Nepal’s economy shows mixed signs of recovery amidst inflation control, modest credit growth

KATHMANDU: Nepal’s macroeconomic landscape is navigating a cautiously optimistic recovery, with consumer inflation subsiding, remittances surging, and exports rebounding sharply—yet capital expenditure remains sluggish, credit expansion is moderate, and trade deficit continues to burden the economy. The Current Macroeconomic and Financial Situation Report, released by the Nepal Rastra Bank (NRB) based on nine-month data ending mid-April 2025, paints a complex picture of stability amid underlying fiscal and structural challenges.

Inflation Moderates Across the Country

The year-on-year consumer price inflation dropped to 3.39% in mid-April 2025 from 4.61% a year ago, reflecting a slowdown in price rises for both food and non-food categories. Notably, food and beverage inflation settled at 2.45%, while non-food and service inflation stood at 3.90%. Major price increases were observed in ghee and oil (11.63%), fruits (9.07%), and pulses and legumes (6.58%), but prices of vegetables (-5.24%), spices (-2.32%), and meat & fish (-0.89%) saw deflation.

Geographically, inflation was highest in Koshi Province (4.91%), followed by Sudurpashchim (3.51%). The Kathmandu Valley registered a 2.95% inflation rate, while the Mountain region recorded the highest among regions at 4.47%.

Meanwhile, the Wholesale Price Index (WPI) also showed moderation, declining to 4.20% from 4.94% a year earlier. Consumption goods saw the highest price increase at 9.83%, while construction materials rose by 2.52%.

Wage Growth Remains Muted

The Salary and Wage Index increased by a modest 2.62%, down from 5.34% the previous year. The most significant rise occurred in Sudurpashchim Province (8.08%), with much smaller increases in Koshi (1.16%) and Bagmati (1.92%).

External Sector Rebounds Strongly

Nepal’s merchandise exports surged by 65.2% to reach Rs.188.20 billion, a strong reversal from the 3.7% decline last year. Exports to India soared by 92.6%, while shipments to China and other countries grew by 6.7% and 5.8%, respectively. Export items such as soybean oil, polyester yarn, tea, and rosin drove the rebound.

On the flip side, merchandise imports also increased by 12.2%, totaling Rs.1309.53 billion, reversing last year’s 2.8% decline. Imports from India (7.7%), China (14.4%), and other countries (24.9%) all rose, with items like transport equipment, vehicle parts, and edible oil topping the import chart.

The trade deficit widened by 6.4% to Rs.1121.34 billion, though the export-import ratio improved to 14.4%, up from 9.8% a year ago. Imports paid in convertible foreign currency from India alone stood at Rs.135.55 billion.

Remittance Inflows Stay Robust

Remittances rose by 10.0% in NPR terms to Rs.1191.31 billion and by 7.3% in USD terms to $8.74 billion. This growth helped lift the net secondary income to Rs.1301.94 billion, a significant rise from Rs.1174.54 billion in the previous year.

Moreover, foreign labor approvals increased, with 358,222 individuals receiving first-time approvals and 249,652 getting renewal approvals for foreign employment—up from 327,842 and 211,226, respectively.

Balance of Payments and Foreign Reserves Strengthen

The current account surplus rose to Rs.210.22 billion, up from Rs.179.83 billion, while the Balance of Payments (BOP) remained positive at Rs.346.23 billion. Gross foreign exchange reserves reached USD 17.63 billion, sufficient to cover 17.1 months of merchandise imports or 14.2 months of combined goods and services imports.

Government Spending Outpaces Revenue

The Government of Nepal spent Rs.998.52 billion during the review period—an increase of 9.8%, with recurrent, capital, and financial expenditures standing at Rs.678.09 billion, Rs.102.90 billion, and Rs.217.53 billion, respectively.

Meanwhile, revenue collection reached Rs.831.40 billion, marking an 11.1% increase from last year. Of this, tax revenue accounted for Rs.744.15 billion, and non-tax revenue for Rs.87.25 billion.

The government’s cash balance also grew sharply to Rs.371.79 billion, from just Rs.93.96 billion in mid-July 2024.

Monetary Indicators Show Stability

The broad money supply (M2) increased by 6.2%, while on a y-o-y basis, M2 expanded by 11.6%. Net foreign assets jumped by 17.4%, and reserve money rose by 4.3%.

Domestic credit expanded 2.5% during the period and 6.8% y-o-y. Credit to the private sector grew by 7.2%, reflecting modest demand.

Banking Sector: Liquidity, Credit, and Deposits

Deposits at Banks and Financial Institutions (BFIs) increased by 5.7%, amounting to Rs.368.47 billion, with a y-o-y growth of 11.5%. Deposit structure changed notably, with saving deposits rising to 35.8%, and fixed deposits dropping to 51.0%.

Private sector credit from BFIs expanded by 7.1%, while y-o-y growth was 8.3%. Most credit went to non-financial corporations (63.4%), with 36.6% directed toward households.

Notable credit increases were seen in the industrial production (9.6%), construction (11.4%), and transportation & communication (10.2%) sectors. However, overdraft loans dropped 12.1%, while trust receipt loans (imports) surged 60.6%.

Interest Rates Ease Amid Liquidity Management

The NRB absorbed Rs.17,186.15 billion in liquidity while injecting Rs.484.71 billion via USD purchase from the forex market. Additionally, it bought INR Rs.386.81 billion through the sale of USD 2.84 billion.

The 91-day treasury bill rate stood at 3.06%, and the inter-bank rate at 3.00%. The base lending rates decreased significantly—commercial banks dropped to 6.29% from 8.51%, and finance companies to 9.17% from 12.02%. Deposit rates also dropped across all institutions.

Capital Market Experiences Strong Growth

The NEPSE index climbed to 2662.08, up from 2025.71 a year ago. Total market capitalization reached Rs.4425.40 billion, with 270 companies listed. Banks and insurers make up 52.7% of market cap, while hydropower firms contribute 15.1%.

The review period saw Rs.52.15 billion worth of securities listed, including bonus shares, ordinary shares, and mutual funds. The Securities Board of Nepal approved fresh public issues worth Rs.28.58 billion.