Nepal’s bubble economy

Two weeks ago, Prime Minister KP Sharma Oli announced jubilantly on social media that Nepal had achieved a historic annual growth of 81.8% in exports.

He was right. Nepal’s trade did take a great leap forward compared to last year. But the dramatic rise was mainly due to processed soya bean oil.

However, Nepal does not produce the edible oil it exports. In fact, the soya and palm oil that make up 44% of total exports are imported from Southeast Asia and South America, and simply re-exported, mostly to India.

Under the SAFTA (South Asian Free Trade Area) Agreement, Nepal can export products to India duty-free if it has at least 30% value-added. Nepal’s traders have taken advantage of SAFTA even though the edible oils they export do not reach that value addition threshold.

“The 30% value addition requirement is often only on paper,” says former commerce secretary Purushottam Ojha. “It is clear that simply packaging edible oils in Nepal does not fulfil the terms of the trade agreement.”

Prime Minister Oli is aware of this, and even called Nepal’s export figures “fake” at an earlier event.

The government is relying on other iffy figures to suggest that Nepal’s economy is strong and getting stronger. For example, the value of imports rose by 13.25% in 2024-25 compared to the previous fiscal year.

Some of it was due to a jump in electric vehicle imports worth Rs 31.76 billion, but mostly it was because more wholesale soya oil was imported to be re-packaged and sold in India.

The very fact that the government boasts about increased imports is an indication of how much it relies on taxing them for revenue. Touting such trade figures cannot be the basis to claim an economic rebound.

“A jump in the value of imports can be interpreted as an increase in purchasing power, but it is not evidence of a stronger economy,” says economist Keshav Acharya. “Even though imports have increased, Nepal's domestic production and productive capacity have not improved.”

Nepal Rastra Bank's semi-annual economic activity study report shows that industrial production was down in the first six months of the last fiscal year.

This despite an increase in the number of new industries registered and investment commitments. Out of the Rs70.2 billion proposed foreign investment, Nepal received only Rs17.9 billion last year.

Meanwhile, the rate of capital formation was limited to 24% last year, which is lower than the year before, suggesting that new investment, job creation and economic expansion all declined.

If domestic production does not improve in relation to this year’s inflated trade figures, the outflow will put pressure on foreign exchange reserves like it did three years ago. At that time, Nepal borrowed from the IMF under its Extended Credit Facility Program to kickstart the economy.

Nepal's bubble economy NT — Source: NEPAL RASTRA BANK

The macroeconomy is on firm footing with foreign exchange reserves at a comfortable Rs2,520 billion in May, up 23% from last year. This was largely due to remittances, and partly due to a falling NPR exchange rate.

Real estate transactions and the stock market index have also been climbing as a result of government policies to revive the sector.

However, former executive director of Nepal Rastra Bank Nar Bahadur Thapa cautions: “This is not organic growth, it is the result of deliberate policy decisions to relax rules on real estate and stock markets transactions.”

In reality, the sharp rise in land prices have increased the cost of production, and excessive monetisation of the real estate has become the main source of Nepal’s economic woes.

The central bank has announced a slew of new policies, shifting the terms of loan repayment for industrialists and entrepreneurs, reducing interest rates, and injecting more working capital — all designed to inject adrenaline into the real estate and stock market sectors.

When he was governor, Mahaprasad Adhikari made several financial reforms during the latter half of his tenure to stimulate the economy, including tightening credit flow.

By the last fiscal year, additional financial reforms had resulted in a credit expansion rate of around 8%. As the pace of credit expansion slows, real estate prices have started to fall. This is actually beneficial to the economy, because it lays the foundation for improvements in land-related entrepreneurship, production, and the construction sector.

Just because real estate and the stock market transactions increase, it does not indicate an economic turnaround — especially when manufacturing and productive sector continues to languish.

“It is foolish to believe that real estate and the stock market have magically revived our economy. Agriculture employs more than half of the population, but it is in decline. Investment in the productive sector has not increased, and job creation has not increased.”

Two years ago, Nepal’s industrialists, business leaders, and political leadership predicted a recession amidst a sluggish business, declining market demand, large-scale job loss, and a shrinking real estate and share market.

Still, the economy grew by 3.36% in fiscal year 2023/24. In fact, Nepal’s economy has grown nominally over the last two decades even when all sectors of the economy are in decline.

Says Keshav Acharya: “The growth in trade, real estate, and the stock market are bubbles. The real economy remains stagnant.”