NRB Publishes First Quarter Review of Monetary Policy: Inflation Declines Sharply, Forex Reserves Strengthen, But Credit Growth Remains Weak

The Nepal Rastra Bank (NRB) has released the first quarter review of the Monetary Policy for FY 2082/83, presenting an in-depth assessment of the country’s macroeconomic and financial conditions. The review highlights notable improvements in key indicators such as inflation, foreign exchange reserves, and overall financial stability, while also pointing out persistent challenges, particularly in private sector credit expansion.

1. Background: Political Unrest, Natural Disruptions and Impact on Agriculture

Following the issuance of the Monetary Policy, Nepal witnessed new political developments, most notably the “Gen-Z Movement” of Bhadra 23 and 24. The protest caused human and material losses and temporarily disrupted business, industries, transport, and market operations. The review notes that the upheaval created a difficult environment for economic functioning in the initial phase.

The monsoon was delayed compared to usual patterns, and excessive rainfall in the month of Asoj added further strain to the agricultural sector. Seasonal paddy and other monsoon crops were negatively affected. As a result, initial estimates indicate that agricultural output may remain below expectations for the current fiscal year.

2. Rising Tourism, Strong Remittances and Recovery in Trade Support the Economy

According to the review, despite the temporary impact of the Gen-Z protests on some hotels, Nepal’s peace and security environment continues to reassure international travelers. Data from the Nepal Tourism Board show that nearly 944,000 tourists visited Nepal in the first ten months of 2025, slightly higher than the number recorded in the same period of the previous year.

Similarly, both exports and imports have increased, with imports returning to pre-COVID levels. Remittance inflows surged by 35.4%, reaching Rs. 553.31 billion, significantly contributing to stabilizing the external sector. Because of this, both the current account and the balance of payments remain in surplus, strengthening the overall macroeconomic stability.

3. Inflation Falls Below Target, Price Stability Achieved

One of the key highlights of the review is the sharp decline in inflation. Annual consumer inflation for Asoj 2082 stood at 1.47%, significantly lower than 4.82% a year ago. This is well below the Monetary Policy target of 5%.

Food inflation remained negative at –2.54%, primarily due to a decline in prices of vegetables, pulses, spices, and legumes. Non-food and services inflation, however, remained at 3.80%, showing relative stability in the services and non-food sectors.

Wholesale price inflation was recorded at 1.32%, while the wage rate index increased by 4.48%, indicating some strength in the labor market.

4. External Sector: Trade Deficit Still Large, But Overall Balance Strong

Exports soared by 89.6% in the first quarter, reaching Rs. 72.78 billion, while imports grew by 19.8% to Rs. 468.08 billion. Despite the improvement in exports, the trade deficit remains large at Rs. 395.30 billion.

However, due to the sharp rise in remittances, Nepal recorded a substantial surplus in both major external accounts:

• Current Account Surplus: Rs. 237.59 billion

• Balance of Payments Surplus: Rs. 264.03 billion

These figures indicate that despite the widening trade gap, Nepal’s external sector remains strong due to high inflow of remittances.

5. Government Finance: Higher Expenditure, Slow Revenue Growth

Data from the Ministry of Finance show that total government expenditure increased by 10.8%, reaching Rs. 364.59 billion in the first quarter.

Of this:

• Recurrent expenditure: Rs. 256.81 billion

• Capital expenditure: Rs. 19.18 billion

• Financing expenditure: Rs. 88.60 billion

However, revenue mobilization remained stagnant, growing by only 0.3% to Rs. 249.05 billion. Slow revenue growth continues to place pressure on fiscal consolidation and budgetary management.

6. Banking Sector Overview: Ample Liquidity, Low Interest Rates, Weak Credit Demand

Nepal’s banking sector continues to experience high liquidity and historically low interest rates. Deposit mobilization grew by 3%, while private sector credit grew by only 1.5%, far below the central bank’s earlier projection of 12% for the fiscal year.

Broad money supply increased by 12.2%, down from 13.3% in the same period last year. Although deposit rates have been declining, real interest rates remain positive.

Weak credit growth indicates subdued investment appetite from the private sector, suggesting that economic confidence has yet to fully recover.

7. Rising Non-Performing Loans Raise Concerns

The review highlights a continued rise in non-performing loans (NPLs), posing potential risks to banking stability.

• Overall NPL Ratio: 5.26%

• Commercial Banks: 5.03%

• Development Banks: 6.03%

• Finance Companies: 12.52%

The rising NPL trend indicates growing repayment challenges among borrowers, reflecting pressures in business performance and household finances.

8. Progress on Key Monetary Policy Measures

NRB reports notable achievement in the implementation of the monetary policy:

• Inflation remains well below the 5% target.

• Foreign exchange reserves are sufficient to cover 16.4 months of imports.

• Policy rate reduced to 4.5%, bank rate to 6%, and standing deposit facility rate to 2.75%.

Policies aimed at agriculture, small and medium enterprises (SMEs), residential housing, real-estate restructuring, and foreign employment loans have also been implemented to support economic activity.

9. Special Relief Measures for Businesses Affected by Gen-Z Movement

To support businesses affected by the Gen-Z protest, NRB introduced special concessions. Banks may now provide loans at a maximum of base rate + 0.5% to affected enterprises for wage payment and operational continuity.

Credit restructuring and rescheduling have been allowed until Poush end for severely impacted borrowers. The loan-to-value ratio for replacing damaged vehicles has been increased to 80%.

10. Significant Reforms Related to the Stock Market

The central bank has removed the single borrower limit for share-backed loans.
Additionally, the minimum holding period for banks to invest in listed shares and debentures has been reduced from one year to six months, allowing greater flexibility.

The previous rule restricting sale of more than 20% of primary capital in a fiscal year has also been cancelled. This is expected to positively influence investor participation and stock market sentiment.

11. Economic Outlook: Growth to Remain Below Target, Stability Remains Strong

The review states that tourism recovery, surge in remittance, rising energy production (with 309 MW added to the grid), and stable foreign exchange reserves will support economic stabilization in the coming months.

However, reduced agricultural output, slow credit growth, increasing NPLs, and expected election-related expenditure may keep economic growth below earlier projections.

Average inflation for the fiscal year is expected to remain around 4%, lower than previous expectations.

12. Conclusion: Stability Achieved, But Key Challenges Persist

The first quarter review concludes that Nepal’s economy is moving toward stability with low inflation, strong external reserves, and sufficient banking liquidity. However, persistent challenges remain—particularly slow credit expansion, high trade deficit, rising NPLs, and pressure on agriculture.

NRB expresses confidence that continued cooperation from stakeholders will help ensure effective implementation of the monetary policy throughout the fiscal year.