Nepal’s financial system is carrying plenty of liquidity, while borrowing costs have fallen significantly. Yet businesses are not responding with a corresponding rise in investment, creating a difficult challenge for an economy seeking stronger growth.

The latest economic picture suggests that the problem is less about the availability of money and more about whether businesses are confident enough to use it for expansion, production and job creation.

Banks have funds, but credit demand remains subdued

Nepal’s foreign-exchange position has strengthened substantially since the post-pandemic period. Foreign-exchange reserves are now sufficient to cover about 18.8 months of imports, while continued remittance inflows have added liquidity to the banking system.

At the same time, lending rates have fallen to relatively low levels. Nepal Rastra Bank’s latest annual data put the weighted average lending rate of commercial banks at 6.55 percent in fiscal year 2025/26, while private-sector credit grew by 6.6 percent.

But credit expansion remains below the pace policymakers have previously sought. The Kathmandu Post reports that private-sector credit has grown by roughly 6 percent annually over the past three years, while the central bank had repeatedly targeted growth of around 12 percent.

The result is an unusual situation: banks have money available to lend, but demand for productive borrowing remains relatively weak.

Investment depends on more than interest rates

Lower borrowing costs can make investment more affordable, but they do not automatically create demand for new factories, hotels, offices, machinery or other productive assets.

Businesses also consider expected sales, regulatory conditions, infrastructure, political and economic uncertainty, access to markets and the likelihood of earning a return on new investment.

Economist Dilli Raj Khanal told the Kathmandu Post that the government needs to do more to rebuild confidence in the private sector. His assessment was that existing recovery measures had not been sufficient to restore business enthusiasm.

The central bank’s research department has similarly acknowledged the gap between high liquidity, low interest rates and weaker-than-expected economic activity.

Some economic indicators are improving

The picture is not uniformly weak.

During the first month of the current fiscal year, private-sector credit increased by about 0.4 percent, or Rs23.5 billion, while deposits declined by 0.3 percent, according to figures reported by the Kathmandu Post. Imports and exports also increased, while real-estate transactions showed signs of improvement.

Government revenue collection also started the fiscal year higher than a year earlier. Revenue reached Rs183 billion in the first month, while capital expenditure increased to Rs7.66 billion from Rs6.35 billion during the corresponding period.

Foreign direct investment in equity also rose to Rs1.01 billion from Rs690 million a year earlier.

These figures point to some improvement in economic activity, although one month of data is not enough to establish a sustained recovery.

Inflation is creating another challenge

While businesses are facing weak investment demand, households are confronting renewed inflationary pressure.

Consumer inflation reached 5.96 percent in the first month of the fiscal year, compared with 1.68 percent a year earlier. Food and beverage prices increased by 6.77 percent, while non-food and services prices rose by 5.52 percent.

The combination creates a difficult policy environment. Faster credit growth and higher government spending could support economic activity, but if production and supply do not increase at the same pace, stronger demand could add to inflation.

Capital markets are showing signs of activity

Nepal’s stock and property markets have also recorded some improvement.

A 21-point capital-market reform package introduced by the government has been cited by economist and former Nepal Rastra Bank executive director Nara Bahadur Thapa as a factor supporting investor sentiment. The package includes measures related to market structure, trading, investment and financial instruments.

However, activity in the stock or property market is not equivalent to long-term productive investment.

For a broader economic recovery, financial resources ultimately need to reach businesses that increase production, create employment and generate new income.

Reconstruction could create new demand

The Bhotekoshi floods have added another layer of uncertainty to Nepal’s economic outlook, damaging homes, farmland, offices and infrastructure.

At the same time, reconstruction could become a source of economic activity if funds are efficiently mobilised into rebuilding roads, bridges, settlements and productive infrastructure.

Economist Nara Bahadur Thapa told the Kathmandu Post that reconstruction and resettlement following the floods could generate substantial economic activity, drawing a comparison with the period following the 2015 earthquake. His projection is an expert assessment rather than an established economic forecast.

The central issue is business confidence

Nepal therefore faces a paradox.

The banking system has liquidity. Borrowing costs are comparatively low. Foreign-exchange reserves and remittance inflows are strong, and some indicators such as revenue collection, exports, real-estate transactions and foreign investment have improved.

Yet businesses remain cautious about committing capital.

That caution matters because sustainable economic growth requires more than liquidity in banks. It requires businesses to believe that new factories, services, infrastructure and other productive ventures will have sufficient demand and a predictable operating environment.

Whether Nepal can turn its abundant financial liquidity into productive investment will depend not only on monetary conditions, but also on business confidence, policy implementation, infrastructure, market demand and the broader investment climate.