rose and tourism collapsed, Colombo could not refinance and defaulted.

Nepal's external debt profile is the opposite. The great majority of it — on the order of 85 to 90 percent — is owed to multilateral lenders, principally the World Bank's International Development Association (IDA) and the Asian Development Bank (ADB). These are concessional loans: very low interest rates (often around 1 percent) and long maturities stretching to roughly three or more decades, with grace periods. Nepal has issued no external commercial sovereign bonds, so it is not exposed to fickle bond-market refinancing at market rates.

Foreign-exchange coverage is the other big difference. Nepal's inward remittances — money sent home by Nepalis working abroad — run at more than three times the value of the country's merchandise exports and are the dominant source of foreign currency. Those inflows, together with a rebound in tourism, kept the current account in surplus in FY2023/24 and lifted gross international reserves to around USD 15.9 billion by December 2024, covering roughly nine to ten months of imports. Ample reserves and concessional, non-market debt are precisely what Sri Lanka lacked.

Much of the recent DSA work sits inside Nepal's IMF-supported reform programme. On 12 January 2022 (Poush 2078 BS), the IMF Executive Board approved a 38-month arrangement under the Extended Credit Facility (ECF) for Nepal worth SDR 282.42 million — about US$395.9 million at approval, equal to 180 percent of Nepal's IMF quota. The ECF is the IMF's main concessional lending tool for low-income countries, carrying a zero-interest rate, and the programme was designed to cushion the pandemic's impact, preserve financial stability, and support governance and revenue reforms.

Each ECF review republishes an updated DSA, which is why the 'low risk' rating has a clear paper trail. The Executive Board completed the fourth review in July 2024, the fifth on 12 March 2025, and the sixth on 1 October 2025; the programme was later extended and the seventh and final review completed in 2026, disbursing the full SDR 282.42 million by the end of the arrangement. Growth was estimated near 4.3 percent for FY2024/25, with inflation easing toward the Nepal Rastra Bank's roughly 5 percent objective.

The programme also intersects with Nepal's own legal guardrails. The Public Debt Management Act sets a statutory ceiling on external borrowing at 33 percent of the previous year's GDP, giving a domestic backstop alongside the international DSA. IMF staff have repeatedly tied the durability of the low-risk rating to Nepal continuing to borrow externally on concessional terms and to gradual, growth-friendly fiscal consolidation.

A low rating is not a clean bill of health, and the DSA is explicit about where the risks lie. The single indicator the mechanical model flags is the PV of external debt-to-exports, because Nepal's export base is small and volatile. Analysts override this to a low rating only because remittances dwarf exports as a source of foreign exchange — but that override is itself a vulnerability: it makes the whole assessment unusually dependent on migrant labour markets abroad. A sustained drop in remittances would erode the very cushion the rating relies on.

The DSA highlights that Nepal's public debt is most sensitive to growth shocks. Because so much borrowing funds development spending, a period of weak growth would raise debt ratios faster than the baseline assumes. Climate and disaster shocks — floods, landslides and earthquakes, such as the September 2024 floods — are called out as a specific channel that could force emergency spending and dent growth simultaneously.

Two structural concerns round out the list. First, a shift in the terms of Nepal's IDA financing (as Nepal's income rises, concessional terms gradually harden), which the DSA has begun to incorporate; staff note it does not currently change the low-risk assessment but bears watching. Second, financial-sector stress — rising non-performing loans, weak private-credit growth, and strain among savings and credit cooperatives — is flagged as a contingent liability that could interact with public finances. None of these tips Nepal into distress today, but together they define the conditions under which the rating could deteriorate.

The DSA's own logic points to what to watch. The rating could worsen if remittances fall sharply, if Nepal starts borrowing heavily on non-concessional or commercial terms, if growth stalls for a prolonged period, or if contingent liabilities from the financial or cooperative sectors crystallise onto the government's balance sheet. Conversely, diversifying and growing exports, sustaining fiscal consolidation, and keeping new borrowing concessional would reinforce the low-risk position.

For a Nepali reader trying to separate signal from noise, the durable takeaway is this: on the published evidence through 2025 and into 2026, Nepal is at low risk of debt distress, its debt is moderate and mostly cheap and long-dated, and it does not share the commercial-debt and reserve weaknesses that sank Sri Lanka. That is a materially different situation from a debt crisis. The honest qualifier is that Nepal's comfort depends on external conditions — remittances, concessional lending, and steady growth — that it only partly controls, which is exactly why the joint DSA is repeated at every programme review rather than settled once.