Nepal’s economy shows mixed signals—Low inflation, record reserves but weak investment and sluggish credit raise concerns

KATHMANDU: Nepal’s macroeconomic indicators for the first three months of FY 2025/26 present a complex and uneven economic landscape, marked by record-high foreign exchange reserves, historically low inflation, a strong balance of payments surplus and a surge in remittances, but also shrinking foreign investment, sluggish credit growth, declining capital expenditure, a weak stock market and rising service-sector deficits.

The latest Nepal Rastra Bank (NRB) macroeconomic report, based on data up to mid-October 2025, signals that Nepal’s economy is stable but stagnant, driven heavily by remittance inflows while productive sectors continue struggling due to limited investment and slow internal demand.

Inflation Hits 1.47%—Lowest in Years, But Signals Weak Domestic Demand

Nepal’s year-on-year consumer price inflation dropped to 1.47%, sharply lower than 4.82% a year ago.
Food prices fell 2.54%, led by a 15.63% drop in vegetable prices, while non-food inflation stood at 3.80%.

Experts warn that while low inflation brings relief to consumers, it also reflects depressed consumption, low purchasing power, and slow private-sector activity.

Inflation by geography reveals:

Wholesale price inflation also fell to 1.32%, indicating soft economic activity across production and supply chains.

Trade: Exports Surge 89.6%, Imports Rise 19.8%, but Deficit Still Expands

Exports jumped to Rs. 72.78 billion, driven by soyabean oil, palm oil, jute goods, cardamom and polyester yarn.
However, exports to China collapsed 66.1%, exposing Nepal’s trade concentration and vulnerability.

Imports rose 19.8% to Rs. 468.08 billion, driven by gold, fertilizers, telecom equipment and vehicles.

Despite the export boom, Nepal’s trade deficit widened 12.2% to Rs. 395.30 billion, highlighting the country’s structural trade imbalance.

Remittances Power the Economy—Up 35.4%

Remittances remain Nepal’s economic backbone. In the first quarter, inflows reached:

In just one month (mid-Sep to mid-Oct), Nepal received Rs. 201.22 billion in remittances.

First-time foreign employment approvals reached 123,459, while re-entry approvals hit 77,257, underscoring continued labor outmigration driven by limited economic opportunities at home.

Balance of Payments at Rs. 264.03 Billion Surplus

Nepal posted a strong balance of payments (BoP) surplus of Rs. 264.03 billion, up from Rs. 185 billion last year.
The current account surplus doubled to Rs. 237.59 billion, driven almost entirely by remittances.

But the most alarming number is foreign direct investment (FDI):

FDI inflow fell 63.8% to only Rs. 1.74 billion, signaling collapsing foreign investor confidence.

Analysts warn that Nepal’s investment climate remains bureaucratic, unpredictable and politically unstable—factors driving investors away.

Foreign Exchange Reserves Hit Record Rs. 2979.81 Billion

Gross reserves jumped 11.3% to Rs. 2.98 trillion (USD 21.21 billion).
Nepal can now finance:

This is one of the strongest reserve positions in Nepal’s history.

Government Spending Up, Capital Expenditure Down 34.7%

Nepal’s fiscal health remains strained:

This shows government development spending has failed to pick up, hurting infrastructure projects and job creation.

Non-tax revenue collapsed 48.5%, indicating slowdown in state-owned enterprises and government services.

Provincial governments also spent just Rs. 17.15 billion of the Rs. 45.08 billion available to them.

Money Supply and Liquidity: Stable but Credit Growth Weak

Broad money (M2) grew 3.2%, while reserve money rose 2.6%.
Deposits at BFIs increased 3.0% to Rs. 7482.59 billion.

But private-sector credit grew only 1.5%, far below expectations.

On a yearly basis:

This indicates poor investment appetite, weak business expansion, and excess liquidity circulating without entering the real economy.

Loan performance by sector:

The dominance of real estate lending continues while productive sectors remain under-financed.

Interest Rates Fall Sharply

The tightening cycle has eased:

Lower rates signal liquidity surplus, but also reflect weak demand for loans.

Stock Market Continues Downtrend

NEPSE fell to 2487.18, down from 2742.89 last year.
Market capitalization dropped to Rs. 4157.90 billion, with market cap-to-GDP falling to 68% from 76%.

Hydropower, manufacturing, hotels and trading companies all posted declines.
BFIs still dominate with 53.5% of total market capitalization.

Service Income Deficit Widens Sharply

The services sector posted a deficit of Rs. 32.68 billion.
Travel income rose 8.1%, but travel payments—especially for education abroad—jumped to Rs. 64.59 billion, including Rs. 42.96 billion just for foreign education.

This demonstrates the mass exodus of Nepali students and growing capital outflow.