Kathmandu – Nepal has once again proposed to take concessional loans from the Asian Infrastructure Investment Bank (AIIB). The interest rates of AIIB loans, established under the leadership of China, are higher than those from other multilateral donor agencies. Nepal aims to reduce these high-interest rates once again.

At the annual meeting of the bank taking place on September 25 and 26 in Uzbekistan, Nepal will propose concessional loans. Since its operation began in 2016, Nepal has continuously pushed for concessional loans from the AIIB. Chinese President Xi Jinping had proposed the establishment of this bank in 2014.

Since its establishment, Nepal has persistently demanded concessional loans from the AIIB. However, the AIIB has yet to decide to provide low-cost loans to Nepal. A Nepali delegation has gone to Uzbekistan to participate in the two-day annual meeting. The delegation is led by Finance Minister Bishnu Prasad Paudel.

The main agenda of the Nepali team, led by Finance Minister Paudel, will be to secure concessional loans. Previously, at the annual meeting held in October last year in Cairo, Egypt, the Nepali side also raised this same agenda. During that meeting, then-Finance Minister Dr. Prakasharan Mahat demanded that the AIIB should provide concessional loans to Nepal. However, Nepal’s request was not addressed.

Subsequently, in April 2023, a high-level AIIB delegation visited Nepal. During that visit, the Nepali side continued to insist on the need for concessional loans. The delegation, led by members of the AIIB’s Board of Directors, met with the Finance Minister, the Governor, and others. In all these meetings, the Nepali side repeatedly demanded that the AIIB should provide concessional loans to Nepal.

The interest rates on AIIB loans are comparatively higher than those from other international donor agencies. Nepal has been borrowing from the World Bank, the International Monetary Fund, the European Development Bank, the European Economic Council, among others. According to the Public Debt Management Office, Nepal has also borrowed from the AIIB. However, due to the high interest rate, the amount borrowed is minimal.

The share of loans taken from the AIIB constitutes 0.13 percent of Nepal’s total external debt. Nepal has borrowed more than NPR 16.4 billion from the AIIB. This amount is less than the loans taken from all other multilateral donor agencies. According to data, Nepal has borrowed the most from the International Development Association (IDA) under the World Bank, which accounts for 48 percent of the total external debt.

Why is AIIB’s Loan Expensive?

The AIIB determines its loan interest rates based on the “Secured Overnight Financing Rate” (SOFR). This rate is higher compared to traditional multilateral lenders from which Nepal borrows. SOFR is based on the interest rate applicable when lending against U.S. government securities. Therefore, it can also be regarded as a benchmark interest rate.

Over the last month, the SOFR interest rate has been at 5 percent, according to the Federal Reserve Bank of New York. This is part of the U.S. Federal Reserve System, which has a specific role. The 5 percent interest rate on loans taken from the AIIB is costly for Nepal since the World Bank and the Asian Development Bank charge a minimum of 0.75 percent to a maximum of 1.5 percent in interest.

Accordingly, compared to the concessional loans provided by the World Bank and the Asian Development Bank, the interest on AIIB loans is at least 3.5 percent higher. This is why the Nepalese government has been continuously requesting the AIIB to provide loans at lower rates, which has been evolving into a unified agenda for Nepal.

Nepal’s Debt Exceeds NPR 2.5 Trillion

As of the first two months of the current fiscal year 2081/82, Nepal’s debt has reached NPR 2.528 trillion. The total public debt, including internal and external, has surpassed this amount, according to the Public Debt Management Office.

Of this, the internal debt is NPR 1.235 trillion, and the external debt is NPR 1.292 trillion. This constitutes 44.32 percent of Nepal’s total gross domestic product (GDP). Overall, Nepal’s debt has been on the rise each year. In just the first two months of the current year, it has increased by more than NPR 94 billion.

The majority of this debt is from the World Bank’s IDA. The loans from the Asian Development Bank and the International Monetary Fund rank third in terms of share. Additionally, loans from the European Investment Bank and the European Economic Council follow suit.

Why Hasn’t Nepal Been Able to Secure Concessional Loans?

Despite continuous efforts since its establishment to secure low-interest loans from the AIIB, Nepal has not succeeded. Nepal is a founding member of the AIIB, which was established with investments from countries including China and India. Currently, the number of member countries in the AIIB has grown to 109, and it has expanded its reach in Asia and Africa.

The AIIB has quickly emerged as a significant global lender in terms of loan disbursement. This means that the AIIB has provided loans to many countries at its higher interest rates. If it were to offer loans to other countries at high rates while providing low rates to Nepal, it could create a situation that necessitates lowering the interest rates for all loans. This is likely the reason why the AIIB is hesitant to reduce loan rates.

Currently, the AIIB has limited its investments in Nepal to improving the electricity distribution system. It has invested more than USD 11.23 million, or NPR 1.5 billion, in loans in Nepal. Nepal is paying 5 percent interest on these loans. This may also be a reason why the AIIB has been reluctant to invest at lower interest rates in Nepal.

Economist Dilliraj Khanal suggests that Nepal should focus on grants rather than concessional loans. In a conversation with Banking News, he stated, “The AIIB might have considered the possibility of reducing interest rates for other countries. That may be why Nepal’s request has not been addressed.” Additionally, since China is the primary investor, Nepal may not have received low-interest loans after initially taking loans at a higher rate from the AIIB.

Nepal has taken a loan of NPR 26 billion (at the current exchange rate) for the Pokhara International Airport. Of this, 25 percent is a grant, making it a “soft loan.” The remaining 75 percent has been taken at concessional interest rates. When taking this loan, Nepal should have been cautious. If Nepal had taken a grant instead of a loan, it could have still enjoyed similar benefits today. However, after taking the loan initially, the issue of grants for other projects does not arise.