KATHMANDU: The current fiscal year’s first four-month period (from July 17 to November 16) concluded with over Rs 110 billion of investable funds accumulated in banks and financial institutions.

Not only that, the foreign exchange reserves at Nepal Rastra Bank (NRB) have reached Rs 2.979 trillion by October 17. The foreign currency reserves were Rs 2.677 trillion at the July 16 end. The foreign currency reserve has been increasing continuously in recent months.

Based on the imports made during the first three months (from July 17 to October 17) of the fiscal year 2025/26, the foreign exchange reserves held by the banking sector are sufficient to cover 20 months of imports of goods and services. Even if both goods and services are imported, there is a reserve sufficient for 16.5 months.

The NRB’s latest monetary policy aims to maintain foreign exchange reserves adequate to cover at least seven months of goods and services imports. The current foreign currency reserve can sustain imports of goods and services for over one year more than the NRB’s target. During this period, the Balance of Payments (BOP) is in a surplus of Rs 264.3 billion. The Balance of Payments (BOP) is a summary of all economic and financial transactions between resident and non-resident individuals and institutions over a specific period. A BOP surplus indicates an increased inflow of foreign currency from external transactions, while a deficit indicates a higher outflow. Currently, Nepal’s BOP is in surplus. This means that the inflow of foreign currency is increasing.

The main reason for the rise in foreign exchange reserves and the BOP surplus is remittances. NRB data shows that remittance inflows grew by 35.4 percent in the first three months of the current fiscal year. Remittances totaling Rs 553.31 billion flowed in from July 17 to October 17. Remittances from July 17 to August 16 alone amounted to Rs 201.22 billion.

Liquidity has been accumulating in banks for the last two and a half years. Remittances are increasing, but lending has not picked up. Due to excess liquidity (investable capital) in the financial system, the NRB has withdrawn (mopped up) Rs 1.307 trillion of liquidity from banks and financial institutions in three months.

Remittances totaling Rs 553.31 billion flowed in from July 17 to October 17. Remittances from July 17 to August 16 alone amounted to Rs 201.22 billion.

The renowned theory of American economist Richard R. Nelson is “The Low-Level Equilibrium Trap.” This theory states, “When per capita income is extremely low, people are equally weak at saving and investing. The very low investment made by individuals leads to extremely low growth in the country’s national income.” Nepal’s economy is exactly in this situation right now.

Furthermore, there is a risk that the country may fall into a liquidity trap. Even with low interest rates, liquidity is increasing, and further reductions do not seem likely to stimulate credit flow. Two years ago, private sector investors protested against high interest rates. It was commonly remarked that investment could not grow due to the interest rates. Now, even with single-digit interest rates, demand for loans from banks and financial institutions has not increased.

Considering the sluggish economy of the last few years, the government has introduced an expansionary budget and monetary policy for the current fiscal year. The expectation was that this would help increase investment and manage the liquidity in banks and financial institutions.

According to Anjan Shrestha, senior vice-president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), there were signs of improvement in the first two months of the fiscal year. However, the economy has taken a downturn again following the Gen Z protest that occurred on September 8 and 9.

Due to excess liquidity (investable capital) in the financial system, the NRB has withdrawn (mopped up) Rs 1.307 trillion of liquidity from banks and financial institutions in three months.

Reasons for expenditure shortfall

According to NRB data, credit extended to the private sector by banks and financial institutions has grown by only 1.5 percent. This is almost half the growth rate of the same period in the previous fiscal year. In the first three months of the last fiscal year, private sector credit grew by 2.5 percent. Last year, Rs 128.65 billion was disbursed. This year, only Rs 82.93 billion has been extended to the private sector.

It is not that the demand for credit is low because the interest rates offered by banks and financial institutions are expensive. The interest rate on loans has now fallen to around seven percent, the cheapest it has been in the last three years. The interest rate banks and financial institutions offer on deposits has also dropped to around four percent.

Economist Homnath Ghimire attributes the failure to utilize funds from banks and financial institutions to multifaceted reasons. He says, “The insufficient development of profitable investment areas, delays in the construction of large government infrastructure projects, and the process initiated by the government formed after the Gen Z protest to break contracts for dilapidated projects suggest a lack of demand for new loans.” Ghimire also believes that the recent political situation and the international context have led to a decrease in aggregate demand, and the cyclical slowdown seen in the import-dependent economy has also reduced the demand for loans.

Excluding hydropower, the private sector’s capacity is weak in building commercial infrastructure projects like cable cars, expressways, and railways. Private sector attraction is low for large and long-term significant projects. Most businesses that flourish in Nepal are import-oriented. Very little investment goes into production and construction work. Ghimire suggests that the lack of private sector interest in large projects is also why the demand for loans has not increased as expected.

In the first three months of the last fiscal year, private sector credit grew by 2.5 percent. Last year, Rs 128.65 billion was disbursed. This year, only Rs 82.93 billion has been extended to the private sector.

On the other hand, interest rates in banks and financial institutions are unstable. Even if one takes a loan at a cheap rate now, there is no guarantee when the interest rate might rise. Two years ago, the loan interest rate reached around 16 percent. It has now dropped to about seven percent. Representatives of the private sector themselves state that an uncertain market and a difficult-to-predict business environment are not encouraging entrepreneurs to take new loans.

Banks, which seek quick returns and rely heavily on physical collateral in the name of risk management, hesitate to easily lend to small and medium-sized enterprises with high potential. As a result, small businesses have been unable to obtain loans even when they desire them.

Furthermore, the entire private sector is distressed after vandalism and arson attacks on the residences and business establishments of industrialists and business people during the recent movement. Representatives of the private sector state that plans for investment expansion are currently ‘on hold’ due to the ambiguous political situation and the weakened morale of the security forces.

“Attacks were targeted at specific individuals and establishments. When the safest place, the home, is subjected to mob violence, vandalism, and arson, who feels safe?” asks Shrestha, senior vice-president of the FNCCI. He adds, “Here, engaging in industry and business and earning profit has been interpreted as a crime.”

Banks, which seek quick returns and rely heavily on physical collateral in the name of risk management, hesitate to easily lend to small and medium-sized enterprises with high potential.

The 1,200 MW Budhigandaki project, considered Nepal’s ‘game-changing’ project, is estimated by consultants to cost about Rs 3.32 billion. The investable capital accumulated in banks now is enough to build three projects of this scale. However, the investment modality for the Budhigandaki project has not yet been determined.

Currently, large industrialists and businesspeople are seeking the rescheduling of previously taken loans. However, the NRB has not granted such permission. Shrestha states, “Large investors feel suffocated because loan rescheduling is not happening. In such a situation, there is no question of planning new investments.”

Ineffective government spending

The theory of the famous British economist John Maynard Keynes is often cited as an example in the context of economic recovery. His theory, also known as Keynesian economics, suggests that the only way to vitalize the economy is to increase the government’s spending capacity. He suggested ways for the government to increase spending, stating that the economy would gain momentum only if the government could increase consumption and investment by cutting tax rates and increasing direct expenditure.

Keynes believed that if increasing spending is not practical during an economic recession, the government should be prepared to choose an unpleasant, or impractical, route. He stressed that if the government is unable to run large and long-term significant projects, it should spend on structures like pyramids. “Keynes says, ‘If that too cannot be done, the government should bury money in the ground and give a mining company the job of extracting that money. The government should pay for that.'”

Keynes’ theory demonstrates how important the government’s role is in mobilizing the components of the economy. However, the government in Nepal has never been able to make its spending effective. According to the data from the Financial Comptroller General Office, the government has spent only 24.38 percent of the budget up to November 16. Furthermore, the expenditure on development work is only 6.42 percent.

Currently, large industrialists and businesspeople are seeking the rescheduling of previously taken loans. However, the NRB has not granted such permission.

Pushkar Bajracharya, professor of economics at Tribhuvan University, says the private sector is not encouraged because the government has not been able to increase spending and conduct effective economic activities in the market. He says, “If the government spends Rs 1, the private sector spends Rs 3. But the government has not been able to increase its expenditure.”

According to Nar Bahadur Thapa, former Executive Director of Nepal Rastra Bank, if development projects were moving ahead rapidly, it would not take long for the foreign exchange reserves accumulated at the NRB to be spent. “But the money is sitting accumulated because large projects are not moving forward,” he says.

Professor Bajracharya suggests that the current government should make a special effort to increase spending without making decisions that negatively affect the country. He says, “The main reason for the failure to spend is the decline in the morale of the private sector. They have not been given assurance of security. The government itself should initiate some large projects to encourage the private sector.”

Former banker Bhuwan Dahal suggests that the government should start working on the concept of large projects to utilize the foreign exchange reserves held at the NRB. “About Rs 1.5 trillion of the accumulated foreign exchange can be spent. The government should be making a plan for its utilization, but no one is paying attention,” he says.