The Current Macroeconomic Situation Report for the first four months of 2025/26, published by the Nepal Rastra Bank (NRB) earlier this week, presents a mixed picture of the country’s economy. While inflation has cooled sharply and external sector indicators remain robust, domestic demand, credit growth and capital spending have continued to lag. This has raised concerns about the sustainability of the recovery. While macroeconomic stability has strengthened, momentum in the real economy is uneven.
Inflation drops to multi-year low
Consumer price inflation eased significantly in mid-November 2025, falling to 1.11 percent year-on-year from 5.6 percent a year earlier. Average inflation during the first four months stood at 1.53 percent, well below 4.59 percent in the same period of the previous fiscal year. This reflects a sharp correction in food prices and subdued domestic demand.
The central bank has set a target of containing inflation below five percent in the current fiscal year.
While food and beverage prices declined by 3.32 percent, mainly due to a steep fall in vegetable prices, non-food and services inflation remained moderate at 3.69 percent. The data suggest that price stability has returned across both rural and urban areas, with inflation staying below two percent in most provinces. However, persistent price increases in services such as education, clothing and miscellaneous goods indicate that inflation risks have not disappeared entirely.
Trade gap widens despite export surge
Nepal trade gap widened further during the review period despite impressive export growth. Merchandise exports surged by 77.5 percent to Rs 93.5bn in the first four months of 2025/26, largely driven by shipments of edible oils, cardamom, jute goods and footwear to India. Exports to India more than doubled, while exports to China fell sharply during the period.
Imports, meanwhile, rose by 18.7 percent to Rs 609.45bn as consumption gradually picks up. This caused the trade deficit to expand by 12 percent to Rs 515.96bn, reversing last year’s modest contraction. Although the export-import ratio improved to 15.3 percent, imports continue to vastly outpace exports.
Remittances anchor external stability
Remittances remain the single most important pillar of Nepal’s external sector. According to the report, inflows jumped by 31.4 percent to Rs 687.13bn during the review period. A strong growth in remittances has been providing strong support to household consumption as well as foreign exchange reserves and the balance of payments.
The current account recorded a surplus of Rs 279.65bn, nearly double the level of a year earlier, while the overall balance of payments surplus widened to Rs 318.4bn. However, the net services deficit widened to Rs 32.91bn, largely due to a significant 11.8 percent increase in travel payments. Education-related travel payments accounted for over half of this outlay, signaling continued foreign currency outflows for overseas studies.
Likewise, foreign exchange reserves expanded by 14.1 percent to Rs 3055.52bn (or $21.52bn). According to the central bank, the reserves are sufficient to cover more than 20.8 months of merchandise imports.
Weak capital spending
On the fiscal front, government finances show rising expenditure pressures but slow revenue growth. Total government spending reached Rs 468.88bn in the first four months, while revenue mobilization stood at Rs 326.55bn. This resulted in a fiscal deficit of Rs 142bn in the four-month period.
Capital expenditure declined by more than 26 percent year-on-year to just Rs 25.31bn. This massive decline in development spending, coupled with a minimal revenue, speaks volumes about administrative bottlenecks and a failure to effectively deploy capital for development.
Subdued credit growth
Despite ample liquidity in the financial system, credit expansion remained subdued at 1.2 percent due to low demand from the market. While private sector credit from both commercial banks and finance companies increased 1.3 percent each, credit disbursed by development banks decreased by 0.1 percent.
According to the central bank, total private sector credit remained at Rs 5,562.75 in mid-December. Credit flow toward agriculture and some service sectors has come down, while credit growth has been concentrated in real estate, margin lending and construction-related activities.
