Nepal's Economy: Robust External Sector Bolsters Stability Amidst Slow Production Growth

Nepal's central bank, Nepal Rastra Bank (NRB), has released its annual economic statistics for the fiscal year 2082/83 (2025/26), painting a nuanced picture of the nation's economic health. While the external sector has demonstrated remarkable resilience and strength, bolstering overall economic stability, the productive sectors continue to grapple with sluggish growth. This dichotomy presents both opportunities and challenges for investors navigating the Nepalese market.

The NRB's report estimates the country's economic growth rate for the review period to be a modest 3.85 percent, a deceleration from the 4.43 percent recorded in the previous fiscal year. A closer look at sectoral performance reveals varying trajectories: the agricultural sector is projected to grow by 1.58 percent, the industrial sector by a more robust 5.67 percent, and the services sector by 4.21 percent. This indicates that while certain areas like industry show promise, the foundational agricultural sector's subdued growth could be a drag on overall expansion.

On the inflation front, the central bank has largely managed to keep price increases under control. The annual point-to-point consumer inflation for the month of Ashar (mid-June to mid-July) stood at 5.14 percent. More significantly, the average inflation for the entire fiscal year was contained at 3.08 percent, a notable improvement from the 4.06 percent recorded in the preceding fiscal year. This stability in prices is a positive indicator for both consumers and businesses, reducing uncertainty and supporting purchasing power. The average inflation for the food and beverage group was particularly low at 1.04 percent, while the non-food and services group saw inflation at 4.21 percent.

The external sector stands out as a beacon of strength in the NRB's assessment. Gross foreign exchange reserves witnessed a substantial increase of 45.6 percent, reaching an impressive NPR 389.76 billion (equivalent to USD 25.31 billion). This robust reserve position is critical for national economic security, as it is deemed sufficient to cover more than 19 months of prospective imports of goods and services, far exceeding international benchmarks for import coverage. Furthermore, the current account recorded a significant surplus of NPR 923.56 billion, and the overall balance of payments (BoP) registered an even larger surplus of NPR 1,027.04 billion. These figures underscore Nepal's improved external financial position and reduced vulnerability to external shocks.

A major contributor to this external sector strength is the continued surge in remittance inflows. During the review period, remittances increased by a remarkable 37.1 percent, reaching a record NPR 2,363.13 billion. This inflow of foreign currency not only supports the balance of payments but also significantly boosts household incomes and consumption, playing a vital role in the Nepalese economy. The number of Nepalis seeking foreign employment remains high, with 406,519 individuals obtaining final labor permits and 385,783 renewing their permits.

In terms of foreign trade, the report indicates a mixed performance. Total merchandise exports grew by 13.8 percent to NPR 315.29 billion. However, imports also saw a significant increase of 16.2 percent, reaching NPR 2,096.38 billion. Consequently, the total merchandise trade deficit widened to NPR 1,781.09 billion. While export growth is encouraging, the larger increase in imports highlights the ongoing challenge of reducing the trade imbalance.

Government finance data reveals that total government expenditure for the fiscal year amounted to NPR 1,582.17 billion, while total revenue mobilization stood at NPR 1,241.32 billion. This indicates a fiscal deficit, which is a common challenge for developing economies. The total outstanding debt of the Nepal government reached NPR 2,974.90 billion, representing 45.07 percent of the Gross Domestic Product (GDP). Managing this debt sustainably will be crucial for long-term fiscal health.

Within the monetary sector, broad money supply expanded by 13.4 percent. Deposit mobilization by banks and financial institutions (BFIs) increased by 13.9 percent, reaching NPR 8,276.93 billion. Credit extended to the private sector saw a more moderate growth of 6.5 percent, totaling NPR 5,857.06 billion. The non-performing loan (NPL) ratio for BFIs was reported at 5.66 percent, a figure that warrants careful monitoring by regulators and investors alike.

The capital market also saw activity, with the NEPSE index settling at 2597.80 points and total market capitalization reaching NPR 4,463.55 billion. This indicates a dynamic equity market, albeit one that can be influenced by broader economic sentiments.

Notably, the report also highlighted a strong performance in the hydropower sector during the fourth quarter of the last fiscal year. The net profit of hydropower companies increased by an average of over 471 percent. Out of 111 hydropower companies whose financial statements were reviewed, 91 reported net profits, while 20 continued to operate at a loss. This surge in profitability for a significant portion of the hydropower sector could be a key area of interest for investors, despite the recent challenges posed by natural disasters.

In conclusion, Nepal's economy presents a complex picture of robust external sector performance, driven by strong remittances and foreign exchange reserves, juxtaposed with slower domestic production growth and a widening trade deficit. While inflation remains under control and the hydropower sector shows impressive profitability, the overall economic growth rate suggests a need for continued policy focus on enhancing productive capacity and fiscal management. Investors should weigh these factors carefully when assessing opportunities in the Nepalese market.