The International Finance Corporation has received permission from the government to issue Nepali currency bonds in international markets but will have to reinvest the capital collected back in Nepal for at least three years.

The private sector lending arm of the World Bank Group got approval from the Cabinet to issue Nepali currency bonds worth $20 million outside Nepal in November last year. This is the first time an international agency has been granted approval to issue Nepali currency bonds in international markets.

A bond is an instrument that represents a loan made by an investor to a borrower, promising to repay the borrowed money at a fixed rate of interest at a specified time.

Since approval, the Cabinet has amended the existing guidelines on Nepali currency bonds to be issued by international agencies and introduced a number of conditions.

“One of the conditions is that the IFC cannot return the invested money before three years,” said Yagya Dhungel, joint secretary at the Finance Ministry. “The second condition is that the IFC will be responsible for any foreign currency risk.”

The IFC will hedge the foreign exchange risks through the private sector window of the International Development Association, also an arm of the World Bank Group.

The IFC is also required to deposit the capital within three months from the date the bonds are issued, according to another condition put forward by the ministry.

The IFC, however, has not made it clear yet where the bonds will be issued.

A Nepal Rastra Bank official said that major prospective buyers of such bonds would be Non-Resident Nepalis and institutional investors in Nepal. The IFC plans to invest the capital collected through the issuance of the bonds through two micro-finance institutions—Nirdhan Utthan Bank and RMDC Laghubitta Bittiya Sanstha—in the form of debts.

“As per conditions put forth by the Finance Ministry in the guidelines, the amount should be invested in the productive sector, such as industry, infrastructure and tourism, among others,” said Dhungel.

The IFC has yet to state the interest rate at which the bonds will be issued. But the central bank has suggested that the Finance Ministry decide the interest on investment through microfinance institutions at not more than 8 percent.
However, the Finance Ministry has, in turn, asked the central bank to do so.

“I think that the interest rate the IFC could charge to micro-finance institutions could be in the range of 8 percent, which we had earlier suggested to the Finance Ministry,” said Guru Prasad Poudel, officiating chief at foreign exchange department of the central bank.

The IFC’s plan to issue Nepali currency bonds in foreign countries comes at a time when the government is trying to attract as much as foreign capital as it can in whatever form possible to increase the availability of financial resources in the country.

As Nepali banks are facing a shortage of loanable funds, the central bank has also allowed Nepali banks to borrow from foreign banks and financial institutions.

“The significance of the IFC issuing Nepali currency bonds has more to do with testing Nepal’s attractiveness as an investment destination,” said Poudel. “It will also help us gauge what investors think about the credibility of Nepal’s economic strength. Bonds worth $20 million are not that big; it’s just a test case for Nepal.”

Political stability after a drawn-out transition was expected to boost investors’ confidence in Nepal, with the availability of round-the-clock electricity as another positive. But red tape, corruption and poor transport infrastructure continue to act as impediments to foreign investment in Nepal.

If there is a positive response to the IFC issuance, it could prompt the government to also issue sovereign bonds in the international market and receive investments in the future, according to Poudel. A sovereign bond is a debt security issued by a national government.

Although the government in 2015 had allowed the IFC and Asian Development Bank to each issue local currency bonds worth $500 million inside Nepal, no bonds were issued due to a lack of adequate loanable funds with Nepali banks.