Economic Situation
of Nepal:
Macroeconomic Report 2026
Based on six months of FY 2025/26 data (mid-July 2025 to mid-January 2026), Nepal's economy shows strong external buffers, record remittances, and the lowest inflation in five years, but growth remains below the government's targets.
Nepal entered the second half of FY 2025/26 in a state of what economists call "stability without confidence." External numbers look strong: inflation has fallen to its lowest point in five years, foreign exchange reserves have hit a record high, and remittances are growing faster than ever. But beneath those headline figures, private investment remains hesitant, capital spending by the government is weak, and non-performing loans in the banking sector are rising. This report unpacks what Nepal Rastra Bank's February 2026 Macroeconomic Report actually tells us, sector by sector, in plain language.
Growth is recovering but remains below the government's 6% target
Nepal's economy is on a gradual recovery path, but the pace is modest. Nepal Rastra Bank estimates real GDP growth at around 4 percent for FY 2025/26, which is below the government's ambitious 6 percent annual target. The NRB's own February 2026 Macroeconomic Report confirms that the median growth forecast hovers around 4 percent under normal conditions, with higher growth of above 6 percent only possible if remittances remain very strong, tourism recovers well, and capital spending picks up simultaneously.
The nominal GDP reached approximately Rs. 6,107 billion in the previous fiscal year, growing 7 percent. The service sector continues to be the main driver of Nepal's economic structure, followed by agriculture. The industrial sector is recovering slowly. Private consumption, which was hit by the Gen-Z protests in mid-2025, has stabilized but has not fully rebounded. Private investment remains subdued, and the government's capital expenditure in the first six months of 2025/26 was only Rs. 49.43 billion, which is very low for an economy of Nepal's size and development needs.
Nepal Real GDP Growth Rate: Trend and Projection (FY 2021/22 to 2025/26)
NRB February 2026 Report projects ~4% growth for FY 2025/26. Source: National Statistics Office; NRB Staff Estimates; World Bank Nepal Development Update Nov 2025.
FY 2021/22 (Post-COVID rebound) 5.6% actual
FY 2022/23 (Slowdown due to tight monetary policy) 1.9% actual
Government Annual Target FY 2025/26 6.0% official target
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NRB's Growth-at-Risk Assessment
The February 2026 report uses a Growth-at-Risk (GaR) model to assess downside scenarios. Under financial stress, downside risks compress further than upside gains expand. The central forecast of 4% is stable, but the gap between Nepal's actual growth and its potential reflects weak private investment, poor capital expenditure execution, and the lingering effects of the September 2025 protests on business confidence.
Section 02
02
Inflation: Prices at a Five-Year Low
CPI dropped from 5.41% to 2.42% year-on-year, the most dramatic disinflation in years
This is the strongest positive story in the February 2026 report. Consumer price inflation fell to 2.42 percent year-on-year in mid-January 2026, down sharply from 5.41 percent in the same month of the previous year. The average inflation over the first six months of FY 2025/26 was just 1.70 percent, compared to 4.97 percent in the same period of the prior year. This is the lowest average six-month inflation in roughly five years, and it is well below Nepal Rastra Bank's 5 percent ceiling.
The main driver of this fall is food prices. The food and beverage price index actually contracted by 0.09 percent year-on-year, meaning food costs were slightly lower than a year ago. Non-food and services inflation was 3.81 percent. This is a meaningful relief for ordinary Nepali households, where food spending makes up a large share of total consumption.
Inflation Indicators: Mid-January 2026 vs Prior Year
Four factors explain the rapid disinflation: adequate domestic food supply, lower global commodity prices (particularly crude oil), a stable exchange rate environment for most of the period, and cautious monetary policy. The NRB's report also notes that wholesale price inflation (5.17%) is running well above consumer inflation (2.42%), which suggests that production and input costs for intermediate goods are rising even as final consumer prices stay low. This gap could eventually pass through to consumers.
Section 03
03
External Sector: Trade, Remittances and the Balance of Payments
Remittances surged 39% while the current account hit a record surplus
Nepal's external sector is the strongest part of the February 2026 report. The current account recorded a surplus of Rs. 429.91 billion in the first six months of FY 2025/26, more than 2.5 times the Rs. 165.67 billion surplus in the same period of the prior year. The overall balance of payments (BOP) surplus reached Rs. 501.24 billion. This is a historically strong position for Nepal.
The engine behind this is remittances. Workers' remittances grew 39.1 percent in Nepali rupee terms and 32.3 percent in US dollar terms over the six-month review period. In the single month of Poush (mid-December to mid-January), remittances reached Rs. 192.62 billion, compared to Rs. 122.44 billion in the same month the previous year. Net secondary income (which is mainly remittances and transfers) totalled Rs. 1,168.02 billion in the review period, up from Rs. 833.86 billion.
Nepal's external sector balance for the first six months of FY 2025/26. Remittances (Rs. 1,168 billion) vastly outweigh the trade deficit, producing a current account surplus of Rs. 429.91 billion. The BOP surplus of Rs. 501.24 billion has fuelled record foreign exchange reserves.
Key External Sector Indicators: FY 2025/26 First Six Months
Indicator
FY 2025/26 H1
FY 2024/25 H1
Change
Merchandise Imports
Rs. 939.02 B
Lower
+14.2%
Remittance Inflows (NPR)
Net secondary Rs.1,168 B
Rs. 833.86 B
+39.1%
Remittance Inflows (USD)
Higher
Lower
+32.3%
Current Account Balance
+Rs. 429.91 B
+Rs. 165.67 B
+159%
BOP Surplus
+Rs. 501.24 B
Lower
Historic high
Travel Income (Tourism)
Rs. 45.40 B
Rs. 31.41 B
+44.5%
Terms of Trade Index
Improved
-
+9.9%
NPR vs USD (Exchange Rate)
Rs.144.01/USD
Rs.137/USD (mid-Jul 2025)
-4.9% depreciation
Sources: NRB Six-Month Data FY 2025/26; NRB Macroeconomic Report February 2026; ShareSansar (February 2026).
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Risk: Export Fragility
While trade figures look healthier, NRB and the World Bank both warn that Nepal's export growth is fragile. A large share of export gains comes from re-exported refined edible oils (soybean and sunflower oil) to India, which depend on India's tariff policy. If India changes those tariffs, this export stream could collapse quickly. True diversification of Nepal's export base remains an unresolved structural challenge.
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Section 04
04
Foreign Exchange Reserves: A Record High
USD 22.47 billion, enough to cover 18.1 months of imports
Nepal's gross foreign exchange reserves climbed 21.1 percent to Rs. 3,242.45 billion (USD 22.47 billion) by mid-January 2026, from Rs. 2,678 billion in mid-July 2025. This is a record high for Nepal and represents one of the strongest external buffer positions the country has ever held. The reserves are sufficient to cover 18.1 months of prospective merchandise and service imports, well above the NRB's own minimum target of 7 months.
Indian currency makes up 22.3 percent of total reserves. The reserves-to-GDP ratio stands at 53.1 percent, the reserves-to-imports ratio at 150.7 percent, and the reserves-to-M2 ratio at 40.5 percent. All three are significantly higher than a year ago, reflecting the steady inflow of remittances and the moderate pace of import growth.
Foreign Exchange Reserves and Import Cover: FY 2022 to FY 2025/26 H1
Bars show USD billion; import cover (months) shown as reference. Sources: NRB; Farsight Nepal Feb 2026; World Bank Nepal Development Update Nov 2025.
FY 2025/26 H1 (mid-January 2026) USD 22.47 billion | 18.1 months — Record High
NRB minimum target: 7 months import cover. Nepal is at 18.1 months.
Section 05
05
Fiscal Position: Revenue Gap and Weak Capital Spending
Government spent Rs. 690 billion but collected only Rs. 577 billion in six months
The fiscal picture is the most challenging part of the report. Nepal's government spent Rs. 690.22 billion in the first six months of FY 2025/26 but collected only Rs. 577.40 billion in revenue. Tax revenue made up Rs. 510.50 billion and non-tax revenue Rs. 56.91 billion. This leaves a significant gap that needs to be financed through borrowing or drawdown of cash balances.
More concerning is the breakdown of spending. Of the Rs. 690.22 billion total, recurrent (operating) expenditure dominated at Rs. 487.14 billion, while capital expenditure, which builds the roads, schools, hospitals, and power plants that grow the economy, was only Rs. 49.43 billion. Financial expenditure (debt repayment and similar) accounted for Rs. 153.65 billion. This heavily recurrent-skewed spending pattern is a persistent structural weakness in Nepal's fiscal management.
Government spending breakdown. Recurrent expenditure (salaries, operations, subsidies) dominates at 70.6%. Capital expenditure, which actually builds economic assets, is only Rs. 49.43 billion or 7.2% of total spending. This pattern has persisted for multiple fiscal years and constrains long-term growth potential.
Section 06
06
Banking and Monetary Sector: Excess Liquidity, Weak Credit
Interest rates at historic lows, but credit growth is sluggish and NPLs are rising
Nepal's banking system is awash in liquidity. NRB absorbed a net Rs. 28,699.90 billion through various instruments during the review period, including standing deposit facilities and deposit auctions. Despite this flood of liquidity, private sector credit grew only 3.6 percent (Rs. 197.47 billion) in the first six months, reaching Rs. 5,695.17 billion. This compares unfavourably to 5.2 percent growth in the same period of the prior year. The disconnect between cheap, plentiful money and sluggish lending is the central puzzle of Nepal's monetary situation.
Interest rates fell sharply. The weighted average deposit rate at commercial banks is 3.56 percent and the average lending rate is 7.12 percent. The interbank rate is 2.75 percent and the 91-day Treasury bill rate is just 2.35 percent. These are historically low levels. Yet businesses are not borrowing aggressively because demand remains uncertain and non-performing loans are rising.
Banking and Monetary Sector Snapshot: Mid-January 2026
Indicator
Current Value
Prior Period
Trend
Deposits at BFIs
Rs. 7,681.35 B
Rs. 7,263.87 B
+5.7%
Private Sector Credit (BFIs)
Rs. 5,695.17 B
Lower
+3.6% (slowing)
Broad Money M2 Growth
+5.4% (6 months)
+3.7%
Improving
Reserve Money Growth (y-o-y)
+26.4%
Lower
Strong
Domestic Credit
-0.3% (6 months)
+1.2%
Contracted
Interbank Rate
2.75%
Higher
Low
91-day T-bill Rate
2.35%
Higher
Historic low
Commercial Bank Deposit Rate (avg)
3.56%
Higher
Falling
Commercial Bank Lending Rate (avg)
7.12%
Higher
Falling
NPL Ratio (BFIs)
5.42%
4.6% (FY25 end)
Rising
NEPSE Index
2,641.44
2,594.13 (Jan 2025)
+1.8%
BFIs = Banks and Financial Institutions. Sources: NRB Six-Month Data FY 2025/26; Farsight Nepal Feb 2026; ShareSansar Feb 2026.
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Rising Non-Performing Loans (NPLs)
The NPL ratio reached 5.42 percent by mid-January 2026, up from 4.6 percent at end-FY25 and 3.9 percent at end-FY24. This is a meaningful warning signal. When borrowers cannot repay loans, banks become more cautious about new lending, which further suppresses credit growth. The World Bank's Nepal Development Update (November 2025) identifies rising NPLs as a key downside risk for the financial sector. NRB needs to ensure banks are building adequate loan-loss provisions.
Section 07
07
Outlook and Key Risks for the Second Half of FY 2025/26
Stable base, but structural weaknesses and political uncertainty weigh on the outlook
Nepal enters the second half of FY 2025/26 with a solid external position but fragile domestic momentum. The NRB's central scenario projects growth around 4 percent. The World Bank has a somewhat more cautious view, projecting slower growth amid political uncertainty and weak private investment. Both institutions agree that remittances will remain the primary stabilizer of the balance of payments.
⚡ Summary of Key Strengths and Risks
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Strength: Forex reserves at record USD 22.47 billion provide a very large external buffer against any short-term shocks.
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Strength: Inflation at 2.42 percent is the lowest in five years, giving NRB room to keep monetary policy accommodative without stoking price pressures.
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Strength: Remittances growing at 39.1 percent in NPR terms provide strong income support for household consumption.
!
Risk: Export growth is heavily dependent on refined edible oil re-exports to India. Any change in India's trade policy could sharply reduce export earnings.
!
Risk: NPL ratio at 5.42 percent is rising and could constrain bank lending further, suppressing credit-led investment.
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Risk: Capital expenditure is critically low at just 7.2 percent of total government spending. Without infrastructure investment, growth potential cannot be unlocked.
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Risk: Political uncertainty surrounding the March 2026 elections could delay investment decisions and distort fiscal priorities toward campaign-related spending.
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Risk: Nepal remains on the Financial Action Task Force (FATF) Grey List, which increases the cost and friction of international financial transactions and may deter foreign investment.
“
Nepal's external numbers are genuinely impressive. Record reserves, record remittances, and the lowest inflation in years. But strong external indicators cannot substitute for the private investment, government capital spending, and export diversification that sustained growth actually requires. The challenge is turning stability into confidence.
Nilambar Khanal · Synthesis from NRB February 2026 Macroeconomic Report, World Bank Nepal Development Update Nov 2025, and East Asia Forum Feb 2026
Questions and Answers
08
Frequently Asked Questions
Plain answers to what most readers want to know about Nepal's macroeconomic situation
The rapid decline in inflation from 5.41 percent to 2.42 percent year-on-year reflects four factors working together. First, global commodity prices, particularly crude oil and food commodities, softened significantly in late 2024 and through 2025. Second, Nepal's domestic food production was adequate, keeping food prices subdued. Third, the Nepali rupee was relatively stable for much of this period, which limits the inflation that comes from imported goods becoming more expensive. Fourth, Nepal Rastra Bank maintained a cautious monetary policy stance even while cutting interest rates, which prevented an overheating of demand. The NRB's own report notes that this is one of the most stable inflation environments Nepal has seen in nearly a decade, though it also flags that wholesale price inflation remains higher than consumer inflation, which could pass through to consumers in the second half of the fiscal year.
Foreign exchange reserves are the dollar savings of a country. They mean the government and central bank have enough foreign currency to pay for imports, service foreign debt, and defend the exchange rate if the Nepali rupee comes under pressure. For ordinary citizens, strong reserves mean greater confidence that imported goods, medicines, fuel, and technology will remain available without sudden shortages or price spikes. When reserves were dangerously low in 2022 (around 7 months' import cover), Nepal faced serious concerns about its ability to pay for essential imports. At 18.1 months' cover today, those concerns are well behind us. Reserves also improve the country's credit rating and make external borrowing cheaper. The main caution, which NRB itself raises, is that this surplus is driven mostly by remittances rather than by exports or productive investment, which means it remains dependent on the continued outmigration of Nepali workers.
The gap between the 6 percent government target and the NRB's 4 percent projection reflects the real constraints on Nepal's economy. To grow at 6 percent, Nepal needs private investment to be growing strongly, the government to be spending its capital budget fully and efficiently, exports to be expanding, and productivity across agriculture and industry to be rising. None of these are happening at the required pace right now. Private investment has been held back by political uncertainty, high NPLs reducing bank lending confidence, and a weak enforcement environment for property rights. Government capital expenditure was only Rs. 49.43 billion in the first six months, which is far below what is needed for infrastructure-led growth. The economy grew at 4 percent in FY 2024/25 and the NRB sees no compelling reason for a sharp acceleration in FY 2025/26. The 6 percent target is an aspiration; 4 percent is the realistic central scenario.
Nepal's trade deficit, where imports far exceed exports, is a structural feature of its economy rather than a sudden crisis. Merchandise imports grew 14.2 percent to Rs. 939 billion in the first six months of FY 2025/26. As a landlocked, import-dependent country, Nepal relies on imports for fuel, machinery, medicines, electronics, and many consumer goods. The critical question is whether remittances and other inflows are large enough to finance the deficit without depleting foreign exchange reserves. Right now, remittances are more than covering the trade deficit, which is why the current account is in a record surplus. The concern is longer-term: if Nepal cannot build a productive export sector and reduce its dependence on remittances for external balance, any slowdown in outmigration or a global recession reducing migrant wages could quickly create external sector pressure. The NRB explicitly notes that the external sector's strength may not be sustainable in the long run due to this dependency.
The Financial Action Task Force (FATF) is an international body that sets global standards for combating money laundering and terrorist financing. Being on its Grey List means a country has strategic deficiencies in its anti-money laundering and counter-terrorism financing framework and has committed to remediate them under FATF monitoring. For Nepal's economy, Grey List status increases the compliance burden on international financial transactions. Foreign banks become more cautious about processing payments to and from Nepal, which can slow remittances, complicate trade finance (including LCs and TTs), and deter foreign direct investment. It also raises the cost of correspondent banking. Nepal has been working toward exiting the Grey List, and FATF's World Bank notes that continued presence on this list is a key downside risk for the economy, particularly for the financial sector's ability to attract international business.
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📄 References
01
Nepal Rastra Bank (NRB). (March 2026). Macroeconomic Report: February 2026. Research Department, NRB, Kathmandu. Primary source for GDP outlook, Growth-at-Risk model, inflation analysis, fiscal sector review, and monetary outlook. nrb.org.np
02
Nepal Rastra Bank (NRB). (February 2026). Current Macroeconomic and Financial Situation: Six-Month Data FY 2025/26 (Mid-July 2025 to Mid-January 2026). NRB Economic Research Department. Cited for all six-month indicators: CPI (2.42%), reserves ($22.47B), remittances (+39.1%), current account (Rs.429.91B), BOP (Rs.501.24B), imports, fiscal data, and banking figures. nrb.org.np
03
Farsight Nepal. (February 5, 2026). Strong First Half for Economy amid Easing Inflation, Record Remittances and Forex Reserves. Cited for: headline CPI 2.42%, food deflation (-0.09%), non-food services inflation (3.81%), forex reserves 53.1% of GDP, NPL 5.42%, detailed BFI data. farsightnepal.com
04
ShareSansar. (February 3, 2026). Macroeconomic Summary of First 6 Months: Inflation at 2.42%, Remittances Rises by 39.1%, Foreign Currency Enough to Cover 18.1 Months Import. Cited for: key six-month statistical summary, NEPSE data (2,641.44), interest rate data, deposit and credit figures. sharesansar.com
05
KhabarHub English. (April 2026). Nepal's Economy on Recovery Path but Sectoral Impact Uneven: NRB Report. Cited for: NRB half-yearly report analysis, GDP target vs projection gap (6% target vs 4% projection), service sector expansion, NPL trend analysis, fiscal revenue challenges. english.khabarhub.com
06
World Bank. (November 2025). Nepal Development Update: Resilience Amid Uncertainty. World Bank Group, South Asia Region. Cited for: GDP growth projections, current account trends, NPL risk assessment, edible oil export vulnerability analysis, debt sustainability, FY26 outlook. worldbank.org
07
Dhungel, N. (February 19, 2026). Nepal's Economy After the Gen-Z Protest. East Asia Forum, Australian National University. Cited for: macroeconomic stability analysis post-protests, private sector confidence analysis, World Bank growth caution, political risk context. eastasiaforum.org
⚠ This blog synthesises data from the NRB Macroeconomic Report February 2026 and the NRB Six-Month Current Macroeconomic and Financial Situation report for FY 2025/26, as cited above. All figures are drawn from official NRB, Ministry of Finance, and National Statistics Office sources or from verified analyses thereof. Macroeconomic data is subject to revision. This is an educational analysis, not financial or investment advice.
Authornilambarkhanal.com.np
Nilambar Khanal
Research Educator and Economic Analyst
Nilambar Khanal writes accessible, data-backed guides on Nepal's economy, banking and finance, research methods, and digital skills. His blog series covers NRB macroeconomic data, trade finance (LC/TT), digital marketing, academic writing, startup fundraising, and financial statement analysis.
Every piece is built directly from primary data sources, official reports, and peer-reviewed research, and written to be useful for students, professionals, and curious readers alike.
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