A Tale of Two Economies: Record External Indicators, but Domestic Market Stagnates

The Nepali economy has presented a stark paradox in the first month (mid-July to mid-August 2026) of the current fiscal year 2026/27. According to the latest macroeconomic and financial data released by the Nepal Rastra Bank (NRB), the country's external sector has never been stronger. Remittance inflows and foreign exchange reserves have hit new heights, and the balance of payments remains in a comfortable surplus. However, in sharp contrast, the domestic economy is characterized by deep stagnation. Despite interest rates dropping to new lows, a conspicuous reluctance among the private sector to borrow—coupled with a sharp spike in inflation—clearly indicates sluggish domestic economic activity.

Remittances Rule the External Sector

The most promising aspect of the economy in the first month was undeniably the surge in remittances. Remittance inflows jumped by a staggering 21.2 percent in a single month to reach Rs 215.05 billion. In US dollar terms, this represents a 10.2 percent increase, totaling $1.40 billion. Interestingly, the number of Nepalis taking new labor approvals for foreign employment dropped slightly from 44,466 last year to 42,693 this mid-August. However, a rise in renewed labor approvals and tighter controls on informal channels (like Hundi) appear to have driven the robust growth in formal remittance channels.

Fueled by these remittances, the country’s total foreign exchange reserves ballooned from Rs 3.897 trillion in mid-July to Rs 3.946 trillion by mid-August. In dollar terms, the reserves stand at $25.84 billion. Similarly, the Balance of Payments (BoP)—the difference between all money flowing into and out of the country—is at a surplus of Rs 90.34 billion, and the current account surplus stands at Rs 94.59 billion. These figures confirm that Nepal is under no immediate pressure regarding foreign exchange constraints to finance imports or meet external obligations.

Trade Improves, Yet Imports Dominate

The foreign trade indicators for mid-August also offer mixed signals. Merchandise exports surged by 61.7 percent compared to the previous year, reaching Rs 38.70 billion. The export growth was primarily driven by items like soybean oil, palm oil, polyester yarn, and jute goods. However, there is little room for celebration. During the same period, merchandise imports also spiked by 31 percent, hitting Rs 187.44 billion. The volume of imports remains nearly five times larger than exports, and a significant chunk of these imports comprises consumable goods like petroleum products, chemical fertilizers, and edible oils, rather than industrial raw materials.

Domestic Slump: Cheap Credit Fails to Attract Borrowers

While the external indicators shine, the state of domestic production and investment remains bleak. By mid-August, the weighted average lending rate of commercial banks had plummeted from 7.76 percent a year ago to 6.48 percent. The base rate has also shrunk to 4.72 percent. Yet, despite these highly favorable borrowing costs, credit flow to the private sector grew by a marginal 0.4 percent (Rs 23.58 billion) during the one-month period. Furthermore, the total deposits in banks and financial institutions actually declined by 0.3 percent (Rs 20.71 billion), dropping to Rs 8.256 trillion in mid-August.

A sector-wise breakdown of credit flow paints an equally disappointing picture. Credit flow to employment-generating sectors like construction, agriculture, and manufacturing is either negligible or negative. Loans to the agriculture sector contracted by 0.9 percent, while credit to the finance, insurance, and real estate sectors shrank by 5.1 percent. This trend clearly demonstrates that lower interest rates alone cannot boost investor confidence; without a revival in market demand, businesses are simply unwilling to take on new debt.

Inflation Squeezes the Public

As businesses struggle with a lack of demand, the general public is being crushed by rising prices. By mid-August, year-on-year consumer price inflation jumped to 5.96 percent. In stark contrast, inflation during the same period last year was a mere 1.68 percent. The food and beverage category has been hit particularly hard, with inflation standing at 6.77 percent. Within this group, the price of ghee and oil surged by 15.62 percent, and fruits by 15.39 percent. Additionally, a 13.17 percent spike in transportation costs has triggered a chain effect across the entire supply chain. Geographically, the sting of inflation is felt more acutely in Madhesh Province (6.94 percent) than in the Kathmandu Valley (4.81 percent), and more in rural areas (6.18 percent) than in urban centers (5.88 percent).

State Coffers Full, Capital Expenditure Dismal

The government's fiscal operations mirror the patterns of previous years. In the first month of the fiscal year, the government collected Rs 92.23 billion in revenue, but managed to spend only Rs 41.89 billion. Shockingly, capital expenditure—which funds development projects—was a meager Rs 1.33 billion. Because the government is failing to spend, a massive Rs 361.81 billion is sitting idle in various government accounts at the central bank as of mid-August.

Overall, the mid-August data confirms that the Nepali economy remains trapped in a cycle of "importing goods with remittance money." While a robust external sector provides crucial macroeconomic stability, the general public is unlikely to see relief from the vicious cycle of inflation and unemployment until domestic investment picks up, capital expenditure accelerates, and local jobs are created. The sluggish credit expansion clearly proves that slashing interest rates is not a magic bullet to get the economy moving again.