Nepal’s sovereign credit rating has become an understandable focus of economic discussion. Fitch rates Nepal BB-, which is below investment grade, and a better rating would lower both the perception and the price of country risk. For international banks and multinational corporations the rating is real, because it sets internal country limits and determines whether a Nepali proposal reaches an investment committee at all. Until 2024 we were simply unreadable to that audience, which was worse. But Nepal should not mistake the rating for the principal reason productive investment remains so low.
The evidence sits in Nepal Rastra Bank’s own annual tables. Last fiscal year Nepal saved 44.77 percent of its national income and invested 26.26 percent of it in fixed assets. The difference of a little over eighteen percentage points of GDP amounts to roughly Rs 1.2 trillion that entered the country but never became a road, a factory, a warehouse or a machine. The composition is more revealing than the size. Gross domestic saving, meaning what Nepal’s own production generates, is only 9.71 percent of GDP. Nearly all of the remainder is remittances, worth about 35.8 percent. Nepal’s enviable savings rate is therefore not the achievement of a productive economy but largely the earnings of Nepalis working abroad, arriving in the financial system without finding enough productive investment at home. Reserves have reached $25.31 billion, close to twenty months of imports, and over the year the central bank bought a net $8.05 billion from the market and then absorbed much of the liquidity created in the process. Managing liquidity the economy could not productively absorb has become one of the central bank’s defining challenges.
This is why Nepal can hold a BB- rating and receive very little foreign investment at the same time. The two measure different things. A rating agency asks whether the government will repay its foreign currency debt on time, and Nepal answers that question relatively well because most of its external debt is concessional and the reserves behind it are substantial. A company weighing a factory asks a different set of questions. Can capital enter and profits leave on a predictable schedule¿ Are contracts, permits and land reliable¿ Is there a practical way eventually to sell and leave¿ Nepal answers the first question well and the second poorly. There is also evidence that procedure matters. Direct investment equity inflows rose 137 percent last year to Rs 28.49 billion after automatic approval routes and removed thresholds simplified entry. That figure measures equity inflows rather than net FDI after repatriation, but the direction is still instructive. Ratings matter, but investors ultimately respond to whether investment works in practice.
The remittances supporting this financial abundance are also less secure than the headline growth rate suggests. Inflows reached Rs 2,363.13 billion, but growth of 37.1 percent in rupees was 28.1 percent in dollars, with part of the difference reflecting a rupee that depreciated 10.9 percent. Beneath that, first-time approvals for foreign employment fell from 505,957 to 406,519 while renewals rose from 333,309 to 385,783. Fewer Nepalis are leaving for the first time while more of those already abroad are remaining there. Whatever else those numbers suggest, they do not describe an expanding pipeline of new migrant workers. Nepal should therefore not assume that remittances approaching 36 percent of GDP will continue growing indefinitely. The opportunity to convert today’s extraordinary flows into productive assets may be narrower than the headline growth rate implies.
Banking is where that conversion first breaks. Deposits grew 13.9 percent to Rs 8,276.93 billion while private credit grew only 6.5 percent, with commercial lending rates at a historically low 6.55 percent. Of all outstanding credit, 62.9 percent is secured against land and buildings. Construction lending grew 18.6 percent and consumer lending 17.8 percent, while agricultural credit contracted. Banks prefer land because land is what courts can seize, so an applicant with property outranks one holding an export contract. Yet with non-performing loans already at 5.66 percent, simply instructing banks to lend more to industry would be reckless. The problem is not simply the willingness of banks to lend but the absence of mechanisms that can make a productive borrower as safe to finance as a plot of land.
The capital market offers too little of an alternative. Of 302 listed companies, 133 are banks and insurers and another 110 are hydropower companies, with only 29 manufacturers and 9 hotels among the rest. Financial institutions hold 51.8 percent of market capitalisation and hydropower another 17.5 percent. Of the Rs 56.03 billion of public issuance approved last year, ordinary shares accounted for just Rs 9.12 billion. Nepal therefore raised barely Rs 9 billion of new corporate equity against Rs 2.36 trillion arriving through remittances. Nor can hydropower be allowed to carry the national investment story alone. The August floods demonstrated concentration and climate risks that have not been adequately priced, and a project that cannot be adequately insured becomes increasingly difficult to finance, whatever its power purchase agreement may say.
What follows is a construction task rather than a promotional one, and it has three parts in sequence. First, Nepal must make productive businesses more bankable through credit guarantees, export-credit insurance, better cash-flow underwriting and risk sharing, so that lenders can finance a contract rather than simply a hectare of land. Second, it needs to deepen the securities market beyond banks and hydropower, developing corporate and infrastructure bonds so that assets lasting thirty years are not financed primarily by deposits lasting two, while bringing more manufacturing, agriculture, tourism, logistics, healthcare and technology companies into the capital market. Third, and only once credible investment vehicles actually exist, Nepalis abroad should have an easy and entirely voluntary way to put part of their savings into them. Five percent of annual remittances would amount to roughly Rs 118 billion, many times recent foreign investment. Simple opt-in investment options within remittance platforms, small denominations and professionally managed funds could create a bridge between migrant earnings and domestic capital formation without resorting to compulsory deductions that might simply encourage informal transfers.
None of this replaces foreign investment. Nepal needs foreign partners for technology, engineering, management expertise and market access as much as it needs their capital. A Japanese company once suggested that I approach JICA rather than expect it to commit its own balance sheet in Nepal. I initially took that as a polite refusal. In fact, it was a lesson in how frontier markets are often financed. Institutions such as JBIC, NEXI, IFC, MIGA and ADB exist precisely to bridge the distance between sovereign risk and a corporate investment committee. A project supported by political-risk insurance, concessional senior debt, credible offtake and multilateral participation can become bankable long before the sovereign itself reaches investment grade. Nepal should therefore pursue both agendas at once: making individual projects financeable now while steadily improving its sovereign credit standing.
The state must demonstrate the same conversion it is asking of everyone else. A country holding about $25 billion in reserves and Rs 8.3 trillion in deposits, with commercial lending rates at 6.55 percent, nevertheless saw capital expenditure fall 14.8 percent to Rs 190.84 billion while recurrent spending rose past Rs 1 trillion. This year’s budget again promises substantially higher capital spending, at Rs 431.10 billion. The question is no longer whether Nepal can allocate money on paper, but whether its institutions, across successive governments, can turn an allocation into an asset. Nepal has spent a decade asking how to bring more money in. The answer has been sitting in the national accounts the whole time. The money is already here. The work is making it productive.
