External Sector Strengthens on Paper, But Growth Remains Remittance-Led

Nepal’s external sector showed a marked improvement in the first four months of fiscal year 2082/83 (up to mid-November 2025), with both the current account and balance of payments recording significantly higher surpluses than a year earlier. Data released by Nepal Rastra Bank indicate that rising inflows—largely driven by remittances and transfers—have outweighed pressures from trade and service deficits, offering short-term stability to the economy.

During the review period, the current account remained in surplus by Rs 279.65 billion, a sharp increase from the Rs 147.78 billion surplus recorded in the same period last year. In US dollar terms, the surplus nearly doubled to USD 1.99 billion, up from USD 1.10 billion. Economists say this improvement reflects a strong inflow of foreign currency at a time when import demand has begun to recover.

However, a closer look at the composition of the current account suggests that the improvement is not the result of stronger exports or higher service earnings. Instead, it is largely supported by remittances and secondary income, underlining Nepal’s continued dependence on income generated by migrant workers rather than domestic productive capacity.

The capital account also showed some improvement. Net capital transfers increased to Rs 6.21 billion, compared to Rs 2.47 billion a year earlier, indicating a modest rise in grants and capital inflows linked to development assistance. This provided additional support to the external position, though its scale remains limited relative to overall financing needs.

In contrast, foreign direct investment (FDI) remained weak. During the review period, FDI inflows (equity only) declined to Rs 2.49 billion, less than half of the Rs 5.76 billion recorded in the same period last year. Analysts see this as a sign of persistent challenges related to policy uncertainty, regulatory complexity and delays in project execution, which continue to discourage long-term foreign investors.

Alongside the current account, the overall balance of payments (BoP) surplus rose to Rs 318.40 billion, up from Rs 205.83 billion a year earlier. In dollar terms, the BoP surplus increased from USD 1.53 billion to USD 2.26 billion. The stronger BoP position has helped bolster foreign exchange reserves, easing concerns over external liquidity and import financing.

Despite these positive headline figures, economists caution against over-optimism. The external surplus is being driven primarily by transfers rather than by a structural improvement in trade competitiveness or service exports. While the surplus provides short-term relief and policy space, it also masks underlying weaknesses in production, investment and export diversification.

Overall, the latest data present a mixed picture. Nepal’s external accounts appear stronger, offering stability in the near term, but the quality of that strength remains a concern. Analysts argue that sustaining external balance over the long run will require expanding exports, increasing service income and restoring investor confidence, so that future surpluses are built on productive economic activity rather than on continued reliance on remittances alone.