Nepal Economy Growth Slows to 3.8% in FY26 as Remittances Strengthen External Sector

Foreign exchange reserves reach USD 25.3 billion, while inflation rises to 5.1% by mid-July 2026 and merchandise trade deficit widens

Nepal’s macroeconomic performance in FY26 showed contrasting trends, with slower domestic economic growth alongside a stronger external sector. Real GDP growth is estimated at 3.8%, compared with 4.4% in FY25, while the annual average CPI-based inflation rate eased to 3.1%.

External accounts remained a key source of strength, supported by a 37.1% increase in remittance inflows. Gross foreign exchange reserves reached USD 25.3 billion (NPR 3,897.6 billion) by mid-July 2026, providing approximately 19.6 months of prospective merchandise and services import cover.

Inflation Accelerates Towards the End of FY26

Nepal’s inflation indicators moved in different directions during FY26. The annual average CPI-based inflation rate declined to 3.1%, from 4.06% a year earlier.

The moderation was primarily driven by food and beverage inflation, which slowed to 1.0% from 4.7%. In contrast, non-food and services inflation increased to 4.2%.

The annual average, however, did not reflect the acceleration recorded towards the end of the fiscal year. Year-on-year CPI inflation reached 5.1% in mid-July 2026, compared with 2.2% twelve months earlier.

The increase was recorded across geographical regions, with the Madhesh and Terai regions reporting the highest year-on-year inflation rates. Wholesale price inflation also increased substantially, reaching 6.7% year-on-year, compared with 1.1% previously.

Economic Growth Moderates to 3.8%

Nepal’s estimated real GDP growth slowed to 3.8% in FY26, from 4.4% in FY25. The primary drag came from agriculture, where growth declined to 1.58%, compared with 3.1% in the previous fiscal year.

Industrial activity provided an offset, expanding by 5.7%, nearly twice the pace recorded a year earlier. The services sector maintained growth of 4.2%.

The changing sectoral composition was reflected in GDP shares. Agriculture accounted for 24.0% of GDP, while industry’s share increased to 14.2%.

Capital formation indicators remained broadly stable. Gross fixed capital formation stood at 26.3% of GDP, while gross national saving remained at 44.8%. Domestic saving, however, was comparatively modest at 9.7% of GDP, indicating continued reliance on remittance-financed national saving.

Remittances Drive Strong External Performance

Nepal’s external sector remained strong during FY26, supported by high foreign exchange reserves and continued growth in remittance inflows.

Gross foreign exchange reserves reached USD 25.3 billion (NPR 3,897.6 billion) by mid-July 2026. This provided coverage equivalent to approximately 19.6 months of prospective merchandise and services imports, the highest level of import cover recorded in the country’s history.

Workers’ remittances increased 37.1% year-on-year to NPR 2.36 trillion during FY26. Between mid-June and mid-July 2026 alone, remittance receipts reached NPR 242.33 billion.

The continued flow of remittances supported household consumption, the external sector and foreign exchange reserve accumulation.

Exports and Imports Both Increase

Merchandise exports increased 13.8% year-on-year to NPR 277.4 billion in FY26, compared with NPR 243.7 billion during the corresponding period of the previous fiscal year.

Export growth was supported mainly by higher shipments of soybean oil, palm oil, cardamom, noodles and bran products.

Merchandise imports increased at a faster rate, rising 16.2% to NPR 2,054.9 billion. The increase was driven mainly by imports of petroleum products, silver, transport equipment, vehicles and spare parts, chemical fertilisers and crude soybean oil.

Higher international commodity prices, particularly petroleum prices, also contributed to the increase in the import bill.

As import growth outpaced export growth, Nepal’s merchandise trade deficit widened to NPR 1,777.5 billion in FY26. Strong remittance inflows and high foreign exchange reserves nevertheless supported the country’s external position despite the larger trade imbalance.

Tourism Maintains Growth During Monsoon Season

Nepal’s tourism sector recorded continued growth in July 2026 despite the peak monsoon period, which is generally an off-peak period for international travel.

International tourist arrivals increased 2.3% year-on-year to 71,775 visitors in July 2026, compared with 70,193 in July 2025.

India remained the largest source market, followed by China and the United States.

From January to July 2026, cumulative international tourist arrivals reached 693,379. Tourism continued to contribute to foreign exchange earnings, employment generation and overall economic activity.

Key Economic Indicators

Monetary and Financial Conditions Remain Accommodative

Monetary and financial conditions remained broadly accommodative during FY26. Deposits, money supply and private-sector credit expanded, while interest rates declined across the yield curve amid ample systemic liquidity.

The repo rate remained at 4.3% and the bank rate at 5.8% from March through July 2026. The weighted average deposit rate declined from 3.5% in March to 3.2% in July, while the weighted average lending rate decreased from 6.9% to 6.6% over the same period.

Capital Market and Currency Performance

The capital market recorded weaker performance during the period, with the NEPSE index and total market capitalisation both declining from year-earlier levels.

The Nepali rupee depreciated by close to 11% against the US dollar, despite the improvement in foreign exchange reserves and external-sector buffers.

Overall, FY26 data show slower domestic output growth alongside strong remittance inflows, record foreign exchange reserves, rising merchandise trade activity and continued tourism growth. At the same time, accelerating year-on-year inflation, a widening trade deficit and weaker capital-market performance remained notable developments during the period.