Nepal’s foreign exchange reserves surged to an unprecedented Rs3.20 trillion by mid-December 2025—more than half of the country’s gross domestic product (GDP)—underscoring a paradox at the heart of the economy: ample liquidity amid sluggish growth, weak investment and widening job deficits.

Economists say reserve levels now far exceed any plausible estimate of Nepal’s liquidity needs.

Rather than reflecting robust economic performance, the swelling stockpile is being driven largely by soaring remittance inflows as young Nepalis leave the country in increasing numbers, while domestic consumption and investment remain subdued.

With low consumption or demand, the year-on-year inflation was stuck at 1.63 percent in mid-December, a two-decade low figure.

“This is a recession-like situation—full reserves but no investment,” said Nara Bahadur Thapa, former executive director of Nepal Rastra Bank (NRB). “Such a scenario typically emerges when there is political instability and low private-sector confidence.”

Thapa noted that foreign exchange reserves now exceed half of Nepal’s GDP. “The immediate policy challenge is to manage these excess reserves actively and deploy them productively,” he said. “If the government is serious about development, financing will not be a constraint.”

The warning comes even as the central bank struck a cautiously optimistic tone last week, a day after the private sector reported business confidence at a historic low. NRB said the economy has begun to show gradual signs of recovery following recent political unrest.

On paper, Nepal’s economy appears strong if reserves alone are considered. In reality, investments are stalled, job creation is anaemic and youth outmigration continues unabated—nearly a million people annually if student departures are included.

Addressing an all-party national dialogue titled “Cooperation for Peace, Stability and Prosperity” organised by the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) in Kathmandu last Wednesday, FNCCI President Chandra Prasad Dhakal said business morale had sunk to an all-time low.

He said the private sector is unable to invest with confidence due to an unfavourable investment climate and weak guarantees of property security. “There is a concern that impunity will flourish if action is not taken against wrongdoers,” Dhakal said.

Questioning the government’s employment strategy, he noted that the state can create only about 3,000 to 3,500 jobs annually. “How will jobs be created if the private sector shrinks?” he asked.

Dhakal called for a clear political commitment to the private sector, which he said contributes 81 percent to the economy and 86 percent to total employment, arguing that business-driven economic activity has not gotten adequate government priority.

Banking data reflects this slowdown.

Credit to the private sector from banks and financial institutions rose by just 1.9 percent, or Rs102.24 billion during the review period, compared with a 3.5 percent increase of Rs178.29 billion in the same period last year.

On a year-on-year basis, private sector credit growth stood at 6.6 percent in mid-December 2025.

“Political instability and governance failures have complicated things,” Thapa said. “Despite a mammoth foreign exchange buffer, Nepal is unable to use it for national development as there is no plan and everything runs on an ad hoc basis.”

He said mega projects such as Budhi Gandaki and Dudhkoshi hydropower schemes should have been launched years ago under a company model with private sector participation in order to mobilise domestic resources, including excess reserves.

Economist Keshav Acharya echoed the concern, noting that monetary policy considers reserves sufficient if they can cover seven months of imports of goods and services. “Right now, we have reserve adequacy of around 18 months,” he said. “That clearly indicates the government’s inability to spend and the private sector’s reluctance to invest.”

Acharya called the situation paradoxical, pointing out that Nepal continues to seek donor funding despite sitting on record reserves. “Even if reserves are maintained for 10 months of imports, the government can still borrow and invest the remaining amount in projects with completed detailed project reports, such as Budhi Gandaki,” he said. “This would reduce reliance on donors for several years.”

Once operational, Acharya added, Budhi Gandaki would generate revenue, service its debt and contribute to energy security.

Kamlesh Kumar Agrawal, president of the Nepal Chamber of Commerce, said political uncertainty remains the core obstacle. “Unless there is political stability, economic activity will not improve,” he said. “Despite record-breaking reserves, investment is not happening because the economy has stalled.”

Agrawal said the current environment is not conducive to attracting foreign investment that could help deploy excess reserves productively. “After the Gen Z movement, the private sector does not feel secure and is discouraged from investing. Without a secure investment climate and policy consistency, economic activity cannot pick up,” he said.

He added that despite low interest rates, funds continue to pile up in banks rather than flowing into productive sectors. “With such huge reserves, foreign investors should have been attracted—but they are not,” he said.

Experts expect reserves to rise further in the coming months as overseas migration accelerates.

Remittance inflows jumped 35.6 percent to Rs870.31 billion in the first five months of fiscal year 2025-26, compared to a 4.7 percent increase in the same period last year. Between mid-November and mid-December alone, remittances reached Rs183.18 billion, up from Rs118.79 billion a year earlier.

In the review period, 175,591 Nepali workers got first-time approval for foreign employment, while 163,924 renewed their approvals. In the corresponding period last year, the figures stood at 190,384 and 135,425 respectively.

As reserves swell further, economists warn that without political stability, policy coherence and credible project pipelines, Nepal risks squandering a rare opportunity to convert financial buffers into sustainable growth and jobs.