KATHMANDU: Although Nepal’s economy appears to be on a path to recovery, its impact across sectors remains uneven, according to the half-yearly macroeconomic report published by the Nepal Rastra Bank.
The report notes that despite political and social unrest triggered by the ‘Gen-Z’ movement during the first quarter of the fiscal year 2025/26, the overall economic situation remained stable.
However, the central bank has projected that key economic indicators are likely to remain slightly below the government’s targets for the current fiscal year.
The government had initially set an ambitious annual economic growth target of six percent. But the NRB now estimates growth will remain around four percent. Similarly, annual consumer price inflation is expected to stay below the projected five percent, hovering at around four percent, according to the report.
The central bank observed structural changes in Nepal’s Gross Domestic Product (GDP), with the service sector expanding while the agriculture and industrial sectors continue to shrink. On the demand side, the economy remains heavily reliant on consumption.
In the banking sector, investable liquidity is currently adequate. However, credit expansion has not picked up as expected. As a result, deposit interest rates in some cases have fallen to notably low levels.
Although non-performing loans of banks and financial institutions increased significantly over the past two years, putting pressure on balance sheets, the report states that recent improvements in loan recovery have helped stabilise bad loans.
The NRB also concluded that while Nepal’s external sector appears strong, it may not be sustainable in the long run. The balance of payments remains in a historic surplus, leading to a rise in foreign exchange reserves. However, this surplus is largely driven by remittance inflows, which are themselves vulnerable to external factors.
Although the trade deficit is at a historic low, the report warns that export growth remains risky due to heavy reliance on refined edible oil (artificial) exports.
On the fiscal front, the report highlights persistent challenges. Revenue collection remains weak and has yet to fully return to pre-pandemic levels. Continuous negative fiscal balances and declining foreign grants have increased the government’s financing needs, pushing total public debt upward.
While greater dependence on domestic borrowing has heightened interest rate and rollover risks, the NRB notes that Nepal’s overall debt level remains below the regional average and well within debt sustainability thresholds. This suggests that the government still retains some fiscal space to increase productive capital expenditure.
Comment