Strong first half for economy amid easing inflation, record remittances and forex reserves

Nepal’s economy delivered a notably stronger performance in the first half of fiscal year 2025/26, supported by easing inflation, higher level of remittance inflows, record-high foreign exchange reserves and a sizeable balance of payments surplus. According to Nepal Rastra Bank (NRB) data from 17 July 2025 to 14 January 2026, macroeconomic conditions improved markedly compared with the same period last year, although fiscal and credit-side weaknesses remain.

Inflation continues to ease at multi-year lows

Headline consumer price inflation eased to 2.42% year-on-year by mid-January 2026, down from 5.41% a year earlier. The sharp deceleration reflects softer food prices, with the food and beverage index contracting by 0.09%, while non-food and services inflation stood at 3.81%.

Average inflation during the first six months of the fiscal year was just 1.70%, well below 4.97% recorded in the corresponding period last year. Prices declined for pulses, spices and cereals, while fruit, ghee and oil registered modest increases. Within non-food items, miscellaneous goods and services rose sharply by 21.75%, followed by education at 7.56%. Provincial figures show inflation highest in Madhesh (3.37%) and Koshi (3.25%), and lowest in Karnali (1.08%).

From a macroeconomic perspective, subdued inflation has created policy space for accommodative monetary conditions, though the divergence between headline inflation and services prices suggests underlying structural rigidities.

External sector records strong surplus

The external sector remained the economy’s strongest pillar. The current account surplus widened to NRs 429.91 billion, while the overall balance of payments (BoP) surplus reached NRs 501.24 billion, more than double the level recorded a year earlier. In US dollar terms, the BoP surplus stood at $3.54 billion.

This improvement was driven primarily by buoyant remittance inflows and stronger exports. Remittances surged by 39.1% to NRs 1,062.93 billion in the first six months, equivalent to a 32.3% increase to $7.5 billion. 

In the month of Poush (mid-Nov to mid-Dec) alone, remittances amounted to NRs 192.62 billion. Net secondary income rose to NRs 1,168.02 billion. Over the period, more than 206,800 new foreign employment approvals were issued, while 194,733 workers renewed labour permits.

While remittances continue to underpin external stability, the economy’s heavy reliance on overseas labour income underscores its vulnerability to external shocks.

Large trade deficit remains a structural challenge

Merchandise exports expanded sharply by 43.8% to NRs 142.02 billion. Exports to India rose 57%, while shipments to other countries grew 10.7%; exports to China fell significantly by 66.7%. By product, soybean oil, cardamom, palm oil, jute goods, and shoes and sandals saw increases, whereas zinc sheets, particle board, tea, woollen carpets, and handicrafts declined.

Imports, however, also increased, up 14.2% to Rs 939.02 billion. Imports from India, China, and other countries rose 5.9%, 22.1%, and 32.4%, respectively. By product, imports of crude soybean oil, chemical fertilizers, transport equipment, vehicles and spare parts, and silver and gold increased, while imports of hot-rolled sheet in coil, edible oil, garlic, pulses, and oilseed products declined during the review period.

As a result, the trade deficit widened by 10.1% to NRs 797 billion, despite an improvement in the export-import ratio to 15.1%.

The data highlight a familiar pattern: export growth is encouraging, but insufficient to offset Nepal’s structurally high import dependence.

Foreign exchange reserves reach record high

Gross foreign exchange reserves climbed by 21.1% to NRs 3,242.45 billion ($22.47 billion). Reserves are sufficient to cover 18.1 months of prospective merchandise and services imports. The reserves-to-GDP ratio stood at 53.1%, while reserves-to-imports reached 150.7%, indicating a very strong external buffer. Indian currency accounted for 22.3% of total reserves.

Such reserve adequacy provides significant protection against external volatility and enhances confidence in macroeconomic management.

Fiscal pressures persist

Government finances remain under strain. Total expenditure reached NRs 690.22 billion, while revenue mobilisation stood at Rs 577.40 billion. Recurrent expenditure dominated at Rs 487.14 billion, whereas capital spending remained weak at Rs 49.43 billion, declining year-on-year. Financial management expenditure totalled Rs 153.65 billion. Cash balances with NRB rose to Rs 346.37 billion.

Low capital expenditure continues to weigh on growth prospects, pointing to implementation bottlenecks rather than financing constraints.

Monetary conditions and credit growth

Broad money (M2) expanded by 5.4% during the review period and by 14.2% year-on-year. Deposits at banks and financial institutions increased by 5.7% to Rs 7,681.35 billion, while private sector credit grew by only 3.6% to Rs 5,695.17 billion, reflecting weak loan demand and cautious lending behaviour. Credit to agriculture declined, while lending to consumption, construction and transport increased.

NRB absorbed a net NRs 28,699.90 billion in liquidity through various instruments, signalling excess liquidity in the banking system. The central bank also injected NRs 493.04 billion through net US dollar purchases.

Interest rates ease further

Short-term interest rates continued to decline. The weighted average 91-day Treasury bill rate fell to 2.35%, while the interbank rate stood at 2.75%. Commercial banks’ average deposit and lending rates eased to 3.56% and 7.12% respectively, reducing borrowing costs. Base rates declined across all categories of banks.

Lower interest rates, combined with ample liquidity, suggest room for a credit recovery, provided confidence and investment appetite improve.

Private sector credit from BFIs rose 3.6% (NRs 197.47 billion) to NRs 5,695.17 billion during the review period, compared to a 5.2% (NRs 265.56 billion) increase in the same period last year. On a year-on-year basis, credit to the private sector from BFIs grew 6.7% by mid-January 2026. On the other hand, the non-performing loan ratio reached 5.42%, signaling a concerning trend.