ILLUSTRATION: ÁLVARO BERNIS
AN AVALANCHE of money sent home by citizens working abroad is pushing Nepal into an unusual economic predicament. Figures published by the central bank on June 9th show that the country is accumulating foreign exchange faster than its subdued domestic economy can absorb it. Gross foreign exchange reserves rose by 38% in the ten months to mid-May, to Rs3.7trn, or $24.19bn. This cache is now vast enough to finance prospective imports of merchandise and services for 19.2 months, a level of liquidity that points to weak internal demand as much as it does to external strength.
The primary motor behind this build-up is the remittance economy. Inflows of money from migrant workers increased by 41.2% in local currency terms during the ten-month review period, to Rs1.9trn. Between mid-April and mid-May alone, workers sent home Rs257.5bn, up from Rs165bn during the same period in the previous year. The flows have remained resilient even as the composition of migration shifts. The number of Nepali workers obtaining first-time approvals for foreign employment fell to 335,510 from 405,610 a year earlier, but renewals rose to 326,364, showing a trend towards longer tenures abroad.
This influx of foreign capital has generated comfortable surpluses elsewhere. The current account recorded a surplus of Rs729bn, up from Rs272bn a year earlier, while the overall balance of payments surplus expanded to Rs863bn. Foreign direct investment, though small in absolute terms, also grew, with equity inflows rising to Rs16.96bn from Rs10.58bn.
Yet the domestic economy is not utilizing these resources to expand capacity. Total merchandise imports grew by 14.8%, roughly matching a 14.2% spike in exports. The trade deficit consequently widened by 14.9% to Rs1.4trn. More telling is the composition of this trade. Intermediate goods, which are used in manufacturing and production, fell as a share of total exports from 32.5% to 29.8%. On the import side, capital goods, which represent investment in plant and machinery, accounted for a mere 9.3$ of the total. Nepal remains a country that imports what it consumes and exports little of what it makes.
Furthermore, buying power is being eroded from abroad. The terms of trade index, which measures the relative price of exports to imports, fell by 16.9%. This deterioration occurred because the import price index surged by 24%, driven by global commodity markets. The price of Brent crude oil rose by 68.3% over the year to $110.91 a barrel by mid-May, while gold prices increased by 46.7%. A 10.4% depreciation of the Nepali rupee against the American dollar since July 2025 has exacerbated these costs, pushing the exchange rate to 152.84 a dollar.
Inside the country, the monetary indicators suggest a banking system flushed with cash but lacking willing borrowers. Deposits at banks and financial institutions rose by 16% to Rs7.9trn. However, bank credit to the private sector grew by just 6.7%. This divergence has altered the composition of bank liabilities. Safe but low-yielding saving deposits now make up 46% of the total, up from 36% a year ago, while the share of long-term fixed deposits has shrunken from 51% to 38%.
Faced with a wall of money and slow loan growth, commercial banks have cut interest rates sharply. The weighted average deposit rate fell from 4.37% to 3.35% over the year, while the average lending rate dropped to 6.73%. To prevent interest rates from collapsing entirely, the Nepal Rastra Bank, the central bank, has been forced into massive liquidity mop-up operations.
The lack of private sector borrowing appetite is seen in where the money is going. Loans to the agricultural sector actually contracted. Where credit is being extended, it is heavily concentrated in property or consumption. Some 63.5% of all bank credit is secured against the collateral of land and buildings. Loans for trust receipts, which finance imports, jumped by 36.1%, and margin nature loans, which fund stock purchases, rose by 15%.
This financial slack has insulated the local stock market from the broader economic torpor. The NEPSE index rose to 2,730.18 in mid-May from 2,620.27 a year earlier, lifting total market capitalization to Rs4.6trn. The stock market is now equivalent to 70.55% of the country’s gross domestic product. Banks, financial institutions and insurance companies account for over half of this valuation, while hydropower companies make up 17.5%.
Public finance is providing little countercyclical stimulus. The federal government’s total expenditure reached Rs1.17trn against revenue mobilization of Rs988bn. Although the state is running a fiscal deficit, its spending is heavily skewed towards recurrent costs, such as salaries and administration, which consumed Rs814bn. Capital expenditure, which funds infrastructure like roads and bridges, actually fell by 5.4% to Rs113.8bn. Because the government has been slow to spend its capital budget while revenue has grown by 7.2%, its cash balance held at the central bank swelled.
The macroeconomic picture is therefore one of external abundance masking domestic stagnation. With consumer prices rising faster than the interest rates offered on bank deposits, savers are facing negative real returns. As long as capital expenditure remains moribund and private credit chases property and imports rather than industrial production, Nepal’s historic stockpile of foreign currency will serve as a reminder of domestic investment opportunities missed. ■
