Inflation drops to 1.63 pc—Lowest Since 2013—as food prices fall 2 pc

KATHMANDU: Nepal’s macro-economy has shifted into an unusually sweet spot, official data released by Nepal Rastra Bank (NRB) on Thursday show, with five-month indicators running counter to almost every gloomy global narrative: inflation is the lowest in South Asia, external buffers are the highest on record, the budget deficit is shrinking, banks are awash with liquidity and remittances are surging at a pace last seen during the post-earthquake rebound.

Yet beneath the headline figures economists warn the recovery is lopsided—driven largely by a spectacular 35.6 % jump in labour income from abroad—and that the domestic engines of growth, private investment and production, remain cold.

The 54-page document, packed with 68 separate indicators, will form the basis of the central bank’s upcoming monetary policy review and comes at a delicate moment when the new finance minister is under pressure to deliver an expansionary budget while keeping prices and the exchange rate stable. Below, the Kathmandu Post distils the key findings, sector by sector.

INFLATION FALLS TO 1.63 %, LOWEST IN 12 YEARS

Annual consumer price inflation dropped to 1.63 % in mid-December, down from 6.05 % a year earlier and the slowest pace since 2013. Food prices actually declined 2 %, helped by a bumper monsoon that pushed vegetable inflation down 8.5 %, while non-food inflation stayed at a benign 3.75 %. Rural Nepal saw prices rise only 1.1 %; Kathmandu Valley 1.95 %.

The wholesale price index rose a modest 2.78 %, with construction materials up 4.5 %, suggesting infrastructure projects are finally lifting input demand. NRB says the decline is structural—better supply chains, stable Indian prices and a stronger rupee—rather than a temporary blip.

RECORD CURRENT-ACCOUNT SURPLUS OF Rs 359 BILLION
Between July and December the country posted a current-account surplus of Rs 358.83 billion, more than double the Rs 158 billion recorded a year ago. Merchandise exports leapt 58.2 % to Rs 116.5 billion, the fastest clip since FY 2016/17, led by soybean oil, cardamom, palm oil and footwear. Imports also rose, but at a slower 15.8 %, narrowing the trade deficit to Rs 649.7 billion from Rs 700 billion last year. The export-import ratio improved to 15.2 % from 11.1 %.

But the real story is invisible earnings. Remittances hit Rs 870 billion in five months, up 35.6 % in local-currency terms and 29 % in dollars. A single month—mid-November to mid-December—brought in Rs 183 billion, roughly the size of Nepal’s annual tourism receipts before COVID. The Gulf recruitment rebound after the pandemic, coupled with higher dollar wages, explains thInflation Crashes to 1.63 %—Lowest Since 2013—as Food Prices Fall 2 %

e surge. Net services income remained negative at Rs 36.5 billion as students and tourists spent more abroad, but the deficit was easily offset by transfers.

BALANCE OF PAYMENTS +Rs 422 BILLION; FX RESERVES $22.1 BILLION
The overall balance-of-payments surplus reached Rs 421.9 billion, pushing gross foreign-exchange reserves to Rs 3.2 trillion ($22.1 billion), enough to cover 18.2 months of merchandise and services imports—the highest import cover ratio in the region. Reserves have risen 19.6 % since July alone, forcing the central bank to mop up dollars worth Rs 410 billion through open-market operations to prevent the Nepali rupee from appreciating too sharply against a weak greenback.

GOVERNMENT FINANCES: REVENUE BEATS EXPENDITURE GROWTH
The federal government spent Rs 564.5 billion in the period, up only 1.5 %, while revenue rose 1.7 % to Rs 406.3 billion. Tax receipts grew 5.4 % but non-tax revenue fell 35 % after last year’s one-off telecom licence fees disappeared. Capital spending was the big laggre, contracting 17 % to Rs 33.9 billion, underscoring implementation bottlenecks. As a result, the treasury’s cash balance at NRB ballooned to Rs 253 billion, giving the finance ministry rare leeway to front-load development outlays in the second half.

Provinces, for the first time, mobilised Rs 74.8 billion in resources but managed to spend only Rs 29 billion, a utilisation rate of 38 %. “The sub-national governments are still learning to budget,” said FCGO spokesperson Ramesh Siwakoti.

BANKING: LIQUIDITY FLOOD, CREDIT LAG
The financial sector is flush. Broad money (M2) grew 12.9 % year-on-year; deposits at banks and financial institutions (BFIs) rose 13.9 % to Rs 7.55 trillion. But private-sector credit expanded only 6.6 %, half the deposit pace. The transmission mechanism is broken. There is demand for working capital, but not for long-term investment because capacity utilisation in manufacturing is still below 70 %.

BFIs parked an average Rs 24.6 trillion daily in the central bank’s Standing Deposit Facility, while the weighted-average inter-bank rate fell to 2.74 % from 3 % a year ago. The 91-day treasury bill yield dipped to 2.37 %. Commercial banks cut their base rates to 5.38 % and average lending rates to 7.26 %—the lowest since Nepal adopted a flexible interest-rate regime.

NRB absorbed a net Rs 24.6 trillion liquidity, fearing excess cash could feed asset bubbles. Real-estate lending still rose 3.7 % and hire-purchase loans 6.1 %, but agriculture credit shrank 2.2 %, highlighting bankers’ risk aversion to the productive sector.

CAPITAL MARKET: NEPSE FLAT BUT LISTINGS RISE
The Nepal Stock Exchange index closed at 2,602 on 15 December, down 3 % year-on-year, yet market capitalisation is still 71.5 % of GDP. New listings—rights, bonus and initial offerings—totalled Rs 43.2 billion in five months, including Rs 21.9 billion in ordinary shares. “Companies are raising money to retire expensive debt,” said NEPSE spokesperson Murahari Parajuli. The Securities Board has approved a further Rs 20.8 billion in mutual funds and primary shares.

EXCHANGE RATE: RUPEE WEAKENS 5 % AGAINST DOLLAR
Despite record reserves, the Nepali rupee depreciated 5.1 % to Rs 144.37 per dollar, tracking the Reserve Bank of India’s movements. A weaker rupee helps exporters but pushes up import bills; NRB says the slide is orderly and sterilised through dollar purchases.

RISKS AHEAD
Economists flag three vulnerabilities. First, the remittance windfall could reverse if oil prices fall and Gulf hiring slows. Brent crude has already dropped 17.8 % to $61.5 a barrel, narrowing fiscal space for Gulf governments that employ Nepali migrants. Second, capital spending inertia may leave the economy dependent on consumption, widening the non-tradable sector and eroding competitiveness. Third, low inflation could tip into deflation if credit demand does not revive, saddling banks with negative real returns.

NRB is expected to keep its policy rate unchanged at 6.5 % in the next review, but traders predict a 25-basis-point cut if credit growth stays below 10 % by March. Finance ministry officials say they will use the Rs 253 billion cash pile to accelerate road, hydro and irrigation projects, aiming to push capital outlays above 5 % of GDP this fiscal year.