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The Nepali economy sustained significant shocks over the past several years, and finds itself at a pivotal juncture. In the wake of global and local disruptions—such as the Covid-19 pandemic, geopolitical conflicts and strained supply chains—the country is showing signs of recovery. Despite encouraging export numbers, improved foreign exchange reserves and moderating inflation, Nepal’s recovery remains fragile and uneven.

The last five years have been tumultuous for Nepal. A contraction of 2.37 percent in the fiscal year 2019-20, due to the pandemic, led to a short but promising recovery, with growth rates of 4.84 and 5.63 percent in 2020-21 and 2021-22. However, due to an ongoing liquidity crisis and restrictive import measures, the economy slowed again in 2022-23, recording a paltry growth of 1.98 percent. The current fiscal year (2024-25) has seen projections for growth at 4.61 percent. While this signals progress, it is still not the transformational shift required to stabilize Nepal’s economy and ensure inclusive prosperity.

One of the few bright spots in the recent data is Nepal’s export performance. Over the last year, exports surged by 77.8 percent, totaling Rs 247.57bn. This was primarily driven by higher exports to India, China and other countries, particularly in items such as soybean oil, polyester yarn, jute goods and tea. Such increases indicate stronger global demand for Nepali products and reflect a degree of improved competitiveness in select sectors. While this growth is encouraging, it hasn’t been enough to fully offset the country’s dependency on imports. The nation’s import bill also saw an increase of 13.1 percent, leading to a widening trade deficit of 6.3 percent to Rs 1,397.23bn. Nepal’s trade deficit is persistent, and despite export growth, the structural imbalance between what the country consumes and what it produces remains entrenched.

The economy’s dependence on remittances is also a key factor in its stability. During the eleven-month period of 2024-25, remittances increased by 15.5 percent in Nepali rupee terms and 12.7 percent in USD terms, amounting to Rs 1,532.93bn ($11.25bn). This inflow continues to support the balance of payments surplus, which rose to Rs 491.44bn. However, this reliance on remittances underscores the vulnerability of Nepal’s economic recovery. The country’s economic stability is heavily tied to the employment prospects for Nepalis abroad, particularly in the Gulf countries, and any adverse shift in the global labor market could have a negative impact on the flow of remittances. Moreover, the increasing trend of young Nepalis seeking employment abroad is a reminder of the limited job opportunities at home and the lack of sufficient growth in Nepal’s productive sectors.

In the meantime, the nation’s inflationary pressures have eased somewhat. Consumer price inflation stood at 2.72 percent year-on-year in mid-June 2025, compared to 4.17 percent at the same point in the previous year. A major driver of this moderation was a 0.54 percent decline in food inflation. However, non-food inflation has remained higher, standing at 3.94 percent, and this continues to reflect pressures in areas like education, clothing and miscellaneous goods. While the easing of inflation is a welcome development, it must be noted that Nepal’s inflation is still heavily influenced by global market conditions, especially with regard to fuel and food prices, which make up a large portion of household expenditures. Due to Nepal’s import-dependent nature, inflation remains vulnerable to shifts in international commodity markets.

The country’s foreign exchange reserves have reached an all-time high, rising to $18.65bn by mid-June 2025, representing a 25.9 percent increase from the previous year. These reserves are now sufficient to cover over 17 months of merchandise imports, providing Nepal with a cushion against external shocks. The increase in reserves is partly driven by the influx of remittances and favorable trade balances, but it also signals greater stability in Nepal’s external sector. The country’s gross reserves stood at Rs 2,569.38bn, and the reserve-to-import ratio reached 122.9 percent. This means that Nepal is in a relatively stronger position than in previous years when the country struggled with low reserves and was vulnerable to external shocks.

However, this financial stability is not yet reflected in robust domestic economic activity. While the external sector appears to be holding up, the internal economy remains relatively sluggish. Government spending continues to be inefficient. Total government expenditure stood at Rs 1,282.94bn while capital expenditure remained disappointingly low at just Rs 143.39bn. Government revenue mobilization increased by 10.5 percent, reaching Rs 1,016.09bn, but the failure to meet capital expenditure targets suggests that the government has not been able to effectively implement its development projects. In many sectors, such as roads, schools and hospitals, critical infrastructure projects remain incomplete, and delays are a sign of systemic inefficiencies, planning deficiencies and a lack of accountability within public institutions. This inability to execute capital projects hinders the country’s long-term development potential, leaving many communities without basic services and further contributing to unemployment.

The private sector, too, is facing challenges. Investment in the economy has declined by 1.3 percent, reversing the gains made in the previous year. Domestic credit growth remains low, and credit flow to productive sectors has been insufficient. The lack of confidence among domestic and foreign investors is evident in the stagnation of private sector investment. As long as the business environment remains uncertain—due to bureaucratic delays, regulatory challenges and ineffective governance—investment will remain subdued. Without adequate investment, Nepal will continue to struggle with low productivity, lack of technological advancement and limited job creation.

Despite these challenges, Nepal’s financial sector has shown signs of resilience. The country’s banking system has witnessed growth in deposits and private sector credit. Deposits at banks and financial institutions increased by eight percent, while private sector credit rose as much. The NEPSE index has also climbed to 2,655.39, indicating investor optimism in certain segments of the market. The stock market capitalization rose to Rs 4.42trn, signaling positive sentiment in the financial markets, although this may not necessarily reflect a broader recovery in the real economy.

One of the most concerning long-term trends is the country’s per capita income growth. Nepal’s per capita income has seen marginal growth, projected to reach $1,496 in 2025. However, much of this income is tied to remittances, rather than domestic economic activities. The fact that many young Nepalis are increasingly seeking work abroad lays bare the lack of opportunities at home. Job creation is not keeping pace with demand, and productivity in many sectors remains stagnant. The country’s inability to generate sufficient domestic employment is one of the most pressing challenges facing Nepal in the coming years.

Nepal’s current economic model—heavily reliant on remittances and consumption—needs to evolve. The country’s growth must be driven by increased productivity, technological advancements and greater investments in both human and physical capital. Development projects must be executed efficiently to create infrastructure that can support long-term growth. The government needs to improve its policy framework to encourage investment and job creation. Reforms in education, health and infrastructure are critical to improving the quality of life for Nepalis and ensuring sustainable economic growth.

The fiscal policy has a prominent role in this and it must focus not just on allocating funds but on ensuring that those funds are spent effectively and transparently. Public institutions must be reformed to be more agile, accountable and capable of delivering results. Only then can Nepal build an economy that is capable of meeting the aspirations of its citizens, especially the younger generation, who are the future of the nation.

Nepal’s economy is at a crossroads. The country has shown resilience in the face of external shocks and internal challenges. However, significant reforms are required to move from recovery to sustainable growth. The focus must shift from short-term fixes to long-term structural transformation. With the right policy interventions, better governance and increased investment in productivity, Nepal can ensure that its recovery leads to lasting prosperity for all its people. The time for reinvention has arrived, and Nepal must seize the moment.

Nepal’s capital market, represented by the Nepal Stock Exchange (NEPSE), is undergoing a pivotal moment. Once seen as a promising platform for investment and economic mobilization, it now stands marred by widespread manipulation and unethical practices that compromise its credibility. While the trading volume has increased and the number of retail investors has multiplied over the years, the surge in activity has also invited a disturbing trend: systematic market malpractices designed to mislead, exploit and ultimately strip small investors of their capital.

Among the most pervasive of these practices is the manipulation of share prices through coordinated trading, a tactic that exploits small-cap companies with low floating shares. Groups of traders often conspire to corner such stocks—accumulating large quantities and controlling the float. By executing a series of synchronized buy and sell orders through different accounts they control, they create the illusion of heightened market activity and demand. This simulated momentum attracts unsuspecting retail investors who, seeing the surge, interpret it as a sign of growth or news-based rally. In reality, they are walking into a trap. Once these orchestrators have driven up prices and lured in enough buyers, they quickly offload their shares at inflated rates, leaving latecomers saddled with overvalued assets.

This behavior is enabled and obscured by the use of multiple dematerialized (demat) and Trading Management System (TMS) accounts, often opened under the names of family members or associates. These accounts, though legally distinct, are in practice controlled by a single orchestrator, allowing them to shuffle shares around and simulate market demand. By exploiting NEPSE’s lenient policy on multiple accounts per individual, manipulators hide their tracks with relative ease. The lack of comprehensive Know Your Customer (KYC) implementation adds another layer of opacity, making it exceedingly difficult for regulators to identify patterns of abuse or hold culprits accountable.

Price manipulation often intersects with insider trading, which continues to thrive in the absence of robust regulatory deterrence. Those with early access to corporate decisions or financial information use it to strategically time their trades. In some cases, prices are deliberately inflated through internal transfers before being pushed onto the public with aggressive promotion tactics. Retail investors are then exposed to these stocks at their artificial peaks, unaware that the fundamentals of the companies in question do not justify such valuations. By the time the truth unfolds, the orchestrators have exited, and the average investor is left with significant losses.

An alarming dimension of this scheme is the misuse of social media platforms. Sites like Facebook, YouTube and emerging voice platforms such as Clubhouse are increasingly being used to spread misinformation, generate artificial hype, and create momentum for otherwise illiquid or fundamentally weak stocks. Traders pose as analysts or experts and recommend stocks with confident predictions of sharp price increases. These discussions are timed with manipulative trades in the market, creating a feedback loop that convinces the public of the stock’s potential. When the bubble bursts, it is often too late for the retail investor to escape.

Adding to the opacity is the practice of fund transfers between related accounts to obscure the money trail. Manipulators move capital across multiple bank accounts under family names or proxy ownership to fund share purchases or mask the source of the investment. This kind of financial obfuscation makes regulatory tracing cumbersome and dilutes the possibility of legal intervention. In some cases, these same actors even default on broker payments, taking advantage of the trust-based relationships between clients and their brokerage firms. By settling trades but withholding payments, they place brokers in financial jeopardy and erode trust within the trading ecosystem.

The use of netting—where trades are balanced across multiple controlled accounts to avoid generating a net position—is another technique used to manipulate prices while maintaining an appearance of normalcy. This tactic helps manipulators push and pull prices during the day, all while ensuring their overall exposure remains neutral by the end of the session. The end result is a market that appears healthy on the surface but is deeply flawed beneath.

The implications of these activities are far-reaching. First and foremost, they create a hostile environment for the average investor. Many enter the market with the hopes of earning modest returns, only to find themselves caught in traps laid by sophisticated manipulators. As losses mount, trust in the market diminishes, driving potential investors away. This is particularly harmful in a developing economy like Nepal, where capital markets should ideally be a channel for democratized wealth creation and economic participation. Instead, the current environment fosters inequality, where those with the knowledge and resources to manipulate the system grow richer at the expense of the uninformed.

From a macroeconomic perspective, this kind of manipulation distorts the price discovery mechanism of the stock market. In an ideal system, stock prices reflect the underlying fundamentals of a company—its profitability, governance, market potential and operational integrity. But when prices are artificially inflated or deflated through manipulative trades, capital is misallocated. Poor-performing companies may receive undue attention and investment, while fundamentally sound firms may be ignored. This harms the broader economy by diverting resources from productive to speculative uses.

Addressing these issues requires a coordinated, multi-pronged reform strategy that targets both the structural loopholes and behavioral incentives that currently enable market abuse. Regulatory oversight must be significantly strengthened. SEBON, as the primary market regulator, needs to enhance its surveillance capabilities, adopting real-time monitoring systems that can detect patterns of matching trades, coordinated activity, and unusual volume surges. The technology exists—it is a matter of political and institutional will to deploy it effectively. Alongside this, NEPSE must overhaul its trading platform to plug known loopholes. Transfers of shares between brokers or across accounts without scrutiny should be restricted or tightly monitored.

There is a compelling need to impose stricter controls on account creation. Limiting each individual to a single demat and TMS account, along with robust biometric KYC processes, will curb the use of multiple accounts for manipulation. SEBON should also require the declaration of beneficial ownership in all trades. Without full transparency on who is ultimately controlling a transaction, regulators cannot effectively enforce accountability.

The penal framework must evolve to reflect the severity of market manipulation. Financial penalties alone may not be sufficient deterrents; trading bans and even criminal prosecution must be part of the regulatory toolkit. Enforcement actions should also be made public, not just to set examples but to build investor confidence that the system protects their interests.

Regulating the influence of social media is another urgent frontier. Financial discussions on public platforms should be brought under the purview of regulatory oversight. Collaborations between SEBON and social media companies can help in tracking, flagging, and penalizing accounts that promote stocks for manipulative purposes. A regulatory framework could also be created to license or verify credible financial commentators, ensuring that their analyses meet ethical and factual standards.

Protecting brokers and incentivizing their role in fraud prevention is equally important. Brokers are often the first to sense suspicious behavior but may hesitate to act due to fear of losing clients or facing legal repercussions. Regulatory bodies must establish clear reporting mechanisms and ensure that brokers are legally protected and encouraged to report red flags. A compensation fund for retail investors, supported by penalties collected from offenders, could provide a safety net for those affected by fraudulent activity.

Education remains the long-term solution. Without empowering investors to think critically, avoid herd behavior and analyze fundamentals, reforms can only go so far. Awareness campaigns, seminars and digital content aimed at educating the public about common manipulation tactics can create a more resilient investor base. Retail investors must be taught how to interpret company filings, understand earnings reports and spot red flags in stock behavior.

Nepal’s stock market is at a crossroads. On one side lies the path of reform, transparency and long-term stability, on the other a continuation of short-termism, manipulation and systemic erosion. The market cannot flourish in an environment where deception outweighs disclosure, and exploitation overshadows equity. A functioning capital market is not just a feature of a modern economy—it is its lifeline. Nepal must choose to protect this vital institution by acting now, decisively and with unwavering commitment to integrity.

The monetary policy for the current fiscal (2023/24) has garnered contrasting reactions from different groups. While some have supported the policy’s intention to mitigate risk associated with stock and real estate lending, others have raised concerns over the absence of an explicit economic growth target, signaling Nepal Rastra Bank (NRB)’s shift in priorities. In the last fiscal, economic activities faced significant challenges due to a dearth of investable capital in banks, rather than high interest rates. During the period from Dec 2021 to Dec 2022, banks experienced a shortage of investable funds, leading to a contraction in loan provision and a subsequent slowdown in economic activities. The confluence of these factors placed entrepreneurs in a precarious situation, further exacerbating the economic dilemma.

Since Jan 2022, the available investable amount in banks has shown an upward trend. However, a certain degree of ambiguity persisted among banks regarding the inclusion of debentures in local-level deposits. Despite this, the demand for loans failed to escalate amid the dormant economic landscape. Consequently, loans were not extended by banks during this period.

The existing scenario suggests that banks still possess an untapped reserve of around seven percent, approximately Rs 4bn, available for investment. This amount is expected to suffice the loan demand for the next 6-7 months. Additionally, auxiliary resources from remittances and debt recovery further augment the investable capital pool. In light of these developments, the Nepal Rastra Bank (NRB) has astutely introduced a flexible monetary policy for the current fiscal, entailing a reduction in the policy rate from seven percent to 6.5 percent. This strategic move aims to ameliorate loan interest rates, as already evidenced by banks’ recent reductions.

Anticipated decrease in interest rates is likely to spur a surge in loan demand, consequently reducing operational costs for businesses. With a relatively low CD ratio, banks can source affordable funds from the NRB and invest them at favorable interest rates into loans, thereby fostering increased economic activities. As a result, entrepreneurs are poised to be more enticed to avail themselves of loans. Meeting the demand of entrepreneurs, interest rate reduction appears to be a key factor facilitated by the current monetary policy, ensuring economic continuity. Additionally, the increment of the real estate loan limit from Rs 15m to Rs 20m is likely to stimulate systematic real estate business and encourage small investors in share loans, both of which contribute positively to overall economic activities.

Furthermore, the monetary policy explicitly addresses the demands regarding working capital loan guidance, as of 2022. While these loans have not been a major issue previously, the NRB acknowledges the necessity of revising guidelines to tackle pertinent problems associated with such loans, ultimately contributing to sustained economic activities.

The introduction of the “Stressed Loan Resolution Framework” to facilitate debt restructuring for borrowers facing challenges due to natural disasters or special circumstances serves as a welcome measure. Effectively utilized, this framework can aid the recovery of affected industries and bolster overall economic viability. However, it is crucial for banks to exercise discretion and refrain from haphazardly rescheduling and restructuring loans, as such practices could engender future complications. Responsible and targeted use of this facility is advisable.

In alignment with government policies aimed at revitalizing the economy, the Nepal Rastra Bank has formulated a monetary policy to complement the budgetary initiatives. The policy focuses on promoting loans to productive sectors, continuing the provision of loans up to two crore rupees for businesses operating in Nepal, and instilling optimism in the prospects of the economy.

In a positive stride, the monitoring of major borrowers has been prioritized, seeking to prevent disproportionate allocation of bank funds and address any inquiries or doubts surrounding their utilization. NRB’s vigilance over large borrowers and the prospects of introducing a policy to extend loans to companies and businessmen with 49 percent public shares are potential measures to bridge the wealth disparity gap.

Additionally, amendments to the Banking Offenses Act are proposed to deter chaotic activities observed in the banking sector recently. Such actions are expected to ensure that perpetrators are held accountable for their actions, thereby promoting a more secure financial environment. Moreover, NRB's collaboration with relevant agencies in combating money laundering and ensuring a safer borrowing environment bodes well for the development of the financial sector.

An encouraging development is NRB’s commitment to supporting the supervision and regulation of savings and credit cooperatives. The establishment of a separate regulatory body, backed by the government and the NRB, is crucial to address the prevailing issues in the cooperative sector, furthering its stability and efficacy.

Business communities anticipate caution in expectations, emphasizing that cheaper interest rates are necessary to foster a conducive business environment, but effective implementation of existing policies is equally crucial. The market’s significant message is that relying solely on monetary policy may not be wise in the future. Instead, policy decisions should consider the broader economy rather than just market demand. To meet political and market expectations, certain flexible elements have been integrated, especially in providing support to the real estate and stock market sectors.

It appears that the NRB aims to strike a cautious balance, considering the improved liquidity situation. Stakeholders may need to adopt a more cautious approach, as no radical shift in policy regimes is expected. The NRB may revisit and revise its actions if the need arises.

The author is Deputy Director at Nepal Rastra Bank. Views expressed herein are personal

The budget for the next fiscal year (2023/24) aims to present a range of reforms recognizing the private sector as a driving force for economic development. These reforms include initiatives to promote domestic production of various materials such as cement, iron rods, zinc sheets, iron pipes, plastic pipes, and electrical wires. The budget also highlights the importance of public-private partnerships in industrial development, the revision of foreign investment limits, and measures to facilitate boulder and gravel extraction. Furthermore, there is a focus on allocating budget resources to projects with site clearance. While these initiatives are commendable, there are concerns regarding the lack of incentives for industrialists in neighboring countries and the need for correction of import duty rates. The private sector is disgruntled following the tax provisions for FPOs (Follow-on Public Offerings) and mergers and acquisitions. Additionally, the imposition of VAT (Value-added Tax) and luxury tax on tourism-related services may have adverse effects on the industry. It is crucial for effective measures to be implemented to control illegal trade, and to take into consideration recommendations for expansion of the list of items eligible for cash subsidies in the export sector. Addressing challenges such as rising interest rates, reduced demand, cash flow issues, declining production, and job cuts requires a comprehensive approach to reboot the Nepali economy, necessitating collaboration between the private sector and the government. While the budget has addressed several of business communities’ concerns, entrepreneurs have underscored the significance of effective implementation of the budget as a determining factor for its success. However, the government has unveiled a comprehensive set of policies, programs, and budget allocations for the upcoming fiscal year. These initiatives aim to stimulate investment in industries leveraging indigenous raw materials such as agriculture, forestry, herbs and water. By reducing dependency on imports, enhancing exports, and fostering job creation, this strategic approach promises to revitalize the current economic landscape. Considerable strides have already been made in developing diverse industrial infrastructure, including industrial zones and special economic zones. However, further progress necessitates robust collaboration between the government and the private sector. Capitalizing on the existing infrastructural foundations, the joint efforts of both stakeholders are essential in expanding industrial infrastructure. The government has said that it is actively engaged in implementing a series of reforms to cultivate a conducive industrial ecosystem, while the private sector is poised to intensify investment endeavors and attract foreign capital. Upholding the principles of social justice, good governance, and economic prosperity, the government must demonstrate unwavering dedication to expedite economic reforms and progress toward these noble objectives. Industrial promotion is a key aspect that needs to be addressed. Clear provisions should be established to eliminate land restrictions for the industrial sector. It is crucial to thoroughly examine and formulate a comprehensive policy on land delimitation to drive industrial promotion effectively. Sustainable infrastructure development is also essential for fostering a prosperous nation. It is recommended to increase the capital budget and establish a well-defined infrastructure development master plan that aligns with national priorities. This will ensure timely and cost-effective completion of ongoing and upcoming infrastructure projects while maintaining superior quality standards. In the upcoming fiscal budget, a careful analysis of the Public Procurement Act is required to identify areas for structural reforms. Forming a committee and introducing necessary amendments to the Act will create an environment conducive to executing projects within specified timelines and budgets. Furthermore, a reassessment of the low bidding qualification system is necessary to ensure infrastructure quality and timely project delivery. The tourism industry, which has received significant investments from the private sector, holds immense potential for Nepal. However, the flag-carrier’s inability to compete effectively has made Nepal relatively expensive for international tourists. Enhancing the competitiveness of Nepal Airlines Corporation through strategic partnerships is crucial. Efforts should also be made to reinstate direct air connections with European countries, as their discontinuation since 2013 needs urgent rectification. The energy sector plays a vital role in foreign exchange earnings and reducing the trade deficit. Private sector investments in the hydropower industry showcase commendable entrepreneurial spirit and willingness to take risks. Agreements and commitments made during the Prime Minister's visit to India, including a 10-year, 10,000-MW electricity purchase agreement, are expected to attract substantial investments in the energy sector and expand the electricity market in India and Bangladesh. Urgent action is needed to reopen power purchase agreements (PPAs) for over 11,000MW, as their halt poses a risk to private sector investments. Facilitating private sector participation in the electricity trade and considering concessional rates for power supply to industries will enhance industrial competitiveness. The information technology (IT) sector holds significant potential for Nepal, given favorable conditions such as availability of electricity and favorable climate. However, the government has still not established IT parks. Defining the minimum prerequisites for IT parks and allowing the private sector to undertake their development is crucial. It is evident that the skilled workforce produced by the IT sector in Nepal is sought after by renowned international companies. This exemplifies the world-class caliber of Nepali IT professionals, with many prominent IT companies in Nepal catering to third countries. Encouraging non-degree IT education by eliminating student quotas in various colleges under different universities is also essential for promoting information technology-related studies. Achieving a six percent economic growth rate in the upcoming fiscal year is vital despite prevailing economic challenges. This necessitates the implementation of an investment-friendly monetary policy to boost the private sector’s confidence. The private sector is adamant on this. To foster an investment-friendly environment, the private sector seeks supportive government policies and administration. Frequent short-term policy changes undermine confidence, and guaranteeing policy stability for at least 10 years regarding laws and regulations will attract investment and facilitate the country's transition from economic recession to a path of prosperity. In the early 1990s, Nepal yielded substantial achievements in socioeconomic development through expanded private sector investment. The country turned from closed to open economy. This led to advancements in education, healthcare, industrial production, employment, and overall economic growth, resulting in Nepal's transition from a least developed to a developing nation. However, recent years have seen excessive regulatory measures impeding the progress of the private sector. Prompt attention to the implementation of the second phase of reforms is crucial. It is encouraging to see the second-phase program prioritized in the budget. Proactive policy and structural reforms should be undertaken to propel the second phase forward. The author is associated with Nepal Rastra Bank. Views expressed are personal