Japan says it will write off a loan of about $200m to Nepal, which was used to fund development projects.
The Japanese embassy in Kathmandu said Nepal could now divert the money to poverty alleviation schemes.
Diplomats say the loan was made 20 years ago, and was used to build two power plants and a cement factory.
Japan is a leading donor to Nepal, and repayment was due last year. Foreign aid accounts for two-thirds of the development budget in the kingdom.