Nepal Economy Shows Strong External Stability, Rising Remittances and Expanding Liquidity

KATHMANDU — Nepal’s macroeconomic and financial position over the first nine months of fiscal year 2025/26 presents a mixed but broadly stable outlook, characterized by strong growth in remittance inflows, rising foreign exchange reserves, surplus balance of payments, easing interest rates, and expanding banking liquidity, even as trade deficit widens, inflation edges upward, and external vulnerabilities persist, according to the latest report on the Current Macroeconomic and Financial Situation of Nepal released by the central bank.

The report, based on data up to mid-April 2026, highlights key shifts across inflation, external sector performance, fiscal operations, monetary conditions, financial markets, and banking sector stability, offering a comprehensive snapshot of Nepal’s economic trajectory during the review period.

Inflation Rises but Remains Moderated Compared to Previous Year

Consumer price inflation (CPI) stood at 4.47 percent year-on-year in mid-April 2026, up from 3.39 percent a year earlier, indicating a gradual upward pressure on prices. However, average inflation during the nine-month period remained relatively contained at 2.39 percent, significantly lower than 4.57 percent in the same period last year.

Food inflation rose to 4.01 percent, while non-food and service inflation increased more sharply to 4.72 percent, reflecting higher costs in transport, education, and services.

Within food items, significant price increases were recorded in ghee and oil (12.87 percent), fruits (11.67 percent), and vegetables (9.18 percent), while prices of pulses, cereals, and spices declined.

In non-food categories, notable inflation drivers included miscellaneous goods and services (19.94 percent), transportation (12.03 percent), and education (7.46 percent).

Regional disparities persisted, with inflation highest in Lumbini Province (5.15 percent) and lowest in Sudurpashchim Province (3.39 percent). Urban inflation (4.74 percent) remained higher than rural areas (3.71 percent).

Wholesale price inflation stood at 3.92 percent, slightly lower than the previous year, while construction materials and intermediate goods showed moderate price increases.

Strong Remittance Growth and Record External Stability

One of the strongest pillars of Nepal’s economy remains remittance inflows, which surged 39.1 percent to Rs. 1.66 trillion in the nine-month period, compared to 10.2 percent growth a year earlier.

In US dollar terms, remittances reached USD 11.55 billion, reflecting continued labour migration and stable overseas employment demand.

This strong inflow significantly supported external stability, contributing to a current account surplus of Rs. 618.68 billion, more than double last year’s surplus.

The overall Balance of Payments (BoP) surplus expanded to Rs. 731.16 billion, compared to Rs. 346.23 billion in the previous year, indicating robust foreign currency inflows and stable external financing conditions.

Net secondary income also rose sharply to Rs. 1.82 trillion, reinforcing household-level liquidity and consumption capacity.

Foreign Exchange Reserves Reach Record Levels

Nepal’s gross foreign exchange reserves increased sharply by 30.5 percent to Rs. 3.49 trillion, equivalent to USD 23.55 billion.

Reserves are sufficient to cover 21.8 months of merchandise imports and 18.4 months of combined imports of goods and services, signaling strong external buffer capacity.

The Nepal Rastra Bank (NRB) and financial institutions both contributed to reserve accumulation, with NRB holdings rising to Rs. 3.08 trillion.

However, the Nepalese currency depreciated by 7.5 percent against the US dollar, reflecting global dollar strength and import pressures.

Trade Deficit Widens Despite Export Growth

Nepal’s external trade imbalance continued to widen as imports grew faster than exports.

Merchandise exports increased 18.5 percent to Rs. 222.94 billion, driven by soyabean oil, cardamom, palm oil, and jute products. However, exports to China declined sharply by 46.8 percent, partially offsetting gains from India and other markets.

Imports rose 13.8 percent to Rs. 1.49 trillion, led by chemical fertilizers, petroleum products, vehicles, and industrial inputs.

As a result, the trade deficit expanded 13 percent to Rs. 1.27 trillion, reflecting Nepal’s structural dependence on imported goods, particularly energy, transport, and consumer products.

Fiscal Expansion with Rising Spending Pressure

Government expenditure reached Rs. 1.06 trillion, with recurrent spending dominating at Rs. 747.52 billion. Capital expenditure remained relatively weak at Rs. 96.20 billion, highlighting persistent execution challenges in development spending.

Revenue mobilization stood at Rs. 886.28 billion, led by tax revenue of Rs. 798.77 billion.

Cash balances with the government surged to Rs. 429.17 billion, indicating liquidity accumulation due to under-spending of capital budgets.

Provincial governments mobilized Rs. 149.15 billion, reflecting increased fiscal decentralization.

Monetary Expansion and Liquidity Surge

Broad money (M2) expanded by 8.1 percent, while net foreign assets increased significantly by 27.4 percent, driven by remittance inflows and external surplus.

Private sector credit grew modestly by 5.7 percent, indicating cautious lending behavior by banks.

Deposits in banks and financial institutions rose sharply to Rs. 7.87 trillion, growing 15.5 percent year-on-year.

The structure of deposits shifted, with saving deposits rising to 45.3 percent share, while fixed deposits declined.

Interest Rates Fall Across Banking System

The financial system witnessed a broad decline in interest rates:

• 91-day Treasury bills: 2.61 percent
• Interbank rate: 2.75 percent
• Commercial bank lending rates: down to 6.77 percent from 8.22 percent
• Deposit rates also declined significantly

This reflects improved liquidity conditions and weaker credit demand.

Banking Sector Stability and Digital Expansion

Nepal’s banking system remains structurally stable with:

• 106 financial institutions
• Over 11,400 branches
• More than 62 million deposit accounts
• Over 2 million loan accounts

Non-performing loans stood at 5.6 percent, indicating moderate asset quality stress.

Digital transactions expanded rapidly, with mobile banking transactions reaching 74.46 million (Rs. 618.71 billion) in a single month, highlighting rapid financial digitization.

Capital Market Growth Continues

The stock market showed strong performance, with the NEPSE index rising to 2,833.6 points, compared to 2,662.1 a year earlier.

Market capitalization increased to Rs. 4.83 trillion, representing 73.23 percent of GDP.

Banking and insurance companies dominated with a 50.2 percent share, followed by hydropower firms.

Key Structural Risks Remain

Despite positive indicators, several vulnerabilities persist:

• Rising trade deficit
• Depreciating currency
• Weak capital expenditure execution
• High import dependence
• Inflationary pressures in transport and services
• Agriculture sector credit contraction

The report suggests Nepal’s economy is currently supported by strong remittance inflows, external surplus, and liquidity expansion, but remains structurally dependent on imports and vulnerable to external shocks.

Sustained growth, according to the central bank indicators, will depend on export diversification, investment acceleration, and stronger capital spending execution in the coming fiscal period.