According to a report published by the Nepal Rastra Bank on October 14, it has absorbed liquidity of Rs6,785 billion in two months, through deposits and other standing facilities from the market. This is an attempt by the central bank to stabilise the market flooded with unutilised capital. The report also shows that bank deposits have increased to Rs7.4 trillion, foreign exchange reserves stand at an all-time high with $20.41 billion, which will be sufficient to fund imports for 16 months.

For a well-functioning economy, these indicators are the symbols of strength. But Nepal has a different story to tell. As of mid-September, total loan disbursement is Rs5.617 trillion and 4.62 percent of the loans disbursed are turned into non-performing, one percentage point higher than the previous year. On the other hand, the real economy remains stagnant, the average growth of the economy is flat at 4.5 percent, and private sector investment is only 17.67 percent of the GDP. Gross capital formation grows at a minimal rate of 0.49 percent annually. The government’s capital spending is 40 percent of the total allocated amount. This reveals a profound structural failure.

Liquidity trap

These evidences suggest that Nepal is in a classic liquidity trap, where monetary policy loses potency as the agents prefer holding cash to making investments, even when the interest rates are low. There is money but no investments, demand for prosperity but not enough private sector confidence to build. There’s a youth bulge, but they are migrating.

In a situation like ours, where credit demand is flat at the banks and private sector investment pipeline is minimal, increasing non-performing assets (NPAs) are not just a financial sector concern; these are a macroeconomic warning signal. When the firms cannot expand and borrowers struggle to repay, the economy creates a vicious circle: Banks hoard liquidity, credit growth slows further and viable businesses suffer alongside weak ones. Nepal must accelerate systemic restructuring of loans targeting productive sectors, strengthen early warning and credit risk systems, improve insolvency and recovery frameworks and introduce credit guarantee schemes for productive small and medium enterprises (SMEs) tied to formalisation and export performance to break this vicious cycle.

The bitter truth

In the past two decades, Nepal has built an economic model outsourced to the sweat of the young blood abroad. Remittances account for over a quarter of GDP; they sustain households and keep the banking system liquid. But this has also lulled policymakers and institutions into complacency.

Who would want to confront the cost of doing business when remittances keep demand alive? Why reform institutions when foreign workers finance our imports? Why develop industries when consumption and trade generate quick returns? Nepal is living in what development economists call a remittance consumption equilibrium: A comfort zone where foreign earnings fuel domestic spending, but not domestic production. Money flows in, goods flow in, jobs do not.

Dilapidating spending and investment

The Government of Nepal’s capital expenditure has remained chronically weak over the years. In the last FY, of the Rs352.35 billion allocated for capital expenditure, only Rs222.68 billion was spent by the government, which is an execution rate of 63.2 percent. This has been the trend over the years. The problem is not money. It is preparation, coordination and state capacity.

Nepal’s private sector mirrors this anxiety. Policy instability, political volatility, regulatory uncertainty and unpredictable tax administration create fear rather than confidence. The result: Liquidity surplus and investment deficit. In recession-like conditions with excess savings, government borrowing should theoretically crowd in private investment by stimulating economic activity. For Nepal’s micro, small and medium enterprises, every quarter is becoming more difficult to manage. Yet the government, hampered by implementation constraints, fails to execute even its budgeted projects. Fiscal policy, the primary tool for escaping a liquidity trap, is blunted by state incapacity.

Figuring out a framework

Nepal’s policymakers face a moment of truth. Do we continue to manage liquidity and celebrate remittance inflow while the real economy stagnates, or do we recognise that capital without investment is not a blessing but a warning? In a liquidity trap like ours, fiscal policy has a multiplier effect without crowding out private investment. The fiscal policy needs to structure a remittance to an investment programme which could offer tax incentives for investments in manufacturing, tourism infrastructure and information technology.

Rather than repeatedly absorbing liquidity from the market only to lend it to the government, our policymakers need an efficient policy framework that mobilises private capital directly, such as models like blended financing and BOOT. The state needs to trust the private sector’s efficiency, innovation and ability to deliver while simultaneously establishing transparent accountability metrics so that private participation strengthens, rather than compromises public interest.

Nepal’s industrialisation process has been slow and a victim of the higher cost of doing business and low productivity. The reform goal should be to achieve sectoral reallocation: Moving workers from low-productivity agriculture and informal services into higher-productivity manufacturing. This requires a massive expansion of technical training aligned with industrial needs, the completion of road networks connecting zones to ports, the strengthening of contract enforcement through commercial courts and explicit investment in technology transfer mechanisms.

We are accustomed to stimuli, committees and slogans and believe that there’ll be change. It is time to realise we need execution, industrialisation and export-ready industrial zones, manufacturing competitiveness, a predictable tax and regulatory climate which rewards production but not speculation. These should be the basics of Nepal’s reformed economy.

Economic theory and comparative experience provide clear guidance. Remittance-dependent economies can transform. Countries like Vietnam prove that late industrialisation can succeed, and the Philippines shows that remittances can be channelled to sustainable economic growth. Sustainable economic growth requires political will, institutional capacity and sustained institutional commitment to structural change.

For Nepal, liquidity trap is not a technical problem requiring technical adjustments. It is a governance crisis demanding political courage.

The policy instruments exist. The economic knowledge is available. The financial resources are present. What remains absent is the courage to act decisively before the opportunity passes forever and another generation of Nepal’s youth becomes another country's economic asset. The clock is ticking.