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In most of the developing world, foreign currency is hoarded like water in a drought. In Nepal, the taps are overflowing. The central bank sits on $20 billion of reserves, enough to pay for 16 months of imports and more than double its own conservative target of seven. The excess, worth roughly $11.6 billion, amounts to 27% of GDP and nearly 30 times annual foreign-debt repayments. Where others scramble to defend their currencies, Nepal’s central bankers are puzzling over a rarer dilemma: what to do with abundance.
It sounds like a happy problem. In an era of global uncertainty, fat reserves are a badge of prudence. They shield fragile economies from currency collapse, capital flight and external shocks. When the pandemic froze trade, countries with big buffers such as India and the Philippines weathered the storm more easily. By those standards, Nepal looks doubly cautious. Its import cover exceeds the IMF’s three-to-six-month rule of thumb and its own seven-month target.
Yet abundance has a cost. Most reserves sit in low-yielding U.S. Treasury bonds, earning returns barely above inflation. Every dollar that sleeps abroad is a rupee that could have built roads, reduced debt or powered growth at home. For a country with patchy infrastructure, anaemic fiscal revenues and stubborn unemployment, $11.6 billion of idle assets is a silent extravagance.
Other countries have tried to make their reserves work harder. Some channel surpluses into sovereign wealth funds (SWFs), professionally managed pools that invest in global equities, bonds or infrastructure. Norway’s fund, the world’s largest, earns roughly 6–7% a year. Singapore’s Temasek and GIC operate on similar lines, fusing commercial discipline with national strategy. In theory Nepal could follow suit: set aside part of its excess for longer-term investment abroad, without compromising domestic stability.
The theory, however, demands institutions that Nepal lacks. An SWF must be insulated from political meddling, governed transparently and run by skilled professionals. Nepal’s state-owned firms from the electricity authority to telecoms offer a cautionary record instead: projects overrun, contracts politicised, losses absorbed by taxpayers. A sovereign fund managed in that fashion would merely shift inefficiency from rupees to dollars.
A humbler, surer path is to pay down debt. Nepal’s external obligations are small—annual servicing costs hover below $500 million—but prepaying them would free future budgets and improve creditworthiness. Ghana and Egypt have used temporary reserve strength to retire debt early, lowering risk and saving on interest. It is unglamorous but sound policy: boring finance in service of stability.
The most tempting idea—spending reserves on domestic infrastructure—is also the riskiest. Roads, hydropower and digital networks would indeed boost growth if done well. But “if” is the operative word. Nepal’s hydropower projects are notorious for cost overruns and shifting political priorities. Unlike East Asian economies that turned capital inflows into enduring productivity, Nepal has yet to prove it can turn cash into competence.
A middle course would be to co-finance selected projects with multilateral lenders such as the World Bank or Asian Development Bank, letting them impose discipline and scrutiny. That would put part of the reserves to work while maintaining safeguards. Even then, prudence suggests keeping a liquid buffer, perhaps ten months’ worth of imports, to absorb shocks from floods, fuel spikes or remittance swings.
Countries that manage abundance well tend to separate it into distinct pots: a core reserve for balance-of-payments stability, a liquidity buffer for emergencies, and an investment tranche for longer-term returns. Nepal could do the same, with clear legal and institutional firewalls between each. It would not make the country rich overnight, but it would make its wealth work harder.
In economics, too much of a good thing can become a problem of its own. Nepal’s surfeit of dollars reflects caution born of past fragility. But if caution hardens into inertia, today’s excess will be tomorrow’s missed opportunity. Even safety, after all, carries a price. ■