Kathmandu: Economists warn Nepal’s economy, once under threat of a foreign currency crisis, now resembles a patient suffering from “diabetes”, with reserves piled up but economic activities sluggish.
Experts use a health analogy: just as a body becomes weak without enough calories and vulnerable to disease, an economy too collapses without sufficient inputs. Conversely, excess calories can cause ailments like diabetes and hypertension, a problem Nepal’s economy is now experiencing.
When foreign currency reserves plunged during fiscal years 2020/21 and 2021/22, Nepal’s policymakers feared a Sri Lanka-style collapse. To conserve dollars, Nepal Rastra Bank (NRB), the central bank, imposed cash margins of 50–100 percent on import Letters of Credit and later even restricted certain luxury imports.
These restrictions, though controversial, helped prevent a depletion of reserves. Today, Nepal holds more than enough foreign currency, with import coverage of 15.4 months by mid-2024, compared to just 6.5 months in 2022.
But the restrictive policies also triggered an unintended slowdown. Economic activities stagnated, banks were left with over Rs 600 billion (US$ 4.5 billion) in unutilized liquidity, and private sector confidence collapsed.
Former NRB Executive Director and economist Nar Bahadur Thapa argues that monetary policy has already done its part by loosening all possible tools except direct cash injections.
“All macroeconomic indicators — reserves, balance of payments, liquidity, and interest rates — are positive. Yet the economy looks like a diabetic patient because fiscal policy has failed to take leadership,” he said.
Analysts point to flawed decision-making during the COVID-19 recovery. NRB pursued highly expansionary monetary policies in 2020/21 and 2021/22, which spurred excessive credit growth (up to 32 percent annually) but fueled speculation in land and stock markets rather than productive sectors. Imports soared by nearly 25–29 percent annually, draining reserves.
When reserves fell sharply, NRB swung to the opposite extreme — tightening policy drastically, raising interest rates, and curbing credit. This sudden reversal stalled the economy.
During the crisis, then-Governor Maha Prasad Adhikari publicly warned that Nepal could “become like Sri Lanka,” which was facing a severe currency crisis. While Nepal avoided collapse, experts argue that defensive, restrictive policies left long-term scars.
The government too failed to complement NRB’s measures with proactive fiscal policy. Instead of investing in infrastructure and growth, it prioritized populist distribution programs. In 2022, while NRB tightened imports, the Finance Ministry expanded the budget by 24 percent, ignoring signals of slowdown.
Reserves: Declined from US$ 12.7 billion (mid-2021) to US$ 9.8 billion (2022), then rebounded to US$ 19.5 billion (mid-2024).
Imports: Peaked at Rs 1.92 trillion (US$ 14.4 billion) in FY 2021/22, fell to Rs 1.61 trillion in FY 2022/23, and modestly rose again in FY 2023/24.
Balance of Payments: Swung from a deficit of Rs 255 billion in 2021/22 to a surplus of Rs 595 billion in 2023/24.
Remittances: Grew 19.2 percent in 2023/24, reaching Rs 1.72 trillion, further boosting reserves.
Nepal’s foreign exchange reserves are now ample, but they are sitting idle. Banks have liquidity but lack investment opportunities, and private sector confidence remains weak. Experts say the situation mirrors a “diabetic patient” — resources exist, but the body (economy) cannot effectively use them.
Economists argue Nepal must now shift from defensive monetary policy to growth-oriented fiscal policy. Investments in infrastructure, job creation, and industrial production could mobilize reserves and excess liquidity productively. Without this, Nepal risks wasting its stability advantage.
Nepal has the space to act. With high remittances, strong reserves, and low inflationary pressure, experts call for:
Accelerated infrastructure projects to stimulate domestic demand.
Targeted fiscal measures to restore private sector confidence.
Balanced monetary-fiscal coordination to avoid policy overreactions.
Failure to act, they warn, means Nepal will continue to miss the opportunity to convert financial stability into sustainable growth — remaining a “diabetic economy” with untapped resources.
Comment Here