Nepal’s Economy Shows Stability but Faces Structural and Policy Challenges

Dipesh Ghimire

An assessment of a country’s economic health is best understood through the data and analysis of its central bank. Recent macroeconomic indicators released by Nepal Rastra Bank for the first two months of the current fiscal year (2081/82) suggest that the economy remains broadly stable, with inflation contained at an average of 3.8 percent. This level indicates that price pressures are within manageable limits and have not yet translated into widespread hardship for the general population.

Despite rising prices, the impact on household purchasing power has been partially offset by a significant increase in wage levels, estimated at around 25 percent. As a result, inflation has not severely eroded living standards. However, concerns persist regarding the availability and quality of essential daily consumer goods. Ensuring a stable supply of key food and household items remains a policy priority for the government to prevent future price shocks.

On the external trade front, Nepal’s import-export dynamics reflect deeper structural issues. Before the COVID-19 pandemic, imports stood at around NPR 2 trillion while exports were close to NPR 300 billion. In the post-pandemic period, imports have shown only marginal growth, while exports have declined noticeably. Reduced infrastructure activity and a slowdown in construction have lowered demand for heavy machinery and construction materials, contributing to the overall decline in imports and weak capital expenditure.

Export performance has also been constrained by falling domestic production. While Nepal has potential in agricultural and natural-resource-based exports, these opportunities remain underutilized. Products such as medicinal herbs, handmade paper, and niche agricultural goods could contribute more significantly to exports if supported by targeted policies. Encouragingly, the recent initiation of electricity exports, though limited in scale, has begun to provide some relief to the trade imbalance.

Historically, Nepal had a presence in international markets for ready-made garments and carpets, with exports reaching the United States and Europe. In recent years, however, these traditional export sectors have struggled. Agricultural exports to neighboring countries have also faced disruptions due to regulatory and logistical barriers, affecting products such as tea, coffee, citrus fruits, and broom grass. These challenges highlight the need for export diversification and improved market access.

Remittance inflows remain a critical pillar of Nepal’s economy. Recent data show that remittances have increased by over 15 percent in local currency terms, pushing foreign exchange reserves to more than NPR 2.15 trillion. While some analysts caution that remittance flows may not be permanently reliable, the nature of Nepali labor migration—largely in essential and low-skilled sectors—suggests continued demand in global labor markets. Strengthening formal banking channels and curbing informal transfer systems could further stabilize remittance inflows.

Fiscal indicators reveal a persistent imbalance between current and capital expenditure. Government spending continues to be dominated by recurrent expenses, while capital expenditure remains weak. Although revenue mobilization has improved, the government faces mounting pressure to control administrative spending and remove obstacles that delay development projects. Without stronger capital investment, economic momentum is likely to remain subdued.

Nepal’s revenue performance has historically demonstrated the impact of strong governance. Periods of high revenue growth in the past were driven not by higher tax rates, but by improved compliance, strict anti-corruption measures, and incentives for honest tax administration. Recent shortfalls in revenue targets point to renewed leakages in the system, underscoring the need for institutional reforms rather than additional tax burdens.

Global developments pose additional risks. Ongoing geopolitical conflicts, particularly the Russia–Ukraine war, threaten global food and energy supplies. As major producers of wheat, edible oils, and petroleum products, disruptions in these countries could fuel inflation in Nepal. Expanding domestic agricultural production and reducing import dependence are increasingly viewed as the only sustainable safeguards against such external shocks.

In the energy sector, Nepal stands at a promising crossroads. With nearly 3,000 megawatts of hydropower already in operation and several thousand more in the pipeline, the country is moving toward energy self-sufficiency. Agreements to export electricity to India and Bangladesh offer new revenue streams. Promoting electric cooking and transportation could further reduce fossil fuel imports, though misinformation about electric vehicles continues to slow adoption.

The economy is also undergoing a gradual digital transformation. Expanding digital payments and reducing reliance on cash could significantly enhance transparency and accountability. A fully digitized transaction system would improve income tracking, reduce corruption risks, and strengthen oversight mechanisms. However, such a transition requires public trust, cybersecurity preparedness, and inclusive digital literacy.

Despite these advancements, a large portion of Nepal’s economy remains informal. Recent academic studies estimate that more than 40 percent of economic activity occurs outside the formal system. Calls for a structured asset declaration and taxation framework have grown louder, though implementation challenges—ranging from legal preparedness to security concerns—continue to delay progress.

Debates around currency management, property taxation, and land ownership further reflect unresolved policy dilemmas. High-denomination banknotes, weak property tax enforcement, and unclear federal responsibilities have contributed to opaque financial practices. Learning from international models, policymakers face the task of balancing private ownership rights with public interest and fiscal sustainability.

Finally, social protection spending remains a contentious issue. While Nepal allocates a relatively small share of GDP to social security compared to many countries, public debate continues over the affordability of welfare programs. International comparisons suggest that well-designed social protection does not undermine economic stability, but rather strengthens social cohesion and long-term growth.

Overall, Nepal’s current economic condition reflects a mix of stability, unrealized potential, and policy challenges. Addressing structural weaknesses, improving governance, expanding productive capacity, and embracing digital and energy transitions will be crucial in shaping a more resilient and inclusive economic future.