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By Sandeep Chaudhary

Broad Money Supply Expansion: Implications for Nepal’s Liquidity

Broad Money Supply Expansion: Implications for Nepal’s Liquidity

Broad money (M2), which reflects the overall supply of money in the economy including currency, demand deposits, and time deposits, is a critical measure of liquidity in Nepal’s financial system. In recent years, its growth trend has been uneven. After peaking at 22.7% in FY 2020/21 amid pandemic-related stimulus and high remittance inflows, growth slowed sharply to 6.8% in FY 2021/22 as liquidity tightened and imports surged. It picked up again to 11.2% in FY 2022/23 and 12.9% in FY 2023/24, signaling improving liquidity conditions. For FY 2024/25, broad money supply expanded by 12.5%, with mid-August 2082/83 data showing growth at 12.5% year-on-year, reflecting steady inflows and robust deposit growth.

The expansion of broad money supply has clear implications for Nepal’s liquidity. On the positive side, it signals that the banking system is flush with deposits, supported by strong remittance inflows (Rs. 1,723 billion in FY 2024/25) and a current account surplus. This has eased liquidity pressures in the financial sector, stabilizing interbank rates (around 2.9–3.0%) and allowing banks to maintain credit flows to the private sector. For businesses and households, this means relatively stable access to loans, lower borrowing costs compared to the tight liquidity phase of 2021/22, and improved confidence in financial intermediation.

However, expanding money supply also brings challenges. Domestic credit growth has remained sluggish—only 6.2% in FY 2024/25—which shows that while liquidity is available, demand for productive lending is weak. Much of the broad money growth is being driven by remittance inflows rather than domestic investment, raising concerns about sustainability. If money supply growth continues without parallel increases in credit to productive sectors, it could either fuel speculative activity in non-productive areas (such as real estate and unregulated lending) or remain idle, limiting its impact on economic growth.

From a policy perspective, Nepal Rastra Bank (NRB) faces the task of balancing liquidity expansion with financial stability. Adequate liquidity is essential for economic recovery, but unchecked growth in money supply could pressure inflation or lead to asset bubbles. Given that CPI inflation is currently subdued (1.68% in mid-August 2082/83), the immediate risk is low, but the structural challenge lies in channeling this liquidity toward investments that boost productivity and employment rather than short-term consumption.

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