Remittance boom and record forex reserves stabilize Nepal’s economy despite trade deficit

KATHMANDU: Nepal’s economy has shown a mixed but generally stable performance in the first seven months of the fiscal year 2025/26, characterized by strong remittance inflows, rising foreign exchange reserves, and manageable inflation, even as structural weaknesses such as a widening trade deficit and slow private sector credit expansion continue to challenge long-term economic stability.

According to the latest macroeconomic report released by Nepal Rastra Bank (NRB), the country’s external sector has strengthened significantly during the review period ending mid-February 2026, largely driven by record remittance inflows from Nepali workers abroad.

Inflation Remains Moderate

Consumer price inflation remained relatively controlled despite global economic volatility. The year-on-year consumer price inflation stood at 3.25 percent in mid-February 2026, lower than the 4.16 percent recorded a year earlier.

Food and beverage inflation stood at 2.50 percent, while non-food and services inflation reached 3.66 percent, indicating relatively stable price movements across most consumer categories.

Price trends varied across provinces. Inflation was highest in Madhesh Province at 5.14 percent, while Karnali Province and Sudurpashchim Province recorded the lowest inflation at around 1.6 percent.

From a geographic perspective, inflation remained slightly higher in the Terai region, reflecting supply chain costs and consumption patterns compared with hill and mountain regions.

Remittance Growth Strengthens External Sector

One of the most significant drivers of Nepal’s economic stability continues to be remittances sent home by migrant workers.

During the first seven months of the fiscal year, remittance inflows increased 39.8 percent to Rs.1.26 trillion, compared with a modest 7.5 percent growth in the same period last year.

In US dollar terms, remittances rose 33 percent to $8.86 billion, highlighting the continued dependence of Nepal’s economy on overseas labor markets.

These inflows have significantly strengthened Nepal’s balance of payments and boosted household consumption across the country.

NRB data show that 245,153 Nepali workers obtained first-time foreign employment permits during the review period, while 227,424 workers renewed their labor approvals, reflecting the continuing outflow of labor to international job markets.

Strong Balance of Payments and Current Account

Nepal’s external accounts remain firmly in surplus.

The current account posted a surplus of Rs.493.78 billion, a dramatic improvement from the Rs.184.14 billion surplus recorded in the same period last year.

Similarly, the overall balance of payments surplus reached Rs.572.73 billion, nearly double the Rs.284.41 billion recorded in the previous fiscal year’s corresponding period.

These improvements reflect strong remittance inflows combined with stable service income and moderate import growth.

Foreign Exchange Reserves Hit Record Levels

Nepal’s foreign exchange reserves have reached historically high levels, providing the country with a strong buffer against external shocks.

Gross foreign exchange reserves increased 23.3 percent to Rs.3.30 trillion (approximately $22.76 billion) by mid-February 2026.

The reserve level is sufficient to cover 21.3 months of merchandise imports and about 18 months of combined goods and services imports, well above international safety thresholds.

Reserves held by the central bank increased significantly, while reserves held by commercial banks also recorded strong growth.

Trade Deficit Continues to Widen

Despite improvements in the external balance, Nepal’s trade structure remains heavily dependent on imports.

During the seven-month review period, merchandise exports increased 32.2 percent to Rs.168.15 billion, while imports rose 13.6 percent to Rs.1.12 trillion.

As a result, the country’s trade deficit widened 10.9 percent to Rs.955.34 billion.

The export-import ratio improved slightly to 15 percent, but imports continue to dominate Nepal’s trade structure.

Major exports included soybean oil, cardamom, palm oil, jute products, and footwear, while exports of zinc sheets, carpets, and handicrafts declined during the review period.

On the import side, purchases of vehicles, fertilizer, silver, transport equipment, and gold increased, reflecting strong consumer demand and infrastructure needs.

Government Finances Under Pressure

Fiscal data also highlight structural pressure on public finances.

According to data from the government’s financial controller office, Nepal’s total government expenditure reached Rs.801.37 billion in the first seven months of FY 2025/26.

Of this amount:

• Rs.562.37 billion was recurrent expenditure
• Rs.63.73 billion was capital expenditure
• Rs.175.27 billion was financial management expenditure

Revenue mobilization stood at Rs.665.02 billion, including Rs.599.31 billion in tax revenue and Rs.65.71 billion in non-tax revenue.

The relatively low capital expenditure remains a persistent concern for economic policymakers, as infrastructure spending is crucial for long-term growth.

Banking Sector and Monetary Indicators

The country’s banking sector has maintained stable liquidity conditions during the review period.

Deposits in banks and financial institutions increased 6 percent to Rs.7.69 trillion, while private sector credit expanded 4 percent to Rs.5.72 trillion.

However, the slower pace of credit expansion suggests cautious lending by banks and moderate investment demand in the domestic economy.

The weighted average lending rate of commercial banks stood at around 7 percent, while the average deposit rate remained around 3.5 percent.

Capital Market and Financial System

Nepal’s capital market has remained relatively stable despite fluctuations in share prices.

The NEPSE index stood at 2,671 points in mid-February 2026, while market capitalization reached Rs.4.48 trillion, representing 73.43 percent of GDP.

A total of 284 companies were listed on the Nepal Stock Exchange, including banks, hydropower companies, insurance firms, and manufacturing industries.

Economic Outlook

Overall, Nepal’s macroeconomic situation appears relatively stable compared with the challenges faced in previous years. Strong remittance inflows and high foreign exchange reserves have provided the country with significant financial buffers.

However, economists note that Nepal’s economy continues to face structural challenges, including its dependence on remittances, a persistent trade deficit, slow capital expenditure, and limited industrial growth.

Addressing these issues will be crucial if Nepal hopes to transition from a remittance-driven economy toward sustainable domestic production, export expansion, and higher long-term economic growth.