Nepal Keeps Fitch BB- Rating as Strong Reserves Cushion Flood Damage and Banking Risks

Strong reserves hold the rating steady after a difficult year

Nepal has retained its BB- sovereign credit rating for a third consecutive annual assessment, with Fitch Ratings affirming a Stable Outlook on November 12, 2026. Foreign exchange reserves projected to cover 16.4 months of external payments and access to relatively cheap development loans helped support the decision, even as flood damage weakened growth and banks faced rising problem loans.

Fitch expects economic growth to slow to 3.4% in the fiscal year ending in mid-July 2027, following floods that affected more than 10% of Nepal's installed electricity generation capacity. Reconstruction and repairs to hydropower plants and transmission lines are then expected to lift growth to 5.2% in the following fiscal year.

The agency's November rating action confirms that Nepal's long term ratings for debt in foreign and local currencies remain BB-, alongside an unchanged BB- country ceiling. Short term ratings remain B. Nepal participated in the assessment process, and the ratings carry European Union and United Kingdom endorsement.

Nepal's financial strengths sit beside substantial weaknesses. Fitch identifies low income per person, weak governance, limited institutional capacity and exposure to disasters as constraints. The government also faces the immediate cost of rebuilding while trying to improve the business environment.

For households and businesses, the central issue is how quickly that financial cushion can support recovery: restoring electricity, repairing transport links, keeping credit available and rebuilding public revenue without allowing debt to rise too quickly.

What BB- and a Stable Outlook mean

A sovereign credit rating assesses a government's ability and willingness to repay its debts. Nepal's foreign currency rating concerns obligations payable in currencies other than the Nepali rupee, including payments owed to private creditors and holders of government debt securities.

BB- is a speculative grade, below investment grade. It signals meaningful vulnerability to adverse economic or financial conditions, alongside an existing capacity to meet obligations. A Stable Outlook means Fitch expects the balance of risks to support the current rating over its outlook period.

The country ceiling addresses the risk that restrictions on access to foreign currency or transfers abroad could affect borrowers within Nepal. Keeping it at BB- leaves that assessment unchanged as well.

Fitch Ratings described the financial foundations supporting its decision:

The ratings reflect Nepal's low government and external debt, mostly on highly concessional terms, and strong external liquidity, with robust access to multilateral financing.

Concessional loans have more favourable terms than ordinary commercial borrowing, such as lower interest rates or longer repayment periods. Nepal's access to institutions including the World Bank and Asian Development Bank helps contain the cost of servicing debt when government finances come under pressure.

Flood damage slows growth before an expected rebound

Flooding on August 26 disrupted electricity generation, transmission networks, roads, tourism and industrial activity. Damage affecting more than a tenth of installed generation capacity struck a sector that Fitch also regards as central to Nepal's longer term growth.

Fitch's forecast puts growth at 3.4% in FY 2026/27, down from 3.9% in FY 2025/26. The expected recovery to 5.2% in FY 2027/28 depends on faster reconstruction and the restoration of power infrastructure. Those figures describe changes in real gross domestic product, meaning economic output after adjusting for price changes.

The main developments span several years:

• November 2024: Nepal received its first BB- sovereign rating.
• September 2025: protests led by young people disrupted the business environment.
• November 2025: Fitch maintained the BB- rating.
• March 2026: the Rastriya Swatantra Party secured a parliamentary majority.
• June 2026: Nepal completed its International Monetary Fund programme.
• August 2026: floods damaged power and transport infrastructure.
• November 12, 2026: Fitch again affirmed BB- with a Stable Outlook.

Beyond the immediate recovery, Fitch expects growth of about 5% over the medium term, supported by hydropower and transmission investment, better execution of public investment spending and expanding service exports. Delayed repairs would postpone both the rebuilding activity and the return of productive capacity.

Remittances provide an unusually large external cushion

Money sent home by Nepalis working abroad remains one of the strongest supports for the country's finances. Remittances amounted to 35.8% of GDP in FY 2025/26, supplying foreign currency that helps pay for imports and external obligations.

Fitch projects reserves equivalent to 16.4 months of current external payments in both FY 2026/27 and FY 2027/28. The projected median for countries in the BB rating category is 5.2 months. Nepal's coverage is therefore about 3.2 times that benchmark.

Chartered accountant Anallraj Bhattarai puts reserve coverage at 20 to 22 months of goods and services imports. Import coverage and coverage of current external payments use different payment baskets, so readers need the relevant measure when comparing the figures.

Nepal is also projected to hold a net external creditor position equal to 38.5% of GDP by FY 2027/28, compared with a net debtor position of 14.6% for BB peers. In simple terms, Nepal's external financial assets are expected to exceed its external liabilities, while the peer benchmark shows the reverse.

Fitch sees that position as support for the Nepali rupee's peg to the Indian rupee. A peg keeps the exchange rate fixed against another currency, making sufficient foreign currency resources especially useful when demand for imports or overseas payments rises.

Rebuilding will absorb more foreign currency

Nepal's current account surplus is expected to narrow from 14% of GDP in FY 2025/26 to an average of 5.6% over the next two fiscal years. The current account records trade in goods and services, income flows and transfers such as remittances.

Reconstruction requires imported materials and equipment. Hydropower development also brings demand for imports, while damaged generating plants can temporarily reduce electricity exports. Disruption to tourism reduces another source of foreign currency earnings.

The forecast therefore combines continued remittance strength with a growing bill for rebuilding and investment. Nepal is still expected to receive more through its current account than it pays out, but the surplus would be less than half its earlier share of GDP.

Fitch also identifies a prolonged conflict involving Iran as a risk to energy and fertiliser imports and tourist arrivals. For Nepal, disruption to those flows could raise the cost of recovery while weakening income from visitors.

Debt rises as reconstruction meets weaker revenue

Federal government debt is projected to increase from 45.2% of GDP in FY 2025/26 to 48.2% by FY 2027/28. That is a rise of 3 percentage points, although the projected level remains 4.5 percentage points below the BB peer median of 52.7%.

Fitch expects federal fiscal deficits to average 4.1% of GDP across FY 2026/27 and FY 2027/28. A fiscal deficit means the government spends more than it receives in revenue and must cover the gap through borrowing or other financing.

Flood disruption and tax relief weigh on revenue at the same time that relief and reconstruction increase spending. Public external debt stands at roughly 24% of GDP and is largely concessional, helping keep borrowing costs manageable.

Bhattarai estimates public debt at around 43% to 44% of GDP, compared with Fitch's federal government estimate of 45.2% for FY 2025/26. He also places potential reconstruction and related financial liabilities at around 700 billion Nepali rupees or more; the final reconstruction bill has not been established.

Nepal's completion of its IMF programme in June 2026 supports fiscal credibility in Fitch's assessment. The next test is whether the government can carry out necessary rebuilding while keeping deficits from becoming persistently larger.

Problem loans put banks under pressure

Non-performing loans reached 5.7% of gross loans by mid-September 2026, according to figures cited in Fitch's assessment. These are loans on which borrowers have fallen seriously behind or repayment has become doubtful.

Watchlist loans stood at 11.1% in the year through mid-April 2026. Watchlist status flags signs of repayment weakness that require closer attention. Because the figures refer to different categories and dates, each gives a separate view of pressure on borrowers.

An IMF assisted review of Nepal's 10 largest commercial banks called for loan reclassification and additional provisions against potential losses. Reclassification means moving a loan into the category that better reflects its repayment risk. Provisions are amounts banks set aside to absorb expected losses.

Weak economic activity and a prolonged property slump have contributed to deteriorating loan quality. Bhattarai estimates average bad loans at about 5% to 6% in the first quarter of the fiscal year and points to low interest rates and ample liquidity as support for business recovery.

For businesses seeking to rebuild, banks' willingness to lend matters alongside the availability of money in the financial system. Larger provisions can put pressure on bank profits and make lenders more cautious just as firms need financing for repairs and working capital.

Governance carries more weight than reserves alone

Nepal stands at the 31st percentile in the World Bank's Worldwide Governance Indicators, a position Fitch identifies as a constraint. A percentile describes a country's place relative to others, rather than a score out of 100 for government performance.

The rating methodology helps explain why strong reserves have not produced an upgrade. Fitch's Sovereign Rating Model uses 18 indicators before qualitative adjustments. Its structural characteristics pillar carries a 53.7% weight, compared with 19.1% for public finance, 17.3% for external finance and 9.8% for macroeconomic performance and policy.

Governance indicators alone account for 22.1% of the model's weight. Institutional quality, income levels and the size of the economy therefore have substantial influence alongside debt and foreign currency resources.

The assessment applies sovereign criteria updated on April 27, 2026, and country ceiling criteria dated July 2023. Fitch also uses a Climate Vulnerability Signal to examine exposure to physical climate damage and changes associated with the transition to a lower carbon economy. A signal of 50 or more for 2035 prompts further analysis that can feed into qualitative adjustments.

Bhattarai identifies weaknesses in environmental, social and governance performance, Nepal's presence on the Financial Action Task Force grey list and an international trafficking watch list as obstacles to improvement. He describes February 2027 as the deadline for addressing the grey list issue. The FATF process concerns weaknesses in measures against money laundering and terrorist financing.

A parliamentary majority creates a reform opportunity

The Rastriya Swatantra Party's majority following the March 2026 election gives the government an opportunity to make policy more predictable and advance reforms. Fitch nevertheless warns that failure to deliver credible changes, or excessive reliance on ordinances, could bring renewed political instability.

Ordinances allow measures to take legal effect outside the ordinary parliamentary lawmaking process. Fitch's concern places the method of introducing policy alongside the substance of reform, particularly where institutional capacity and the rule of law are already weak.

The government is preparing amendments to 59 laws intended to make business operations easier. Their practical effect will depend on passage and implementation, while officials must also manage immediate flood relief and reconstruction.

Fitch identifies two broad routes for the rating. Persistent high deficits, a sharp increase in debt or renewed instability that damages governance and growth could bring a downgrade. Improvements in governance and economic reforms that lift investment, growth and income per person, together with a credible downward path for debt, could support an upgrade.

Nepal's unchanged rating leaves the country with a substantial financial cushion and a demanding recovery agenda. Restoring electricity and transport, recognising bank losses accurately and carrying out durable legal reforms are concrete tasks that will shape how much of that cushion translates into stronger economic activity.

Key Points

• Fitch affirmed Nepal at BB- with a Stable Outlook on November 12, 2026, maintaining the grade first assigned in 2024.
• Growth is projected to slow to 3.4% in FY 2026/27 before recovering to 5.2% in FY 2027/28 as reconstruction advances.
• Foreign exchange reserves are forecast to cover 16.4 months of external payments, compared with 5.2 months for BB peers.
• Federal government debt is expected to reach 48.2% of GDP by FY 2027/28, still below the projected peer median.
• Bank problem loans, weak governance and exposure to disasters remain major risks.
• A future upgrade would depend on stronger institutions, investment and growth, alongside a credible reduction in the debt burden.