Nepal’s Balance of Payments in 2024/25: A Narrowing Deficit Amidst Economic Resilience

Kathmandu, April 10, 2025 – Nepal’s Balance of Payments (BoP) for the first eight months of fiscal year 2024/25 (mid-July 2024 to mid-March 2025) shows a narrowing current account deficit and a positive shift in the overall economic outlook, according to the latest provisional data. The current account deficit decreased by 11.0% to Rs. 208,406.8 million from Rs. 234,293.2 million in the same period of 2023/24, driven by a significant reduction in the services deficit and a robust increase in secondary income, primarily from worker remittances. This article provides a detailed analysis of the BoP data, exploring key trends, underlying factors, and their implications for Nepal’s economy.

Current Account: A Narrowing Deficit

The current account deficit, a key indicator of a country’s external economic health, improved by 11.0% in 2024/25, reaching Rs. 208,406.8 million compared to Rs. 234,293.2 million in 2023/24. This improvement is largely attributed to a 36.3% reduction in the services deficit, which dropped from Rs. 291,882.5 million to Rs. 186,022.7 million. A closer look reveals that this reduction was driven by a decrease in travel-related expenditures (from Rs. 104,472.5 million to Rs. 104,780.4 million, a marginal increase but offset by other factors) and a significant improvement in government goods and services n.i.e., which shifted from a deficit of Rs. 91,111.1 million to a surplus of Rs. 81,239.6 million. This shift suggests that Nepal may have reduced its reliance on foreign services or increased its service exports, possibly in areas like telecommunications and government-related services.

However, the goods deficit widened by 12.9%, increasing from Rs. 874,605.3 million to Rs. 987,393.8 million. This increase aligns with earlier custom-wise trade data, which showed an 11.2% rise in imports (from Rs. 1,030,222.7 million to Rs. 1,145,566.2 million), outpacing the 57.2% growth in exports (from Rs. 100,617.4 million to Rs. 158,172.4 million). The growing goods deficit reflects Nepal’s continued dependence on imported consumer goods, machinery, and now electric vehicles, as imports of four-wheelers rose by 19.6% with 8,775 units imported, mostly from China and India.

Primary income remained nearly unchanged at Rs. 55,250.6 million in 2024/25, compared to Rs. 55,257.2 million in 2023/24, indicating stability in income from investments and compensation of employees. Secondary income, primarily driven by worker remittances, saw a 3.7% increase, rising from Rs. 876,937.4 million to Rs. 909,759.1 million. This growth aligns with data indicating that personal remittances as a percentage of GDP soared to 25% in 2023, highlighting the critical role of remittances in supporting Nepal’s external position. Remittances continue to be a lifeline for the economy, cushioning the impact of the goods deficit and supporting household consumption.

Capital and Financial Accounts: Declining Inflows

The capital account, which includes capital transfers such as debt forgiveness, saw a 30.2% decline, dropping from Rs. 55,774.4 million to Rs. 38,905.2 million. This reduction may reflect a decrease in foreign aid or grants, which are often volatile and subject to geopolitical dynamics. The decline in capital transfers contributed to a slight increase in the net lending/net borrowing balance (from Rs. -178,518.8 million to Rs. -169,501.6 million), indicating that Nepal’s external financing needs remain significant despite the improved current account.

The financial account, which captures investment flows, also saw a 21.1% decrease in inflows, falling from Rs. 146,602.2 million to Rs. 115,740.3 million. Notably, the data shows no direct investment, portfolio investment, or reserve asset changes, with all financial account activity recorded under “other investment.” This suggests that Nepal is relying on other forms of financing, possibly loans or deposits, rather than attracting significant foreign direct investment (FDI). This is a concern, as earlier reports indicated a 16.1% increase in foreign exchange reserves (to Rs. 2,369.08 billion by mid-February 2025), but the lack of FDI inflows could limit long-term economic growth.

Reserves and Net Errors: A Positive Shift

The changes in reserves showed a significant improvement, with the negative balance decreasing by 47.4% from Rs. -74,801.5 million to Rs. -39,372.4 million. This indicates that Nepal’s foreign exchange reserves are being depleted at a slower rate, aligning with reports of a BoP surplus of Rs. 284.41 billion (down slightly from Rs. 297.72 billion last year). The net errors and omissions, which reflect unrecorded transactions, decreased from Rs. 42,115.9 million to Rs. 37,587.2 million, suggesting improved data accuracy in the BoP compilation.

Economic Context and Interpretation

The narrowing current account deficit is a positive development for Nepal, reflecting resilience amid challenging conditions. The World Bank projected a 4.5% economic growth for Nepal in 2024/25, up from 3.9% in the previous fiscal year, driven by growth in agricultural and industrial sectors. This growth likely supported the 57.2% surge in exports, as seen in earlier trade data, particularly for commodities like tea and polyester yarn. However, the 12.9% increase in the goods deficit underscores Nepal’s structural trade imbalance, exacerbated by rising imports of electric vehicles and consumer goods.

The 36.3% reduction in the services deficit is a standout achievement, potentially driven by reduced travel expenditures and increased service exports. However, the ongoing upgrade of Tribhuvan International Airport, which began in November 2024, has disrupted tourism—a key service export—by reducing operating hours and increasing ticket prices. This may have offset some gains in the services sector, as tourism is a significant contributor to Nepal’s economy.

The 3.7% increase in remittances is consistent with Nepal’s reliance on its diaspora, with remittances accounting for 25% of GDP in 2023. This inflow has been crucial in offsetting the goods deficit and supporting the current account. However, the decline in capital and financial account inflows raises concerns about Nepal’s ability to attract sustainable foreign investment. The lack of FDI and portfolio investment suggests that structural barriers, such as bureaucratic hurdles and political instability, may be deterring investors.

The 47.4% improvement in the changes in reserves aligns with reports of adequate foreign exchange reserves, which increased by 16.1% to Rs. 2,369.08 billion by mid-February 2025. The central bank’s monetary policy stance, which remained cautiously accommodative with a 50-basis-point rate cut on July 26, 2024, likely supported this stability by encouraging economic activity while managing inflation, projected at 5% for 2024/25.

Challenges and Future Outlook

Despite these positive trends, Nepal faces several challenges. The growing goods deficit, driven by rising imports, highlights the need for export diversification and import substitution. The decline in capital and financial account inflows suggests that Nepal must improve its investment climate to attract FDI, which is critical for long-term growth. The World Bank’s support for 25 active investment projects worth $2.4 billion in Nepal, focusing on fiscal decentralization, financial sector reforms, and energy, could help address these gaps if implemented effectively.

Natural disasters, such as the 2024 floods and landslides that caused damages equivalent to 0.8% of GDP, continue to pose risks to infrastructure and agriculture, key drivers of economic growth. The disruptions at Tribhuvan International Airport further underscore the need for alternative infrastructure, such as a second international airport, to support tourism and trade.

The reliance on remittances, while a strength, also exposes Nepal to external shocks, such as economic downturns in Gulf countries where many Nepali workers are employed. Diversifying income sources through industrial development and service exports could reduce this vulnerability.

Nepal’s Balance of Payments for 2024/25 reflects a cautiously optimistic outlook, with a narrowing current account deficit, stable reserves, and a robust remittance inflow. However, the growing goods deficit, declining capital inflows, and structural challenges highlight the need for strategic reforms. By focusing on export diversification, improving the investment climate, and building resilient infrastructure, Nepal can sustain its economic recovery and achieve more balanced growth in the years ahead. As the country navigates these challenges, the resilience shown in the BoP data offers hope for a stronger economic future.