IMAGE: GUY BERRESFORD
IN THE first month of the fiscal year, Nepal’s government raised 9.5 per cent more revenue than a year earlier. It spent 9.2 per cent less. Capital expenditure, the money that goes into roads, bridges and power plants, was 2.9 per cent of GDP last year. In the same month, Nepalis abroad sent home Rs 215 billion. That is more than the government spent on capital projects in the whole of last year. The contrast between what the country receives and what it builds has become the defining feature of its public finances.
The external accounts are strong. Exports rose 61.7 per cent year-on-year, to Rs 38.7 billion. Imports rose 31 per cent, to Rs 187.4 billion. The trade deficit widened to Rs 148.7 billion. Remittances covered that gap about one and a half times over. Foreign-exchange reserves climbed to $25.84 billion, up 29 per cent from a year earlier. That is enough to pay for 18 to 22 months of goods imports, far above any conventional adequacy benchmark.
Part of this strength comes from the exchange rate. The Nepali rupee is pegged to the Indian rupee, which fell about 10 per cent against the dollar over the past year. The implied rate moved from about Rs 140 to the dollar in August 2025 to about Rs 152.7 in August 2026. That change lifts the rupee value of remittances sent from dollar-linked economies. In dollar terms, remittance growth was about 11 per cent in the month, not the 21.2 per cent recorded in rupees. The same depreciation raises the local-currency value of external debt. External debt is now 24.2 per cent of GDP, domestic debt 20.8 per cent. Total public debt is about 45 per cent of GDP.
The government’s revenue rebound is tied to the import surge. Import-related taxes, including value-added tax and excise, form a big share of receipts. With imports growing at 31 per cent, collections have followed. The full-year revenue ratio, however, has been falling. Revenue was 22.4 per cent of GDP in FY2021-22. By FY2025-26 it was 18.8 per cent. The first month’s 9.5 per cent growth reverses a 10.8 per cent contraction in the same month last year, but it does not restore the earlier level.
Spending tells a different reality. The first month’s 9.2 per cent contraction follows a year in which capital expenditure fell to 2.9 per cent of GDP, down from 3.6 per cent the year before. The government is running on cash it accumulated rather than new domestic borrowing. Domestic debt stood at Rs 1.4 trillion in mid-August, roughly flat from the end of the previous fiscal year. Its cash balance at the central bank has grown, absorbing some of the liquidity created by the external surplus. This accidental sterilisation has kept domestic credit growth at 2.5 per cent.
The banking system is liquid but idle. Deposits grew 14.5 per cent year-on-year, to Rs 8.2 trillion. Private-sector credit grew about 7 per cent. The credit-to-deposit ratio has fallen to about 71 per cent, well below the levels above 90 per cent seen before 2022. Broad money grew 13.8 per cent, but domestic credit grew only 2.5 per cent. The expansion is coming from net foreign assets, not from lending at home. The interbank rate has been pinned at 2.75 per cent for a year. The 364-day Treasury bill yields 2.06 per cent. Banks are bidding for any paper the government offers.
Interest rates have fallen accordingly. The weighted average deposit rate is 3.15 per cent, down from 4.02 per cent a year earlier. The weighted average lending rate is 6.48 per cent, down from 7.76 per cent. The base rate is 4.72 per cent. The spread between deposits and loans is about 3.3 percentage points. With credit demand weak, banks face pressure on net interest margins. Non-performing loans were already above 5 per cent and rising before this report. Consolidation among banks and financial institutions is likely to continue.
The liquidity has to go somewhere. The NEPSE index stood at 2,643.8 in mid-August, down 5.2 per cent from a year earlier but up 1.8 per cent from the end of the previous fiscal year. Market capitalisation is 68.9 per cent of GDP, down from 75.1 per cent. With deposit rates low and bank credit slow, household savings are moving towards equities, gold, and real estate. The central bank’s macroprudential rules on real-estate exposure and margin lending will shape whether that money funds productive investment or another surge in equities, gold, and real estate.
The real economy is growing modestly. Real GDP grew 3.7 per cent in FY2025-26 at basic prices, up from 2.3 per cent in FY2022-23 but below the government’s longer-term ambitions. Gross fixed capital formation rose to 26.3 per cent of GDP from 23.6 per cent. Gross capital formation reached 31.9 per cent. Domestic savings, however, are just 9.7 per cent of GDP. National savings, boosted by remittances, are 44.8 per cent. The gap between what Nepal invests and what it saves at home is bridged by money earned abroad. Gross national income grew 6.7 per cent and gross national disposable income 9.3 per cent, both faster than GDP. Purchasing power is rising faster than domestic production.
The composition of investment matters. Public capital spending fell while private fixed investment recovered. The investment pickup is private and hydropower-led, not government-led. The FY2026-27 budget’s credibility rests on reversing the decline in public capital spending. The first month’s contraction offers little encouragement.
The external surplus will narrow as imports continue to outpace exports. The current account should stay positive. Reserves will stay high. That gives Nepal room to buy gold, prepay expensive external debt, or build buffers for the transition ahead.
That transition now has a new timetable, or rather a proposed one. This year Nepal requested its graduation from Least Developed Country status be postponed by three years, from November 2026 to November 2029.
Nepal had already postponed graduation once, after the 2015 earthquake and the pandemic. A former trade secretary noted that the additional time granted after Covid went largely unused, and that the transition strategy remained a government document because the state failed to strengthen the private sector and raise productivity. The request for another three years buys time. It does not buy a plan.
The first month of the fiscal year has set the pattern. Money is coming in. Revenue is being collected. The building has not started. ■
