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NEPAL IS being mugged from three directions at once. Oil is surging, the dollar is expensive and the country is still totting up a devastating flood bill. On October 23rd Brent crude hit $117.18 a barrel, its highest since late April, after attacks around Saudi Arabia raised fears of more disruption to Middle Eastern supply. The same day the Nepal Rastra Bank put the dollar at Rs151.42 buying and Rs152.02 selling. For an economy that imports most of its petroleum, that combination stinks.
The damage starts at the petrol pump. Nepal buys fuel from India, where prices track international costs and the exchange rate. When crude gets dearer, Nepal Oil Corporation gets a bigger bill. It can pass the pain to households and firms, feeding inflation, or swallow losses and strain its finances, inviting a government bail-out. Neither makes the underlying bill vanish.
Diesel is the real bastard. Trucks haul food, cement and consumer goods over Nepal’s miserable roads. Higher fuel costs raise the price of moving almost everything, from vegetables to construction materials. Airlines bleed more. Farmers pay more to run machinery and shift produce. Firms with slim margins cannot absorb the hit, so consumers eventually get screwed. The damage reaches far beyond motorists.
The dollar adds another kick in the teeth. Nepal’s rupee is pegged to the Indian rupee at Rs1.60. That anchor brings predictable trade and prices with India, Nepal’s biggest trading partner. It also means Kathmandu cannot freely adjust against the dollar when the Indian rupee weakens. A stronger dollar makes imported oil, machinery and medicines more expensive in Nepali rupees even if their dollar prices do not budge. The peg imports part of India’s monetary and currency conditions into Nepal. Kathmandu controls neither the dollar’s strength, global oil prices nor the Reserve Bank of India’s response.
The floods have left the government with even less room to manoeuvre. The August disaster wrecked roads, bridges, hydropower plants and homes across the Rasuwa corridor and nearby districts. The World Bank estimates direct damage to physical assets at $1.66bn. Finance minister Swarnim Wagle says reconstruction could need $4bn-5bn. The World Bank now projects growth of 3.7% in fiscal 2026-27, with damage to energy and transport infrastructure weighing on production and services.
Rebuilding will require imports of fuel, equipment, steel and other materials—more demand for foreign currency just when imported energy is getting more expensive. Damaged hydropower and transmission infrastructure may cut electricity exports, depriving Nepal of foreign-exchange earnings. Tourism faces disrupted routes and damaged facilities. The government must spend more while parts of the economy generate less.
Nepal has one important defence: remittances. Money sent home by Nepalis abroad has financed imports and built reserves. The World Bank says remittances reached 35.8% of GDP in fiscal 2025-26, while reserves climbed to $25.3bn, enough for 19.6 months of imports. Those buffers are substantial. They make an immediate balance-of-payments crisis less likely. They cannot insulate every household or business from higher prices.
The uglier question is interest rates. India has already moved. The Reserve Bank of India raised its policy repo rate by 25 basis points to 5.50% in October as inflation climbed to 5.54% in September. Its policymakers warned that further increases may be needed if oil and food prices keep inflation high.
Will Nepal Rastra Bank follow? It faces pressure, though an Indian rate rise does not automatically require an identical move in Nepal. The two countries have separate central banks and monetary frameworks. The currency peg, however, narrows Nepal’s room for independent policy. If Indian rates rise while Nepal keeps rates much lower, the gap could influence financial flows and complicate management of the peg. The scale of that pressure will depend on currency conditions, domestic liquidity and the inflation outlook.
Nepal’s starting point is different from India’s. The World Bank reports inflation fell to 3.1% in fiscal 2025-26 and that the NRB cut its policy rate to 4.25% amid excess liquidity and weak credit demand. Cheap credit has done little to persuade businesses to borrow aggressively. A rate increase now could make loans more expensive, discourage investment and pile pressure on firms already dealing with fuel and transport costs. Keeping rates low could become difficult if imported inflation persists or the peg comes under strain.
For Balen Shah’s government and Wagle, the choices are unpleasant. Subsidising fuel shifts costs onto public finances. Letting prices rise squeezes consumers and businesses. Higher interest rates could restrain inflation at the cost of credit and growth. Heavy reconstruction spending is essential, yet wasteful procurement or poorly chosen projects would leave Nepal with more debt and little extra productive capacity.
The government’s response will matter more than its rhetoric. It needs to protect essential spending, direct reconstruction money towards infrastructure that restores economic activity, avoid blanket subsidies and preserve confidence in the currency peg. The NRB must watch imported inflation and financial conditions without choking off a fragile recovery.
Nepal has reserves, remittances and hydropower to soften the blow. It also has damaged infrastructure, weak domestic production and a big import bill. The immediate danger is a slower economy in which households pay more while businesses invest less. If oil stays high and the dollar strengthens, the pressure will spread from fuel prices to food, transport, credit and the public budget. The test for Shah’s government is whether it can manage that squeeze without turning an external shock into a home-grown economic mess. ■
