Nepal’s Inflation at 3.75% in FY 2081/82: Regional Variations and Economic Insights from Nepal Rastra Bank Data

Nepal Rastra Bank (NRB) has released its economic data for the first eight months of the fiscal year 2081/82 (2024/25), revealing a year-on-year consumer price inflation rate of 3.75%. Alongside this, detailed Consumer Price Index (CPI) data by ecological belts highlights regional variations in inflation, with the Mountain region experiencing the highest rate at 4.77% and the Kathmandu Valley the lowest at 3.25%. This report, combined with broader economic indicators such as a significant rise in exports and a robust balance of payments surplus, paints a picture of a stabilizing yet regionally diverse economic landscape in Nepal.

Inflation Trends: A Regional Breakdown

The CPI data, based on the base year 2023/24=100, tracks price changes across four ecological belts: Kathmandu Valley, Terai, Hill, and Mountain. The overall CPI rose from 99.50 in February/March 2023/24 to 102.23 in February/March 2024/25, reflecting the reported 3.75% year-on-year inflation. However, regional disparities are evident:

• Kathmandu Valley: The CPI increased from 99.72 to 102.96 over the year, resulting in a 3.25% inflation rate. Month-on-month, the CPI saw a marginal rise of 0.05% from January/February 2024/25 (102.90) to February/March 2024/25 (102.96). Food and beverage prices in the Valley dropped slightly by 0.26% month-on-month, while non-food and services rose by 0.17%, indicating stable urban consumption patterns.

• Terai: The Terai region, a key agricultural and industrial hub, recorded a CPI increase from 99.13 to 102.87, translating to a 3.77% year-on-year inflation rate, closely aligning with the national average. Month-on-month, the CPI rose by 0.14%. Food and beverage prices dipped by 0.23%, but non-food and services increased by 0.37%, reflecting higher costs in transportation and other services.

• Hill: The Hill region saw a more pronounced year-on-year inflation rate of 4.72%, with the CPI rising from 98.73 to 103.40. However, month-on-month, the CPI slightly declined by 0.01%, driven by a 0.64% drop in food and beverage prices, though non-food and services rose by 0.38%. This suggests short-term price corrections in food items, possibly due to seasonal supply improvements.

• Mountain: The Mountain region experienced the highest inflation at 4.77%, with the CPI increasing from 100.20 to 104.98. Month-on-month, the CPI saw a slight decline of 0.07%, primarily due to a 0.66% drop in food and beverage prices, while non-food and services rose by 0.30%. The high year-on-year inflation in non-food and services (6.03%) indicates significant cost pressures in this remote region, likely due to transportation and logistical challenges.

Broader Economic Context: Growth in Trade and Remittances

The NRB report also highlights positive developments in Nepal’s external sector. Exports surged by 57.2%, a remarkable growth that outpaced the 11.2% increase in imports. This narrowing trade deficit contributed to a balance of payments surplus of NPR 310.37 billion, signaling improved external stability. Foreign exchange reserves reached USD 17.27 billion, providing a strong buffer against global economic uncertainties.

Remittance inflows, a lifeline for Nepal’s economy, grew by 9.4% in Nepali rupees and 6.9% in US dollars. This steady rise in remittances supports household consumption, which likely contributes to the stable inflation rates observed in urban areas like the Kathmandu Valley.

Fiscal and Monetary Indicators

On the fiscal front, the government’s expenditure stood at NPR 839.36 billion, while revenue mobilization was NPR 720.35 billion, indicating a fiscal deficit. Broad money supply expanded by 4.8% over the eight months, with a year-on-year growth of 9.9%, reflecting increased liquidity in the economy. Deposits in banks and financial institutions grew by 4.3%, and private sector credit increased by 6%, with year-on-year growth rates of 9.5% and 7.7%, respectively. This moderate credit growth suggests cautious lending, possibly in response to inflationary pressures.

Interpretation: Regional Disparities and Economic Implications

The CPI data reveals significant regional variations in inflation, which have important implications for policy and economic planning:

• Urban Stability vs. Rural Pressures: The Kathmandu Valley’s lower inflation rate (3.25%) reflects better access to goods and services, stable supply chains, and higher purchasing power. In contrast, the Mountain region’s 4.77% inflation, particularly the 6.03% rise in non-food and services, highlights the challenges of remoteness, where transportation costs and limited market access drive up prices. The Hill region’s 4.72% inflation, despite a month-on-month dip, suggests vulnerability to supply-side shocks, especially in food items.

• Food vs. Non-Food Inflation: Across all regions, food and beverage prices showed month-on-month declines (e.g., -0.66% in Mountain, -0.64% in Hill), possibly due to improved agricultural supply or seasonal factors. However, non-food and services inflation was consistently higher (e.g., 6.03% year-on-year in Mountain), driven by rising costs in transportation, housing, and utilities. This trend aligns with global inflationary pressures on energy and logistics, which disproportionately affect remote areas.

• Economic Growth and Inflation Balance: The 3.75% national inflation rate is moderate compared to global standards, indicating that Nepal is managing inflationary pressures relatively well. The significant export growth (57.2%) and remittance inflows (9.4% in NPR) are positive signs of economic resilience, supporting consumption and external stability. However, the fiscal deficit (expenditure of NPR 839.36 billion vs. revenue of NPR 720.35 billion) suggests a need for better revenue mobilization to sustain public spending without fueling inflation.

Policy Recommendations

The data underscores the need for targeted policy interventions to address regional disparities and sustain economic stability:

1. Regional Price Stabilization: The government and NRB should focus on improving supply chains in the Mountain and Hill regions to reduce non-food inflation. Subsidies on transportation or investment in rural infrastructure could help lower costs.

2. Agricultural Support: The month-on-month decline in food prices is a positive sign, but policymakers should ensure this trend continues by supporting farmers with better access to markets, seeds, and fertilizers, especially in the Terai and Hill regions.

3. Monetary Policy Calibration: With broad money supply growing at 9.9% year-on-year and private sector credit at 7.7%, the NRB should monitor liquidity to prevent overheating, especially in urban areas like the Kathmandu Valley, where consumption is high.

4. Export-Led Growth: The 57.2% export growth is a bright spot. The government should continue to support export-oriented industries through incentives, trade agreements, and infrastructure development to sustain this momentum.

Nepal’s economy in the first eight months of FY 2081/82 shows signs of resilience, with moderate inflation at 3.75%, a robust balance of payments surplus, and significant export growth. However, regional variations in inflation highlight the need for targeted interventions to address cost pressures in the Mountain and Hill regions. As Nepal navigates global economic challenges, balancing inflation control with growth-oriented policies will be key to ensuring equitable development across its diverse ecological belts.