Remittance surge pushes Nepal’s external sector to record high despite rising inflation and trade deficit

KATHMANDU: Nepal’s economy remained on a stronger footing during the first 11 months of the current fiscal year, supported by record-high remittance inflows, unprecedented foreign exchange reserves and a massive balance of payments surplus, although rising inflation, a widening trade deficit and sluggish private sector lending continue to expose underlying structural weaknesses.

The latest Current Macroeconomic and Financial Situation report released by Nepal Rastra Bank (NRB), based on data up to mid-June of fiscal year 2025/26, paints a mixed picture of the economy. While external sector indicators have reached historic highs, domestic demand remains subdued as banks continue to struggle to expand credit despite ample liquidity.

Perhaps the most significant achievement during the review period is the continued strengthening of Nepal’s external sector. Gross foreign exchange reserves climbed to an unprecedented Rs 3.76 trillion, equivalent to approximately US$24.68 billion, enough to finance imports of goods and services for 19.1 months.

Such a level of reserves is far above international adequacy standards and provides the country with a substantial cushion against external shocks. The reserves increased by over 40 percent in Nepali rupee terms compared to the beginning of the fiscal year, while in US dollar terms they expanded by 26.5 percent.

The surge in reserves has largely been driven by record remittance inflows and a significant balance of payments surplus rather than export earnings.

According to the report, remittance inflows reached Rs 2.12 trillion during the first eleven months of the fiscal year, representing a remarkable 38.2 percent increase from the same period last year. In US dollar terms, remittances rose by 29.6 percent to US$14.59 billion. During the one-month period between mid-May and mid-June alone, Nepali migrant workers sent home nearly Rs 204 billion, underscoring the continuing dependence of the domestic economy on overseas employment.

The continued inflow of remittances has translated into a substantial current account surplus of Rs 802.06 billion, more than doubling last year’s surplus of Rs 321.74 billion. Likewise, the country’s overall balance of payments (BoP) recorded a surplus of Rs 926.06 billion, nearly twice the Rs 491.44 billion recorded during the corresponding period of the previous fiscal year. These figures indicate that foreign currency earnings entering the country significantly exceeded foreign currency payments during the review period.

Foreign direct investment (FDI) also posted notable improvement, although its overall contribution to the economy remains relatively modest. Equity investment from foreign investors reached Rs 22.83 billion, more than double the Rs 11.07 billion received during the same period last year, reflecting improving investor confidence in selected sectors despite persistent structural bottlenecks.

However, Nepal’s external sector continues to face long-term vulnerabilities because imports are growing much faster than exports.

Merchandise exports increased by 12.3 percent to Rs 277.97 billion during the review period, mainly supported by higher exports of soybean oil, palm oil, cardamom, noodles and bran products. Exports to India and other countries increased, although shipments to China fell sharply by nearly 36 percent.

At the same time, merchandise imports climbed by 15.2 percent to Rs 1.89 trillion, driven largely by higher purchases of petroleum products, transport equipment, vehicles and spare parts, silver, fertilizers and crude soybean oil. Imports from India, China and other countries all recorded double-digit growth.

As imports continued to outpace exports, Nepal’s merchandise trade deficit widened by 15.7 percent to Rs 1.62 trillion, while the export-import ratio slipped slightly to 14.7 percent from 15.1 percent a year earlier. The figures once again highlight Nepal’s chronic dependence on imported goods and the limited competitiveness of domestic production despite recent export gains.

The report also points to changing dynamics in Nepal’s services sector. Although net services income remained negative, the deficit narrowed compared to last year. Travel income remained virtually unchanged at around Rs 82 billion, while travel-related payments declined by 4.7 percent. Nevertheless, spending by Nepalis on overseas education continued to rise, reaching Rs 132.23 billion, indicating that education remains one of the country’s largest foreign currency expenditures.

While external indicators have strengthened, inflation has begun showing signs of acceleration.

Year-on-year consumer price inflation reached 5.22 percent in mid-June compared to 2.72 percent a year ago. Food inflation stood at 4.95 percent, while non-food and services inflation was slightly higher at 5.37 percent. Despite the recent increase, average inflation during the first eleven months remained at only 2.89 percent, significantly below last year’s average of 4.24 percent, suggesting that price pressures intensified only in recent months.

Food prices were primarily pushed higher by steep increases in fruits, ghee and edible oils, meat and vegetables. Among non-food items, miscellaneous goods and services registered the sharpest increase of more than 16 percent, followed by transportation costs, education and clothing.

Provincial inflation also varied across the country. Koshi Province recorded the highest annual inflation at 5.75 percent, while Sudurpashchim Province experienced the lowest at 4.61 percent. Inflation in Kathmandu Valley stood at 4.98 percent, remaining slightly below the national average.

The report also notes that wholesale prices increased much faster than consumer prices. Wholesale inflation reached 8.47 percent, reflecting higher costs of intermediate goods and imported inputs that could eventually pass through to retail prices if current trends persist.

Global commodity prices have also contributed to inflationary pressures. International crude oil prices increased by nearly 17 percent over the year, while gold prices surged by more than 21 percent. Meanwhile, the Nepali rupee depreciated by 9.8 percent against the US dollar during the review period, making imports more expensive and increasing the cost of foreign debt servicing. The exchange rate reached Rs 151.88 per US dollar in mid-June compared to Rs 137 at the beginning of the fiscal year.

Government finances present another area of concern.

During the first eleven months, total government expenditure reached Rs 1.35 trillion, while revenue mobilisation stood at Rs 1.08 trillion, leaving a sizeable fiscal gap. Recurrent expenditure amounted to over Rs 908 billion, while capital expenditure remained limited at only Rs 132.67 billion, reflecting the government’s continuing inability to accelerate development spending despite entering the final month of the fiscal year.

The report shows that capital expenditure actually declined by 7.5 percent compared to the previous year, even as recurrent expenditure continued to grow. This pattern has become a recurring feature of Nepal’s public finances, with most government spending directed toward salaries, social security, grants and debt servicing rather than productive infrastructure investment.