The fiscal year 2024–25 marked a cautiously optimistic phase in Nepal’s post-pandemic economic recovery. With a projected GDP growth of 4.61 percent, a narrowed fiscal deficit and record foreign exchange reserves, Nepal demonstrated notable resilience. However, beneath these surface indicators lies a complex interplay of structural weaknesses, external dependencies and opportunities that deserve closer scrutiny.
What it really means
At first glance, Nepal’s GDP growth of 4.61 percent appears moderate and consistent with a recovering economy. But this figure, while respectable, remains below the 7–8 percent growth rate necessary for rapid poverty reduction and meaningful job creation. The marginal increase in growth from the previous year’s 3.9 percent suggests a slow recovery rather than robust expansion.
More importantly, much of this growth was consumption-led and driven by remittance inflows, rather than investment-led industrial or export expansion. This signals a structural concern: Nepal’s economy continues to lean heavily on external income rather than internal productivity.
Services dominate, industries lag
The composition of GDP reflects deep-rooted imbalances. The services sector contributed over 62 percent to GDP, dwarfing agriculture (25.2 percent) and industry (12.8 percent). While services growth—particularly in transport, storage, and financial activities—is encouraging, it raises questions about sustainability. Services, especially low-productivity informal ones, often expand when there is a lack of industrial dynamism.
The industrial sector, despite moderate growth in construction and manufacturing, remains constrained by infrastructural bottlenecks, power reliability issues and limited domestic and foreign investment. Agriculture, although vital for employment, continues to suffer from low productivity, climate vulnerability and lack of commercialization.
A silver lining?
Headline inflation was 4.72 percent, down from previous years. This reflects effective monetary tightening and better supply chain management. However, food inflation persisted around 3.3 percent, affecting poor households disproportionately.
More analytically, the disinflationary trend owes much to suppressed demand and import-based consumption rather than domestic supply resilience. In a context where inflation in neighboring India remains high, Nepal’s price stability is fragile due to the currency peg and trade dependence. Any external price shock—especially in fuel or food—could reverse the gains swiftly.
Strength built on vulnerability
Remittances grew by 9.4 percent, reaching over Rs 1trn. On the surface, this is a strong signal of income support for households and foreign exchange stability. However, the economy’s growing reliance on labor exports (over 25 percent of GDP) reflects domestic weaknesses in job creation. Migration is not a sign of strength—it is often a symptom of failure to absorb labor at home.
The surge in exports (up 57 percent) is driven by a few commodities like edible oil re-exports and textiles, making it highly sensitive to global demand and bilateral trade policies. The trade deficit remains wide, and Nepal continues to import high-value goods while exporting low-value products—an unsustainable model.
The record-high foreign exchange reserves (covering over 14 months of imports) are welcome but largely attributable to remittances and restrained import demand rather than export competitiveness.
Improved discipline, but at what cost?
Nepal’s fiscal deficit declined sharply—from Rs 70bn to around Rs 16bn in the first eight months—thanks to higher revenue growth and restrained spending. While this reflects improved fiscal discipline, a closer look reveals underperformance in capital expenditure. Many development projects remained delayed or underfunded due to bureaucratic inefficiency, procurement issues and political instability.
Moreover, public debt is at 43.8 percent of GDP—moderate by international standards—but its composition is shifting toward more domestic borrowing, raising concerns over future interest liabilities and crowding out of private investment.
Loosening sans uptake
The Nepal Rastra Bank lowered policy rates to inject liquidity into the economy, leading to historic lows in lending rates. Yet credit uptake remained sluggish, indicating low investor confidence and weak private sector appetite for expansion. The rise in non-performing loans to 4.9 percent underscores emerging stress in the banking system, which could worsen if economic recovery remains tepid.
This disconnect between monetary easing and private sector response suggests deeper structural barriers—legal hurdles, creditworthiness concerns and weak project pipelines.
Climate shocks and structural risks
Nepal’s economic resilience was tested by major floods in mid-2024, causing damage equivalent to 0.8 percent of GDP. This highlights the increasing economic cost of climate change, especially for a country with fragile topography and inadequate disaster preparedness. Yet, climate adaptation and green investment remain minimal in budget allocations.
Additionally, long-term risks—including heavy remittance dependence, trade imbalances, political instability and underemployment—remain unaddressed. These challenges, if not structurally tackled, could stall Nepal’s path to middle-income status.
Conclusion: Resilient, yet restricted
Nepal's economic performance in 2024–25 reflected stability without transformation. The country avoided crisis and managed moderate growth, but it did not make the leap toward a more productive, inclusive or diversified economy. The gains were largely reactive rather than strategic—buoyed by remittances, import compression and fiscal restraint rather than innovation or competitiveness.
To transition from recovery to take-off, Nepal must move beyond short-term fixes. Reforms in public administration, industrial policy, export diversification, education and climate resilience are essential. Without them, the economy risks settling into a low-growth equilibrium marked by dependence, inequality and untapped potential.
