Nepal’s economy in motion: Surging exports, remittance boom, and inflation under control

KATHMANDU: Nepal Rastra Bank (NRB) has unveiled its macroeconomic and financial report based on the ten months of data up to mid-May 2025 (FY 2024/25), revealing a cautiously optimistic economic scenario marked by subdued inflation, impressive growth in foreign exchange reserves, booming remittance inflows, and a surge in exports.

However, challenges remain in revenue-expenditure alignment, services trade deficit, and a rising trade gap, signaling the need for prudent fiscal management and export diversification.

Inflation: Tamed But With Sectoral Variations

Nepal’s year-on-year (y-o-y) consumer price inflation cooled to 2.77% in mid-May 2025 from 4.40% a year earlier. Food and beverage inflation decelerated significantly to 1.52%, driven by price declines in vegetables (-8.11%), spices (-2.20%), and meat & fish (-0.48%). However, specific items like ghee & oil (11.08%), fruit (6.15%), and pulses (5.17%) saw notable hikes.

Non-food and service inflation stood at 3.45%, mainly driven by higher prices in miscellaneous goods (9.04%), education (5.88%), and clothing (5.23%). Regionally, Koshi Province recorded the highest inflation at 4.29%, while Lumbini posted the lowest at 2.15%.

Wholesale Prices and Terms of Trade

Wholesale Price Inflation (WPI) also moderated to 3.95% from 5.68% a year ago. Consumption goods prices surged 10.89%, while intermediate and capital goods rose marginally by 0.10% and 2.73%, respectively. The terms of trade (ToT) improved by 1.8%, reflecting favorable price movements in export vs. import commodities.

External Sector: Exports Outperform, Trade Deficit Widens

Nepal’s merchandise exports skyrocketed 72.7% to Rs.217.91 billion, reversing last year’s decline. The growth was led by soyabean oil, polyester yarn, tea, and oil cakes. Exports to India soared 104.7%, while those to China and other nations rose modestly.

Conversely, imports increased 13.1% to Rs.1474.19 billion, with surges in soyabean oil, rice, vehicles, and sponge iron. Imports from China climbed 15.1%, while those from India rose 7.9%. Despite export growth, the trade deficit expanded 6.7% to Rs.1256.28 billion. The export-import ratio, however, improved from 9.7% to 14.8%, indicating better trade balance quality.

In terms of composition, 66.5% of exports were final consumption goods, up from 42.8% last year. Imports, however, were still dominated by intermediate goods at 51.9%, reflecting a dependency on foreign inputs for production.

Remittance and Foreign Employment: Sustaining the Economy

Remittance inflows rose 13.2% in NPR terms and 10.5% in USD terms, totaling Rs.1356.61 billion and USD 9.96 billion respectively. In just one month (mid-April to mid-May 2025), inflows hit Rs.165.30 billion, showcasing the resilience of Nepal’s overseas workforce.

Notably, 405,610 individuals received first-time labor approvals for foreign employment, while 280,314 obtained renewals—both reflecting year-on-year growth.

Services Sector: A Drag on External Balance

Net services income recorded a deficit of Rs.86.53 billion, widened from Rs.50.31 billion the previous year. While travel income increased modestly by 8.6%, travel payments jumped 17.9%, mainly due to rising education expenses abroad (Rs.112.44 billion).

Current Account and BOP: Strengthened Despite Trade Imbalance

The current account posted a Rs.255.93 billion surplus, up from Rs.193.31 billion last year. In dollar terms, the surplus stood at USD 1.89 billion. The Balance of Payments (BOP) remained at a healthy surplus of Rs.438.52 billion, supported by robust remittances and capital inflows, including Rs.10.6 billion in FDI equity—up 50.5% from last year.

Foreign Exchange Reserves: A Pillar of Stability

Gross foreign exchange reserves rose 23.1% to Rs.2512.95 billion (USD 18.40 billion), with NRB alone holding Rs.2211.11 billion. The reserves now cover 17.4 months of merchandise imports and 14.6 months of total imports (goods & services), signaling macroeconomic robustness.

The reserves-to-GDP ratio improved to 41.1%, and reserves-to-imports rose to 121.4%, showing resilience even amid rising imports.

Government Finance: Revenue Still Trails Expenditure

The Government of Nepal spent Rs.1157.89 billion, a 9.6% increase over the previous year. However, revenue collection stood at only Rs.922.43 billion, creating a fiscal gap. Tax revenue contributed Rs.828.94 billion, while non-tax revenue brought in Rs.93.49 billion.

Recurrent expenditure made up Rs.773.23 billion, and capital expenditure—still low in volume—was Rs.120.38 billion, barely up 7.6%. Alarmingly, financial management expenditure surged 37.3% to Rs.264.29 billion, underscoring rising debt servicing and internal financial transfers.

Provincial Governments: High Revenue Transfers, Low Spending

Provincial governments mobilized Rs.161.77 billion, mostly through grants from the federal government (Rs.123.15 billion). Yet, their total expenditure was just Rs.100.17 billion, showing underutilization of funds.

Monetary Sector: Stable Money Growth and Banking Expansion

Broad money supply (M2) rose 6.6%, and on a y-o-y basis, grew 11.4%. Reserve money increased 4.5%, while Net Foreign Assets (NFA) expanded Rs.438.52 billion, supporting liquidity in the financial system.

Deposits at BFIs rose Rs.399.81 billion (6.2%), and private sector credit expanded 7.3%. Fixed deposits declined to 50.8% of total deposits, while savings deposits surged to 35.9%, indicating changing preferences among depositors.

Credit Trends: Sectoral and Instrument-Level Growth

Private sector credit grew across sectors: construction (12.3%), transport (11.9%), real estate (5.2%), and industrial production (9.0%). Trust receipt (import) loans soared 58.1%, and margin loans rose 39.3%, while overdraft loans declined 12.9%, reflecting tightening control over revolving credit.

Liquidity and Interest Rates: Controlled Volatility

NRB absorbed Rs.19.24 trillion in liquidity, mainly via deposit collection and SDF tools. Simultaneously, it injected Rs.564.11 billion by purchasing USD from the forex market. Interbank transaction volume declined sharply to Rs.1.62 trillion from Rs.3.82 trillion last year.

Interest rates declined: 91-day T-bill rate fell to 2.95%, and interbank rate edged up to 3.00%. Lending rates dropped across the board—commercial banks now average 8.11%, down from 10.34%.

Financial Access and Capital Markets: Steady Expansion

Nepal had 107 BFIs in mid-May 2025, with 11,505 total branches. Commercial banks accounted for 5,083 branches. Though microfinance branches dropped, total banking outreach remains strong.

The NEPSE index stood at 2620.27, up from 1998.89 a year earlier. Market capitalization reached Rs.4358.71 billion, with BFIs and insurance making up 52.4%. The number of listed companies remained stable at 271.

During the period, NEPSE listed securities worth Rs.58.43 billion, including ordinary shares, mutual funds, right shares, and FPOs. The Securities Board approved public issuance of Rs.34.05 billion in new instruments.

Navigating Risks and Opportunities Ahead

Nepal’s economic indicators show positive momentum in external stability, remittance inflows, monetary control, and capital markets. However, vulnerabilities linger in trade deficit management, underutilized capital budgets, and services trade imbalances.

Structural reforms to boost domestic production, diversify exports, increase capital spending efficiency, and attract quality FDI are essential to build on the momentum and navigate potential shocks in the global financial environment.