Remittances remain the lifeline for Nepal, inflation eases, trade deficit widens

KATHMANDU: Nepal’s economy posted a modest recovery in fiscal year 2024/25 with an estimated growth rate of 4.61 percent, up from 3.67 percent in the previous year, according to the Nepal Rastra Bank’s (NRB) annual Current Macroeconomic and Financial Situation report. The growth was largely driven by improvements in the industrial and service sectors, while agriculture grew at a slower pace.

The National Statistics Office (NSO) estimated that the agriculture sector grew 3.28 percent, industry expanded by 4.53 percent, and services by 4.21 percent. The composition of GDP reflected Nepal’s economic structure: agriculture contributed 25.16 percent, industry 12.83 percent, and services remained dominant with 62.01 percent.

Inflation Moderates, But Food Prices Remain Volatile

Annual average inflation eased to 4.06 percent from 5.44 percent a year ago. Regionally, inflation ranged from 3.57 percent in Bagmati Province to 5.46 percent in Koshi Province, with Sudurpashchim also recording a higher 5.02 percent.

Food and beverage inflation averaged 4.69 percent, while non-food and services stood at 3.71 percent. The steepest food price hikes were seen in vegetables (10.71 percent), ghee and oil (8.72 percent), and pulses (7.9 percent). On the non-food side, miscellaneous goods and services rose 9.39 percent, followed by clothing and footwear (6.09 percent).

The wage and salary index, a key indicator of living standards, slowed to 2.85 percent from 5.03 percent last year, highlighting that real wage growth continues to lag behind inflation in many provinces.

External Sector: Exports Surge, Imports Rebound, Deficit Still Expands

One of the most remarkable shifts was in the external sector. Nepal’s exports surged 81.8 percent to Rs. 277.03 billion in 2024/25, reversing last year’s 3 percent decline. Exports to India jumped 117.8 percent, while shipments to China grew marginally by 1.6 percent.

Major export gainers were soybean oil, polyester yarn, jute goods, tea, and footwear, while palm oil, garments, ginger, and zinc sheets recorded declines.

Imports, however, grew 13.3 percent to Rs. 1.80 trillion, driven by higher demand for crude soybean oil, vehicles, transport equipment, rice, and sponge iron. Petroleum products, gold, fertilizers, and aircraft parts saw lower imports.

The result: the trade deficit widened by 6 percent to Rs. 1.53 trillion. Despite the surge in exports, the export-import ratio improved to 15.4 percent from 9.6 percent last year, signaling a slight narrowing of dependency.

Remittances Remain the Lifeline

Remittance inflows surged 19.2 percent to Rs. 1.72 trillion in NPR terms, equivalent to USD 12.64 billion, reinforcing their role as Nepal’s economic backbone. In the last month of the fiscal year alone, remittances reached Rs. 189.11 billion, a sharp jump from Rs. 117.78 billion during the same period last year.

More than 839,000 Nepalis received work approvals for foreign employment in 2024/25, underscoring the growing reliance on labor migration. Travel income, mostly tourism, grew 7.7 percent to Rs. 88.66 billion, but travel payments ballooned by 18.1 percent to Rs. 223.72 billion, largely due to education-related expenses abroad.

Balance of Payments and Reserves Strengthen

Nepal’s external account remained healthy. The current account posted a surplus of Rs. 409.20 billion, more than double last year’s surplus of Rs. 221.71 billion. Balance of Payments (BoP) surplus hit Rs. 594.54 billion compared to Rs. 502.49 billion a year ago.

Foreign exchange reserves rose 31.2 percent to Rs. 2.67 trillion (USD 19.50 billion). This reserve level is sufficient to finance 15.4 months of imports of goods and services, far exceeding international adequacy benchmarks.

Fiscal Situation: Rising Deficit, Low Capital Spending

On the fiscal side, the government continued to struggle with imbalances. The fiscal deficit widened to Rs. 404.42 billion, up from Rs. 379.38 billion last year.

Government expenditure stood at Rs. 1.52 trillion, with recurrent expenditure (salary, subsidies, and daily operations) dominating at Rs. 980.38 billion. Capital expenditure, crucial for infrastructure and development, was only Rs. 222.68 billion — a reflection of Nepal’s chronic underutilization of development budgets.

Revenue collection reached Rs. 1.17 trillion, of which tax revenue was Rs. 1.05 trillion. This left a financing gap, increasingly filled by domestic borrowing of Rs. 329.99 billion and external loans of Rs. 125.40 billion.

As a result, Nepal’s public debt rose to Rs. 2.67 trillion, equal to 43.71 percent of GDP, slightly up from 42.71 percent a year ago.

Banking and Financial Sector: Deposits Outpace Credit

Deposits at banks and financial institutions (BFIs) grew 12.6 percent to Rs. 7.26 trillion, while private sector credit rose only 8.4 percent to Rs. 5.49 trillion.

The credit-to-deposit ratio indicates sluggish credit expansion relative to deposits, reflecting weak investment appetite. Loans to agriculture actually declined 0.2 percent, while loans to services grew 12.8 percent, industry 7.9 percent, and transport and communication 15.5 percent.

Concessional loans also gained traction, with Rs. 78.66 billion extended to nearly 95,000 borrowers, including Rs. 20 billion for women entrepreneurs.

Interest Rates Fall, Liquidity Absorbed

Interest rates continued their downward trajectory. The average base rate of commercial banks fell to 6.02 percent from 8.00 percent last year. Deposit rates dropped to 4.19 percent from 5.77 percent, while lending rates slipped to 7.85 percent from 9.93 percent.

NRB absorbed a record Rs. 24.65 trillion in liquidity through various instruments, a sharp increase from Rs. 3.87 trillion a year ago, underscoring excess liquidity conditions in the banking system.

Capital Market Gains Momentum

The stock market surged strongly. The NEPSE index rose to 2794.79 points in mid-July 2025, up from 2240.41 a year earlier. Market capitalization expanded to Rs. 4.65 trillion, representing 76.25 percent of GDP.

Hydropower companies accounted for 15.3 percent of market capitalization, while banks and insurers dominated with 54.1 percent. A total of 272 companies are now listed on NEPSE, with new securities worth Rs. 83.19 billion listed during the year.

Critical Observations

While macroeconomic stability indicators — growth, inflation, BoP surplus, and reserves — appear encouraging, structural weaknesses persist.

Dependence on remittances remains overwhelming, exposing the economy to external shocks.

Export growth is largely concentrated in a few commodities, making sustainability uncertain.

Capital expenditure execution is dismally low, undermining long-term growth potential.

Public debt levels are creeping up, though still within manageable limits.

Bank credit to productive sectors like agriculture is declining, raising concerns over inclusiveness.

Falling interest rates and liquidity surplus may indicate weak private sector demand and investment inertia.

Outlook

Nepal enters the new fiscal year with some comfort from strong reserves, moderate inflation, and improved exports. However, the economy’s reliance on external labor markets, weak fiscal management, and sluggish private sector credit highlight the need for deeper reforms.

Unless the government prioritizes effective capital expenditure, diversification of exports, and productivity-driven growth, the current momentum could quickly lose steam.