Nepal Development Update, April 2025

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - Nepal's economic growth accelerated to 4.9 percent in the first half of FY25, up from 4.3 percent in H1FY24, driven by growth in the agricultural and industrial sectors, despite a slowdown in the services sector [18][36] - Headline inflation eased to 5 percent in H1FY25 from 6.5 percent in H1FY24, primarily due to reduced non-food and services inflation, although food and beverage inflation remained elevated at 7.5 percent [20][30] - The current account surplus moderated from 2.8 percent of GDP in H1FY24 to 2.4 percent in H1FY25, influenced by declining remittance inflows and a narrowing trade deficit [21][69] - The fiscal deficit narrowed significantly, reaching near balance in H1FY25, driven by stronger revenue growth outpacing slower expenditure increases [24] Summary by Sections Recent Economic Developments - Real GDP growth accelerated to 4.9 percent in H1FY25, with significant contributions from agriculture and industry, while the services sector experienced a slowdown [18][36] - Natural disasters caused damages equivalent to 0.8 percent of GDP, impacting infrastructure and agriculture [19][42] - The monetary policy stance remained cautiously accommodative, with a reduction in the policy rate leading to record low lending rates [22] - The financial sector faced challenges with a non-performing loans (NPL) ratio reaching 4.9 percent, prompting increased loan-loss provisions [23] Outlook, Risks, and Challenges - Economic growth is projected at 4.5 percent in FY25, with the services sector expected to drive growth, although tourism disruptions may limit growth in accommodation and food services [26][27] - Inflation is expected to moderate to 5 percent in FY25, driven by lower non-food inflation and favorable agricultural output [30] - The current account surplus is projected to narrow over the medium term, primarily due to lower remittance and a widening trade deficit [31] - The fiscal deficit is expected to remain at 2.5 percent of GDP in FY25, with public debt projected to rise to 43.4 percent of GDP by FY27 [32] Real Sector - The agricultural sector grew by 3.6 percent in H1FY25, supported by increased paddy production despite the impact of floods [55] - The industrial sector expanded by 6.6 percent in H1FY25, driven by electricity and manufacturing sub-sectors [50] - The services sector grew by 5.1 percent in H1FY25, with notable declines in financial and insurance activities and accommodation and food services [46] External Sector - The current account surplus moderated to 2.4 percent of GDP in H1FY25, reflecting a decline in remittances and primary income [69] - Official remittance inflows decreased from 12.9 percent of GDP in H1FY24 to 12.4 percent in H1FY25, influenced by a reduction in migrant outflows [74] - Merchandise exports rose to 1.9 percent of GDP in H1FY25, primarily due to increased refined edible oil exports [91]