Here is the state of the country’s economy as Balen takes charge of power

KATHMANDU: As Balen Shah assumes power, the responsibility of steering the country’s economy has been entrusted to Finance Minister Swarnim Wagle

Despite commanding a near two-thirds majority, the government faces significant economic challenges.

Looking at key economic indicators, inflation remains under control, remittance inflows are strong, and foreign exchange reserves are more than adequate—these are positive signals for the government. While economic momentum is slow, there is no immediate risk of a crisis.

However, a major concern is the inability to channel excess liquidity in banks into productive investment. Another challenge is reviving weakened domestic consumption.

Amid these conditions, rising tensions in the Middle East pose a growing risk to remittance inflows from Gulf countries. This could further suppress domestic demand and also impact foreign exchange reserves. The government will need to act to mitigate these risks.

In this report, we analyze which of the country’s key economic indicators are strong, stable, or concerning, based on data published by the Nepal Rastra Bank up to mid-January (Magh).

Inflation — Stable

According to central bank data up to mid-January, the average annual inflation rate stands at 1.92 percent. For the month of Magh alone, inflation reached 3.25 percent.

So far, inflation appears to be under control and remains below the annual target. The central bank aims to keep inflation within an average of 5 percent for the current fiscal year.

However, if tensions in the Middle East escalate, inflation could rise beyond expectations.

In particular, a sharp increase in petroleum prices could raise transportation costs, leading to higher prices for consumer goods overall.

Remittance Inflows — Strong

Remittance inflows into Nepal have remained strong over the past two years, with monthly inflows exceeding NPR 100 billion.

According to central bank data, a total of NPR 1.261 trillion in remittances has entered the country by mid-January of the current fiscal year.

However, Middle East instability could negatively impact this trend, as the income of Nepali workers in Gulf countries may be affected.

Foreign Exchange Reserves — Strong

Data published by the central bank shows that foreign exchange reserves exceeded NPR 3.3 trillion between Shrawan and Magh. These reserves are sufficient to cover imports of goods and services for 18 months.

Investable Funds in Banking Sector — Adequate

Due to rising remittance inflows, Nepal’s banking system currently has ample liquidity available for lending.

The central bank estimates around NPR 1.1 trillion in investable funds in the system. If the government creates a favorable investment environment and boosts private sector confidence, this capital could flow into productive sectors and support overall economic growth.

Private Sector Credit Demand — Concerning

Despite abundant liquidity, demand for credit from the private sector remains weak. The annual growth rate of loans extended to the private sector is only 6.8 percent.

Boosting private sector confidence to increase credit uptake and stimulate economic growth is one of the government’s biggest challenges.

Central bank officials, however, argue that the current lower credit growth should be viewed in context, as lending had expanded significantly in previous periods.

Interest Rates — Favorable

Currently, loans from banks and financial institutions are available at relatively low interest rates. In Magh, the average lending rate stood at around 7 percent, with some sectors receiving loans at even lower rates.

With sufficient liquidity and low interest rates, there is potential for the private sector to benefit from cheaper capital—provided overall economic sentiment improves.

Emerging Risks

Economists note that these positive indicators have so far helped prevent further economic slowdown. However, they could turn negative in the coming months.

Former Nepal Rastra Bank Executive Director Dr. Gunakar Bhatta warns that prolonged conflict in the Middle East could reduce remittance inflows, lower government revenue, and create pressure on inflation and banking sector liquidity.

He also highlighted petroleum prices as a key risk factor for Nepal’s economy.

As the conflict continues, global oil prices have surged. On Monday morning, Brent crude reached $115 per barrel, compared to $70–72 before the conflict began.

Following the conflict, the Nepal Oil Corporation has already adjusted fuel prices. Typically revised every 15 days, fuel prices were increased within just 10 days—petrol by NPR 15 per liter and diesel by NPR 10 per liter—yet losses remain unadjusted, suggesting further increases may follow.

In the first seven months of the fiscal year, Nepal imported petroleum products worth NPR 158 billion. Rising oil prices will increase import bills, putting direct pressure on foreign exchange reserves.

Higher diesel prices will also increase transportation costs, leading to higher prices for consumer goods and impacting daily life.

Additionally, Middle East tensions threaten employment opportunities for Nepali workers in Gulf countries, a key destination for foreign employment. Although labor approvals have resumed after a temporary suspension before Chaitra 3, prolonged instability could reduce overseas employment opportunities. Currently, around 1.7 million Nepalis are working in these countries.

Economist Dr. Bhatta warns that external pressures combined with domestic weaknesses could further slow Nepal’s already sluggish economy.

He noted that historically, three major global recessions were triggered by petroleum price shocks.

According to Forbes, a $10 increase in crude oil prices can reduce the U.S. economy by 0.2 percent, though the impact varies by country. Oil-import-dependent economies like Nepal face higher risks.

Nepal had initially targeted 6 percent economic growth for the current fiscal year, but this was revised downward to 3.5 percent a month ago. If Middle East tensions disrupt domestic indicators, growth could decline further.

Meanwhile, capital constraints among middle- and lower-income groups remain another concern.

The real estate sector continues to face sluggish activity. Compared to the previous year’s Falgun, property transactions declined by 20 percent—from 46,000 transactions to 36,471.

Similarly, around NPR 700 billion in deposits has been mobilized by cooperatives, but many depositors have been unable to withdraw their savings. More than NPR 39 billion remains stuck in 23 troubled cooperatives.

The government’s fiscal position is also under pressure. By Falgun, it collected NPR 658 billion in revenue and secured an additional NPR 343 billion through internal borrowing and budgetary support. Total expenditure stands at NPR 927 billion, but capital expenditure—critical for infrastructure development—has not exceeded 20 percent.

If the Middle East conflict persists, the new government is likely to face increasing pressure both externally and domestically.

Nepal Rastra Bank Executive Director Dr. Ram Sharan Kharel noted that while the situation is currently under control, prolonged conflict could impact remittances, foreign exchange reserves, and the tourism sector.