Nepal Stays BB-

As Nepal heads  into the final weeks of 2025 amid a politically delicate moment, t has at least one piece of to cheer about: the country’s sovereign rating has not slipped.

The flip side, however, is harder to celebrate. Nepal’s fractured political landscape continues to weigh on its credit standing, according to global rating agency Fitch, which on November 18 reaffirmed the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-’ with a Stable Outlook—unchanged from the first-ever sovereign rating in 2024. The decision  highlights Nepal’s low public debt, strong foreign-exchange reserves, and hydropower-driven growth prospects, even as persistent political volatility and structural weaknesses continue to drag on its overall credit profile.

The reaffirmation offers some relief to the interim government, whose primary tasks are to hold the House  of Representatives elections on March 5 and steer an economy still absorbing the aftershocks of the Gen Z protests earlier this year. The unrest toppled the government in early September and prompted the formation of an interim administration. Despite the political upheaval, Fitch says Nepal’s macroeconomic fundamentals remain strong enough to justify maintaining the current rating.

Govt Says Rating Validates Nepal’s Economic Management  Government officials have welcomed the latest rating, expressing satisfaction that Nepal has maintained stability despite months of sociopolitical  upheaval,  monsoon-related natural disasters, and a slowing global economy. Finance Ministry spokesperson Tanka Prasad Pandey  said the affirmation  reconfirms Nepal’s internationally recognized capacity to meet long-term obligations and signals that the country’s macroeconomic footing remains “steady and resilient.”

“Even amid election-driven spending pressures and rising uncertainty, the government’s fiscal discipline, improvements in revenue administration, prudent spending priorities, commitment to holding timely elections, and continued progress on strategic national  projects have strengthened international confidence in Nepal,” Pandey said.

He added that maintaining the rating supports Nepal’s efforts to attract additional foreign investment, expand development partnerships, and preserve the stable credit profile the country will need if it decides to issue sovereign bonds  in international markets. Stable ratings, he said, are especially crucial for long-term investments in energy, infrastructure, tourism, agriculture, and the digital economy.

Why Fitch Reaffirmed the Rating According to Fitch, Nepal’s rating continues to be anchored by its low and highly concessional debt structure. Federal government debt is projected to rise moderately to 46.1% of GDP in 2025/26—still well below the projected median of 54.4% for countries rated ‘BB’. Significantly, government-guaranteed debt remains negligible, and local and provincial governments currently hold no debt at all, providing additional fiscal space. External debt, carrying an average maturity of 13 years and interest rates of roughly 1%, substantially reduces rollover and interest-rate vulnerabilities.

A standout factor reinforcing Nepal’s rating is its exceptionally strong external liquidity position. Foreign-exchange reserves covered 13.5 months of imports in 2024/25, far exceeding the
‘BB’ peer median of 4.8 months.

Nepal also maintained a net external creditor position of 13.5% of GDP, a sharp contrast to the typical net debtor position among countries with similar ratings. These sizable reserve buffers  are expected to continue supporting the Nepal Rastra Bank’s longstanding currency peg with the Indian rupee—one of the central pillars of Nepal’s monetary and external stability framework.

Political Instability Remains the Largest Risk 

Fitch emphasizes that Nepal’s fragmented political setting, governance shortcomings, and uncertainties ahead  of the 2026 elections remain the biggest constraints on its sovereign rating. Delays in political transition or post-election instability could hinder  policy continuity, obstruct fiscal consolidation, and weaken investor sentiment, it said.

Nepal’s ESG indicators—especially those related to political stability, rule of law, institutional quality, and control of corruption—remain at the lowest significance score of ‘5’, exerting a material negative influence  on the rating.

Fiscal Deficit Expanding, Growth Slowing

Fitch expects Nepal’s fiscal deficit to widen to 3.5% of GDP in the current fiscal year, driven by subdued revenue growth, election-related spending, reconstruction commitments, and damages from the September unrest—estimated at Rs 80 billion. The deficit is expected to narrow  slightly
in the coming fiscal year as imports normalize and economic activity strengthens.

Nepal’s GDP growth is projected to slow to 2.5% in the current fiscal year from 4.6% in 2024/25, weighed down by political unrest, weaker tourism inflows, subdued business sentiment, and climate-related disruptions to agriculture. Growth, however, is expected to recover gradually, supported by major hydropower generation and transmission projects.

The country’s financial sector continues to grapple with residual issues from the credit surge of 2021. Non-performing loans (NPLs) rose to 5.2% in 2024/25, up from 3.7% the previous year, and could be revised again once the central bank completes an IMF-supported loan portfolio review of the 10 largest banks by December.

The insurance sector has also come under  pressure, with domestic reinsurers facing substantial claims stemming from the September unrest and associated property damage.

What Could Change Nepal’s Rating? According to Fitch, Nepal’s rating trajectory will largely depend on how the country manages political, fiscal, and governance-related challenges in the coming years. The agency has cautioned that a downgrade is possible if political instability worsens or if governance quality declines in ways that undermine policy effectiveness. Any deterioration
in fiscal discipline, a reduction in support from multilateral or bilateral partners, or setbacks in the ongoing IMF program  would also heighten downward pressure on the rating, according  to Fitch.

On the other hand, Nepal could move toward an upgrade if it delivers  sustained and robust economic growth that raises overall income levels. Tangible improvements in governance and regulatory quality would further enhance Nepal’s case, as would continued fiscal consolidation that leads to a durable  reduction in public debt, the rating agency added in its outlook.

Stable Yet Vulnerable

While Nepal’s rating remains stable for now, economists warn that the country’s long-term ratings outlook depends not only on its macroeconomic buffers  but also on its ability to implement durable  reforms. They caution that the government’s celebratory tone should not overshadow the broader need for deliberate, structural efforts to strengthen policy credibility and economic governance.

Not all experts, however, share the government’s optimism. Nar Bahadur  Thapa, former executive director of the Nepal Rastra Bank, said Nepal celebrated last year’s “BB-” rating “too eagerly,” despite having shown no meaningful  improvement in the latest review. He argued  that the government should have adopted a structured, multi-year strategy to raise the rating.

“If rating-improvement initiatives had been embedded into the national budget, every institution would have been compelled to work toward that objective. Instead, we settled for the status quo—and that was the fundamental mistake,” he said.

Thapa warned that without a clear strategy in future budgets, there is a risk of Nepal facing a downgrade in the coming years. He urged the government to prepare a comprehensive action
plan and pursue systematic reforms to strengthen the country’s credit standing.

(This report was originally published in December 2025 issue of New Business Age magazine.)