Arya News - Economists warn that Nepal’s economy has slowed significantly over the past few years, with little policy intervention to stimulate growth.
KATHMANDU – Nepal’s inflation has fallen to a 22-year low, reflecting a sharp slowdown in domestic demand as large numbers of people leave the country in search of better income and opportunities abroad.
According to Nepal Rastra Bank, the country’s central bank, inflation stood at 1.11 percent in mid-November, down from 5.60 percent in the same period last year. This is the lowest inflation rate recorded in more than two decades. The last time inflation dipped to a comparable level was between mid-May and mid-July of fiscal year 2003-04, when it stood at 1.8 percent.
Economists say inflation in Nepal has never turned negative, and the latest reading marks the lowest level in nearly two-and-a-half decades.
Nara Bahadur Thapa, a former executive director of Nepal Rastra Bank, attributes the record-low inflation to three main factors. First, he said, global economic conditions are weakening, with many economies heading to recession amid rising trade policy uncertainty, which has dampened overall demand and prices worldwide. Second, India’s relatively stable macroeconomic situation, combined with Nepal’s fixed exchange rate regime with India, has had a positive spillover effect on Nepal’s price stability.
Inflation in India stood at 0.71 percent in November, further reinforcing the downward pressure on prices in Nepal.
Third, Thapa said, prices of lentils and legumes have declined globally after China reduced its purchases of soyabean from the United States due to the ongoing tariff war. This has contributed to lower food prices in Nepal, helping push overall inflation to a historic low.
At the same time, domestic demand has weakened sharply as outmigration continues to rise, with no clear signs of economic recovery at home. A growing number of Nepalis are leaving the country for foreign employment, while those unable to afford overseas migration are increasingly heading to India, where economic conditions are improving.
Many families, particularly from the far-western region, are moving to India to earn, and this trend is on the rise, Thapa said. The result has been historically low demand in the domestic market, while supply has remained relatively stable, leading to a further decline in inflation.
Economists warn that Nepal’s economy has slowed significantly over the past few years, with little policy intervention to stimulate growth. They say the government has failed to implement decisive economic measures, while ongoing political turmoil has deepened uncertainty and weighed on investor and consumer confidence.
Despite the slowdown, Nepal’s external position remains comfortable. The country’s foreign exchange reserves stood at $21.52 billion in mid-November.
The central bank’s report shows that food and beverage inflation declined by 3.32 percent in the review month, while non-food and services inflation stood at 3.69 percent. During the same period last year, prices in these categories had risen by 9.10 percent and 3.65 percent, respectively.
Within the food and beverage group, the price index of ghee and oil rose by 5.25 percent, non-alcoholic drinks by 3.61 percent, and milk products and eggs by 1.97 percent. By contrast, vegetable prices fell sharply by 14.43 percent, spices by 7.85 percent, and pulses and legumes by 5.36 percent.
Under the non-food and services categories, education inflation increased by 7.56 percent, clothes and footwear by 6.29 percent, and furnishing and household equipment by 4.55 percent.
Rising costs in the clothing and footwear segment have been driven partly by supply-side disruptions. Traders say goods ordered from China have not arrived on time and have been stuck since August due to disruptions at the northern border. The use of alternative routes has increased transport costs, while higher bank interest rates have added to overall expenses, pushing up prices of garments and footwear.
Nepal meets most of its garment and footwear demand through imports from China. The Kerung border, a key northern trade point, has remained closed since July 8, when flash floods swept away the border bridge on the Kerung–Rasuwagadhi trade route. Alternative routes have proven risky, with frequent landslides and floods continuing to hamper transportation.
At the provincial level, inflation was highest in Koshi province at 1.80 percent and lowest in Sudurpashchim province at 0.26 percent.
Inflation in Nepal began easing in late 2023, dropping to 5.38 percent in November from 7.5 percent in October, and has continued on a downward trajectory since then, culminating in this year’s record-low reading. Geographically, rural inflation stood at 0.66 percent, while urban inflation was slightly higher at 1.26 percent.