IMAGE: BARON REZNIK
THE NEPAL Rastra Bank’s headquarters in Baluwatar, a squat concrete building that houses the country’s monetary authority, has seldom had so much cause for optimism. In the eleven months to mid-June, the central bank’s balance sheet shows a balance-of-payments surplus of Rs926bn, foreign-exchange reserves of $24.7bn and a current-account surplus of Rs802bn. These are the sort of numbers that finance ministers in emerging economies dream about.
Walk a few kilometres to the shops of New Road, Kathmandu’s commercial heart, and a different picture emerges. Customers are buying imported rice cookers and mobile phones with remittance money, but the shopkeepers themselves speak of sluggish sales and soaring costs. The wholesale price of fuel has jumped 48% in a year. Basic metals are up 32%. The cost of ghee and oil has risen 15%. The consumer price index is running at 5.22%, more than double last year’s rate.
The economy is caught in a strange purgatory. The headline growth figure of 3.9%, a marginal improvement on the previous year’s 3.8%, is respectable by historical standards. But it hides a big malady. The growth is almost entirely a function of remittances, which have swollen to Rs2.1trn, equivalent to nearly a third of the country’s nominal GDP. Nepalis are getting richer, but not because they are producing more within their borders. They are richer because of wages earned in Doha, Kuala Lumpur and Dubai.
This is the recovery narrative. It is real but it is hollow. The domestic economy is failing to generate productive employment, and the most enterprising segments of the population continue to leave. Between mid-June 2024 and mid-June 2025 the number of Nepalis seeking foreign employment rose again. The central bank’s data shows that while gross domestic product grew (GDP) by 3.9%, gross national disposable income (GNDI) grew by 9.3 per cent. The gap between what is produced in Nepal and what is available to Nepali households has never been wider.
The stagflation warning is written in the wholesale price index, which has surged to 8.47%. Fuel and power prices are up 36.8%. Chemical products have risen 14.8%. These are input costs. They will eventually feed into retail prices. The central bank’s monetary policy tools are virtually useless against a 48% spike in fuel prices. Raising interest rates to curb imported inflation would only further crush domestic investment. Lowering rates, as the NRB has done aggressively, has produced a liquidity trap.
The policy rate has been cut, the base rate has fallen to 4.88% from 6.09% and the weighted average lending rate is down to 6.64% from 7.99%. This is cheap money by any measure. Yet private sector credit growth has decelerated to 6.4%, down from 8.2% the previous year. Banks are flush with deposits of over Rs8trn, but they cannot find creditworthy borrowers with profitable investment opportunities. The transmission mechanism is broken. You can lead a horse to water, but you cannot make it drink.
The stock market is confirming the stagnation. The NEPSE index closed at 2724 in mid-June, barely changed from 2655.4 a year earlier. In a healthy economy with cheap credit, equities should be rallying as future earnings are discounted at lower rates. The flatline suggests that the corporate sector does not foresee a surge in profitability. Investors are parking their money in risk-free treasury bills yielding about 2.7% rather than equities.
The government is missing in action. Revenue growth has slumped to 6.4%, half the 10.5% seen the previous year. Total expenditure growth has slowed, too. Capital expenditure, the government spending on roads, hydro-plants and irrigation that could create jobs and build productive capacity, has stalled. Bureaucratic red tape, procurement delays and political infighting at the provincial level have paralysed the development budget. In an environment where the private sector is refusing to invest, the government should be the spender of last resort. Instead it is borrowing to cover recurrent expenditure, crowding out potential private investment by acting as the safest borrower in a risk-averse market.
The trade deficit suggests the same trouble. Merchandise exports grew 12.3% to Rs278bn but from a low base. Imports grew 15.2% to Rs1.89trn billion. The remittance bandage of Rs2.1trn is the only thing preventing a balance-of-payments crisis, but it is also financing a consumption boom that leaks capital back out of the country. The export and import unit value price index suggests that Nepal’s terms of trade remain unfavourable.
Being stuck in the middle is dangerous. A 3.9% growth rate prevents outright panic, reducing political urgency for substantial reforms. But the economy is highly susceptible to external shocks. A recession in the Gulf states, a sharp spike in global oil prices or a slowdown in India would pull the rug out from under the remittance-fuelled illusion. The central bank’s data is a chilling warning. Cheap money and foreign reserves are necessary conditions for growth, but they are not sufficient. Without aggressive capital expenditure, supply-side reforms and targeted credit interventions, Nepal will stay where it is: teetering on the edge of a plateau, looking down at an abyss on one side and a steep climb on the other. ■
