KATHMANDU: For the last three years, Nepal’s foreign currency reserve accumulation has been on a continuous upward trend. Up to three years ago, there was concern about whether the country might default due to weak foreign currency reserves. However, that situation has now reversed.

According to the Nepal Rastra Bank (NRB), the foreign currency reserve reached Rs 2881 billion (equivalent to US $20.41 billion) by September 16. The data made public by the NRB last week shows that the foreign exchange reserves in Nepal grew by 7.6 percent in the two months of the current fiscal year alone.

At the end of the last fiscal year, the NRB held Rs 2677 billion in foreign exchange reserves.

The foreign currency reserves currently held by Nepal are sufficient to cover the import of goods and services for 16 months. Nepal must pay for imported goods and services in US dollars.

The target set in the NRB’s latest monetary policy is to maintain foreign exchange reserves sufficient to cover the import of goods and services for a minimum of seven months. The current foreign currency reserve can cover the import of goods and services for nine months more than the NRB’s target.

Looking at the foreign exchange reserve at the beginning of the fiscal year 2022/23, there was a concern as to whether the country was on the verge of default. There were even comments suggesting that Nepal’s economic situation might be heading towards that of Sri Lanka, pointing to the shrinking foreign currency reserves in Nepal.

At that time, due to a lack of foreign currency reserves, Sri Lanka had reached a point where it could not afford to buy medicine, fuel, food grains, or electricity. Ranil Wickremesinghe, the then Prime Minister of Sri Lanka, had declared that the country had economically defaulted.

In 2019/20, due to COVID-19, Nepal’s foreign trade had stalled, leading to a surge in imports. The effect of this was an increase in foreign currency reserves, which reached a level sufficient to cover the import of goods and services for five months and six days in the first month of the fiscal year 2021/22.

However, after the COVID-19 pandemic subsided, imports also increased, which took a toll on the foreign exchange reserves. By mid-February 2022, Nepal’s foreign exchange reserves had dropped to a level sufficient to cover the import of goods and services for only six months and 18 days. At that time, the inflow of remittances into Nepal was also decreasing, and tourist arrivals were affected.

To stop the declining foreign currency reserves, the then government was forced to act. To increase foreign exchange and discourage imports, the NRB increased interest rates and implemented a policy requiring a 100 percent cash margin deposit for the import of 18 categories of goods.

Furthermore, in around May 2022, the government even published a notice in the gazette banning the import of 10 types of goods, including vehicles, expensive mobile phones, and chocolates. The World Bank and the International Monetary Fund had expressed dissatisfaction with the government’s imposition of import restrictions.

The subsequent improvement in the foreign exchange reserve is now at its peak.

To increase foreign exchange and discourage imports, the NRB increased interest rates and implemented a policy requiring a 100 percent cash margin deposit for the import of 18 categories of goods.

The main source of foreign currency in Nepal is remittance. Over the last few years, the volume of remittances entering Nepal through the banking channel has consistently increased.

According to the NRB’s report on “The Current Economic and Financial Situation of the Country,” published last week, the remittance inflow increased by 33.1 percent during the two months of the current fiscal year 2025/26. During this period, remittances amounting to Rs 352 billion entered the country, according to NRB statistics. In the first month of the current fiscal year alone, Rs 189 billion in remittance flowed in.

By the end of the previous fiscal year 2024/25, remittance entering Nepal had increased by 1.2 percent. Last year, Rs 193 billion in remittance entered through the banking system. Kiran Pandit, Executive Director and Spokesperson for the NRB, states that remittance is the main reason for the growth in Nepal’s foreign currency reserves.

Nepal also acquires foreign currency from tourist arrivals. Foreign currency is also earned from Nepalese exports, but this quantity is minimal. The NRB also earns returns by investing foreign currency reserves in the bonds issued by various countries and in correspondent accounts in foreign banks. The income generated from this also comes in foreign currency. Pandit states that compared to remittance, the share of foreign currency from tourism, exports, and investment returns is extremely low. Foreign currency is also received in the form of loans and grants provided by foreign donor agencies.

Foreign currency is mainly used to pay for imports made by Nepal. The foreign currency reserve increased because the remittance inflow volume exceeded the import volume. In the last two months, imports stood at Rs 305 billion, while Rs 352 billion in remittance entered Nepal during the same period. Foreign currency is also utilized for the payment of principal and interest on foreign loans.

How to reap the benefit?

For several years, there has been a call to utilize foreign currency reserves for the country’s economic development. Economist and former banker Bhuwan Dahal argues that the foreign exchange reserves can be used for the country’s economic development. Dahal’s statement is that the accumulated foreign currency should be used for the construction of large and “game-changer” infrastructure projects in the country.

Former NRB Governor Dipendra Bahadur Chhetry holds a different opinion than Dahal. He argues that extreme caution should be exercised when utilizing foreign currency. Chhetry says, “The foreign currency reserve can be used for the construction of infrastructure that is immediately needed. However, Nepal’s economy is import-based. The situation could even arise where the letter of credit (LC) issued by importers becomes worthless if the Financial Action Task Force (FATF) takes further action against Nepal, as the country has been placed on the Grey List.” He concludes, “This issue must also be considered before deploying the foreign currency reserve.”

The FATF, which monitors money laundering globally, has placed Nepal on the Grey List of financially risky countries due to issues related to money laundering.

Former NRB Executive Director and Economist Nar Bahadur Thapa suggests that the foreign currency reserve is increasing because development work in Nepal has failed to gain momentum. Thapa adds, “If the work on large infrastructure development had been brisk, a large amount of foreign currency would be spent on purchasing the necessary infrastructure. Since development work is not happening, the increase in foreign currency is not unnatural.” Thapa’s contention is that the continuous growth of foreign currency reserves indicates that the economy is not dynamic in the country. According to him, the government’s inability to spend its development budget is what has caused the foreign currency to accumulate. For a year, the work on the Kathmandu-Terai Fast Track has not progressed well. Projects like Budhigandaki have not been able to move forward. There has also been no significant progress in the Sunkoshi-Marin Diversion. The use of the currently accumulated foreign currency, by importing the hydromechanical equipment to build hydropower projects, will make the economy more dynamic, Thapa believes.

Indeed, the government only spent 63 percent of its allocated budget in the last fiscal year. That was the highest amount spent so far. In the three months of the current fiscal year, development expenditure has not even reached five percent.