Nepal’s economy finds its feet
Growth is up, credit is flowing again—but not all is as buoyant as it seems
Image via Nepal Peak Adventure
After years of torpor, Nepal’s economy appears to be stirring from its slumber. Inflation is easing, GDP is ticking upward, credit is trickling back into the economy and the trade deficit is narrowing. The government forecasts growth of 4.61% for this fiscal year 2024-25, up from 3.67% last year. For a landlocked nation better known for trekking routes than trade routes, such numbers sound almost implausibly upbeat.
But as any Sherpa will attest, a brisk start on a trail says little about how the journey will end.
Take inflation. Consumer prices rose by 4.57% in the first nine months of the fiscal year—comfortably below the 5% target and much gentler than last year’s 5.92%. That is good news, but not necessarily good policy. Much of the disinflation is imported: global grain prices have softened, oil is cheaper and India—Nepal’s chief trading partner and a de facto inflation anchor—has seen a moderation in its own price pressures. A strengthening rupee and new trade agreements have helped, but Kathmandu cannot take much credit for the kindness of strangers.
Still, the Nepal Rastra Bank, the central bank, has played its part with uncharacteristic deftness. It has kept the policy rate at 5%, allowing liquidity to remain ample but not excessive. Banks, once reluctant to lend and happier hoarding cash, are now rediscovering their raison d’être. Interest rates have slipped into single digits, and credit to the private sector, though still below the 12.5% annual target, grew by 8.1%—enough to suggest thaw without froth.
Not all lending, however, is created equal. Margin loans—those taken against shareholdings—are up nearly 38%, hinting at a speculative undertow. Working capital loans have climbed by 17%, which sounds more wholesome. But only a fifth of new credit is going to construction and industry, the sectors most likely to generate long-term productivity. A property bubble has not yet inflated, but policymakers would be wise to keep a pin close to hand.
One welcome change is in the composition of imports. For years, the nation’s ports were clogged with motorbikes, instant noodles and palm oil—consumables that nourished neither industry nor infrastructure. Now intermediate and capital goods account for a growing share of imports, suggesting domestic production may be reviving. Imports of intermediate goods jumped 17.8% in the first nine months of the year, a sharp reversal from the 10.3% slump over the same period last year. This may prove more meaningful than any GDP headline.
Meanwhile, the external position looks improbably robust. Foreign-exchange reserves are sufficient to cover over 14 months of imports—double the official comfort level. The current account is in surplus, bolstered by resilient remittances and subdued capital flight. That is no small feat in a country where more people live abroad than live in the capital.
Exports, perennially the country’s Achilles’ heel, are finally twitching. In the first nine months of the year, merchandise exports surged by 65.2%. That figure flatters to deceive—the baseline was low, and the surge owes more to a handful of products (soybean oil, polyester yarn, jute) than to a diversified industrial revival. Still, the direction of travel is right, if not the pace.
Tourism, too, is ascending from the depths of the pandemic. Foreign arrivals are rising, hotel bookings are brisk and Thamel’s shopkeepers have resumed their cheerful haggling in multiple currencies. Service-sector receipts are up and so is confidence—though one bad monsoon or geopolitical squall could wash that away.
On paper, structural reform is gathering steam. Laws have been tweaked to appear more investor-friendly. The government has begun to act on the recommendations of a high-level economic reform commission, a rare instance of policy translating into action. The Nepal Electricity Authority plans to add 900 mw of hydropower capacity annually for the next three years. If it delivers, the country’s rivers might become cash flows rather than cash drains.
And yet a Himalayan gap remains between potential and performance. Its growth lags behind regional peers: Bangladesh and India are expected to grow by more than 6%, notwithstanding their larger and more complex economies. Investors still grumble about inconsistent policies, administrative caprice and a bureaucracy that moves only when pushed—then only slightly.
Nor is the recovery immune to external tremors. Much of its economic stability rests on remittances and commodity prices, which are hostage to events far outside its borders. The threat is not only exogenous shock, but endogenous drift: a political class more prone to budget populism than fiscal prudence, and institutions that too often conflate reform with press releases.
Still, the mood is changing. Banks are lending. Traders are importing productive goods. Tourists are returning. And policymakers, for once, seem to be moving in concert rather than conflict. That may not constitute a miracle—but in Nepal it might just count as progress.
The path ahead is still steep, and the air thin. But for the first time in years, the economy is walking uphill rather than sliding down. Whether it can reach the heights it aspires to will depend less on fortune than on follow-through. The base camp is still there; the question is whether the will to climb it is, too. ■