By Dipesh Ghimire
NRB’s First Quarter Review Signals Stability Amid Structural Weaknesses: Inflation Falls Sharply, Reserves Strengthen, But Credit Growth Remains Worryingly Weak
Nepal Rastra Bank (NRB) has released the first quarter review of the Monetary Policy for FY 2082/83, offering a mixed picture of the economy—one where inflation is at historic lows and foreign reserves are strong, yet credit expansion remains severely constrained. The review portrays an economy that appears stable on the surface but is still struggling to generate domestic momentum.
1. Political Unrest and Climate Shocks Reveal Economic Vulnerabilities
According to the central bank, the Gen-Z Movement of Bhadra 23–24 created disruptions across business, transport, and tourism-related operations. Although the unrest was short-lived, the incident underscored Nepal’s fragile investment climate and how quickly political volatility can impede economic confidence.
Moreover, delayed monsoon and excessive rainfall in Asoj have undermined agricultural output. Agriculture, which contributes nearly one-third of Nepal’s GDP, is particularly vulnerable to climatic irregularities. The review subtly signals that Nepal’s economic recovery remains heavily weather-dependent—an underlying structural weakness.
2. Tourism Recovers, Remittances Surge, but Real Sector Still Under Stress
Tourist arrivals have surpassed last year’s levels, indicating that Nepal’s global image remains intact despite political disruptions. Nearly 944,000 tourists entered Nepal in the first 10 months of 2025, reflecting rising global mobility and improving tourism confidence.
Remittance inflows grew by 35.4%, reaching Rs. 553 billion—a figure unprecedented in recent years. This surge has single-handedly strengthened the external sector, generating current account and balance of payments surpluses.
However, while remittance-driven consumption boosts imports and government revenue, it does not necessarily strengthen domestic production. NRB’s review implicitly highlights that Nepal’s economic stability is being “imported” via foreign labor rather than generated domestically through investment and industry.
3. Inflation Plunges Below Target: Relief, but Also a Warning Sign
Inflation falling to 1.47%, far below the 5% target, is portrayed as a victory for monetary stability. Food inflation, particularly vegetables, pulses, and spices, has turned sharply negative.
While this low inflation benefits households, it also reflects weak demand in the economy. When aggregate demand is subdued, businesses struggle to expand, and employment creation slows. NRB’s interpretation stops short of explicitly stating this, but economists view unusually low inflation in a developing economy as a signal of slow economic activity, not just price relief.
In simple terms, prices are low partly because people are spending less.
4. Trade Deficit Widens Despite Export Growth—A Structural Problem
Exports rising by nearly 90% might seem impressive, but the real picture is more complex. Much of this growth is from low-value goods and re-exports rather than from high-value manufactured products. Meanwhile, imports have climbed back to pre-COVID levels, widening the trade deficit to Rs. 395 billion.
NRB interprets this cautiously, but the implication is clear:
Nepal’s productive capacity remains extremely weak, and export growth is not structurally transformative.
The deficit would have destabilized the economy had remittances not cushioned the blow.
5. Fiscal Condition: Rising Expenditure, Stagnant Revenue, Weak Governance
Government spending increased by 10.8%, driven mostly by recurrent expenses—salaries, pensions, and administrative overheads. Capital expenditure remains disappointingly low at Rs. 19.18 billion, reaffirming Nepal’s chronic inability to execute development projects.
Revenue grew by a mere 0.3%, exposing deep issues in tax compliance, economic activity, and import-based revenue dependence. NRB diplomatically notes the figures, but the interpretation is stark:
The government is spending more but earning almost nothing more.
This imbalance increases future risks of higher domestic borrowing and fiscal stress.
6. Credit Growth Alarms the Central Bank—Weakest in Recent Years
One of the most concerning indicators in the review is the 1.5% growth in private-sector credit, far below the 12% projection for the fiscal year.
This is not only a number—it reflects a broader economic reality:
Businesses are hesitant to invest.
Banks are cautious due to rising NPLs.
Consumers are delaying purchases.
Investment confidence is weak across sectors.
NRB indirectly acknowledges that monetary easing alone cannot stimulate the economy unless political certainty and business confidence improve.
7. Non-Performing Loans Rise—A Warning Signal of Borrower Distress
NPLs increasing to 5.26% is a sign that borrowers across sectors—manufacturing, trading, SME, transport—are struggling to repay loans. Finance companies have the highest NPL at 12.52%, indicating severe distress among smaller institutions.
The review interprets this as manageable since banks still maintain capital adequacy above regulatory minimum. However, rising NPLs usually precede a slowdown in credit issuance—as banks become more conservative, markets receive fewer loans, further cooling economic activity.
In essence, higher NPLs today mean weaker economic growth tomorrow.
8. Interest Rates Fall, Liquidity Surplus Expands, but Money Isn't Flowing into the Real Economy
NRB has reduced:
Bank rate: 6.5% → 6%
Policy rate: 5% → 4.5%
Standing deposit facility rate: 3% → 2.75%
Interbank rates have dropped to 2.58%, indicating surplus liquidity.
But despite ample liquidity, banks are unable to push credit into the market. This disconnect—liquidity abundance but credit scarcity—is a sign of declining investment demand rather than monetary tightening.
9. Gen-Z Movement Relief Package Reflects Government and NRB’s Urgency
NRB’s decision to allow:
Base rate + 0.5% interest for affected industries,
Loan restructuring until Poush, and
80% LTV for replacing damaged vehicles
reflects a recognition that businesses suffered real financial damage. While these measures soften the impact, they also reveal how fragile Nepal’s business ecosystem is—where even short-term unrest generates long-term financial shocks.
10. Stock Market Reforms May Energize Investor Sentiment
The removal of the single borrower limit on share-backed loans marks a major shift in NRB’s regulatory stance. Additionally, reducing the minimum holding period for banks from 12 months to 6 months could increase liquidity in the capital market.
These decisions appear aimed at:
boosting investor confidence,
reviving trading activity, and
stabilizing the stock market after months of volatility.
NRB’s reform package implicitly acknowledges the stock market’s growing importance as a financial intermediary.
11. Outlook: Stability Maintained, But Growth Likely Below Target
NRB projects inflation at around 4% for the year—moderate and manageable.
Foreign reserves remain strong, covering 16.4 months of imports, one of the highest coverage levels in South Asia.
Tourism recovery, remittance growth, and added electricity production (309 MW) are positive signals. However, the central bank cautiously hints that overall GDP growth may fall below earlier expectations due to:
weak agriculture output,
rising political uncertainty,
slow credit flow,
increased NPLs, and
expected election-related spending pressures.
This interpretation suggests Nepal’s recovery is stable but shallow, dependent more on external remittances than domestic productivity.
12. Conclusion: Economy Stable Today, But Long-Term Risks Remain
The NRB’s first quarter review paints a cautiously optimistic picture—low inflation, strong reserves, and stable banking conditions. But a deeper interpretation shows an economy where:
domestic production is weak,
business confidence is fragile,
investment appetite is low,
fiscal discipline is deteriorating,
and structural dependencies are deepening.
Nepal appears stable, but much of this stability is supported by remittances rather than internal economic strength. Without reforms that enhance productivity, strengthen industries, and restore investor confidence, long-term growth will remain subdued.
