Nepal’s Economy Shows Signs of Recovery, but Structural Pressures Persist

Nepal’s economy is gradually emerging from a period of severe stress, and recent macroeconomic indicators suggest that the situation is no longer as alarming as it once appeared. While the overall outlook has improved compared to previous years, the pace of recovery remains uneven, and key components of the economy have yet to generate strong momentum. The government continues to pursue measures aimed at restoring economic stability, but the results so far reflect cautious optimism rather than robust growth.

Recent quarterly data point to a significant improvement in the external sector. Remittance inflows have increased by more than 11 percent, providing much-needed support to foreign exchange reserves and household consumption. The balance of payments has shifted into a surplus, while foreign exchange reserves have risen to a level sufficient to cover around 14 months of imports of goods and services. Inflation has remained within the government’s target range, easing pressure on household budgets and reinforcing macroeconomic stability.

Liquidity conditions in the financial system have also improved. Deposits in banks and financial institutions have grown, and credit to the private sector has started to expand after a prolonged slowdown. Interest rates have declined sharply, allowing borrowers to access loans at relatively low costs. In theory, these conditions should stimulate investment and consumption. However, the expected surge in demand has yet to materialize, revealing deeper structural weaknesses in the economy.

A landmark development has been Nepal’s first-ever sovereign credit rating. The rating has placed Nepal among relatively stable economies in South Asia and sent a signal of increased transparency to international investors. Policymakers view this as a milestone that could help attract foreign investment by providing an independent assessment of the country’s economic fundamentals. It has also challenged long-standing perceptions that Nepal’s economy lacks credibility or clarity.

Despite these positive signals, the domestic economy remains under pressure. Strong remittance growth, abundant liquidity, and lower borrowing costs have not translated into higher demand or full utilization of industrial capacity. Manufacturing activity remains subdued, and export figures show a decline compared to the previous year. The slowdown in exports has begun to affect employment, especially in production-oriented sectors.

At the same time, import trends present a mixed picture. Data indicate that domestic production has not expanded sufficiently to replace imports, yet overall imports have continued to fall. Even during major festive seasons, import volumes have remained lower than expected. This suggests weak consumer demand rather than a successful shift toward domestic production, raising concerns about the depth of the economic recovery.

The government has acknowledged that reviving a sluggish economy cannot be achieved overnight. Prolonged stagnation has weighed heavily on the private sector, eroding confidence and delaying investment decisions. While monetary policy has been adjusted to support businesses, entrepreneurs remain hesitant to expand operations due to lingering uncertainty about demand and policy consistency.

The capital market, often viewed as a barometer of economic sentiment, reflects this cautious optimism. After spending a long period at historically low levels, the stock market has rebounded significantly, reaching new highs before stabilizing. Trading volumes have improved, indicating that investors have not completely withdrawn from the market. Analysts suggest that sustained improvement in economic sentiment could further support market activity and encourage broader investment.

Fiscal conditions, however, present a more complex challenge. Government revenue collection has struggled to keep pace with ambitious targets. In the first four months of the fiscal year, revenue collection has fallen well short of annual goals, raising concerns about budget execution. Failure to meet revenue targets could constrain government spending and complicate future budget planning.

The gap between revenue targets and actual collection reflects both economic weakness and overly optimistic projections. Compared to the previous fiscal year, the current budget aims for a substantial increase in revenue, despite continued economic pressures. This mismatch has made implementation difficult and increased the risk of spending cuts or delays.

Natural disasters have further complicated fiscal management. Floods and landslides during the monsoon season disrupted transportation networks and trade flows, temporarily reducing imports and economic activity. While these disruptions are not permanent, they have added to short-term revenue shortfalls and strained public resources.

Government spending patterns also remain a concern. Capital expenditure continues to lag behind recurrent spending, especially in the early months of the fiscal year. While operational expenses proceed automatically, development spending has been slow due to procedural delays, coordination challenges, and outstanding payment obligations. This imbalance has limited the stimulative impact of public spending.

Construction contractors have repeatedly raised concerns about delayed payments, which have affected cash flows and project timelines. Although the government has begun settling some outstanding liabilities, budgetary constraints and delays in reimbursement from development partners have slowed progress. Improving the efficiency of payment systems remains a priority to prevent further disruptions.

The scale of the current budget has added another layer of complexity. Compared to actual spending in the previous year, the present budget represents a significant expansion. Many projects included in the budget lack adequate preparation, feasibility studies, or clear funding sources. As a result, implementation has become increasingly difficult, forcing the government to prioritize selectively.

Experts argue that budget planning must return to fundamentals. Projects should be selected based on necessity, readiness, and expected economic returns. Without proper planning and prioritization, large budgets risk becoming unmanageable, leading to persistent under-execution and inefficiency.

A deeper structural issue lies in the relationship between revenue and capital expenditure. Government revenue is barely sufficient to cover recurrent spending, leaving little room for investment in infrastructure. As a result, the government has become increasingly reliant on loans and external assistance to finance development projects. While borrowing is sometimes unavoidable, it must be directed toward projects with clear and high economic returns.

In the long run, strengthening domestic revenue mobilization is essential. This requires a tax system that is fair, transparent, and taxpayer-friendly. Expanding the tax base, improving compliance, and reducing leakages are critical steps toward sustainable fiscal management. At the same time, foreign loans and grants must be aligned with national priorities rather than donor preferences.

Overall, Nepal’s economy appears to be moving away from crisis conditions, but recovery remains fragile. External indicators provide reassurance, yet domestic demand, industrial activity, and fiscal capacity continue to face constraints. Sustained improvement will depend on restoring private-sector confidence, improving budget discipline, and implementing structural reforms that support long-term growth rather than short-term stability alone.