Nepal’s Inflation Trends: A Four-Year Analysis Shows Declining Rates Amid Economic Growth in FY 2081/82

Nepal Rastra Bank (NRB) has released detailed economic data for the first eight months of fiscal year 2081/82 (2024/25), alongside a historical National Consumer Price Index (CPI) monthly series spanning 2021/22 to 2024/25. The data reveals a year-on-year inflation rate of 3.75% in March 2024/25, with an average inflation of 4.72% for the first eight months of the fiscal year. This marks a notable decline from the peak inflation rates observed in previous years, reflecting a cooling of price pressures. Combined with robust economic indicators such as a 57.2% surge in exports and a balance of payments surplus of NPR 310.37 billion, Nepal’s economy shows signs of stabilization, though challenges remain in managing inflationary pressures and ensuring equitable growth.

Four-Year Inflation Trends: A Detailed Breakdown

The National Consumer Price Index (CPI) data, with the base year 2023/24=100, tracks monthly inflation from 2021/22 to 2024/25. The year-on-year percentage changes provide a clear picture of inflation trends over this period:

• 2021/22: The CPI averaged 88.05, with inflation averaging 6.32%. Inflation peaked at 8.56% in June, driven by post-pandemic supply chain disruptions and rising global commodity prices. The lowest inflation was in September at 3.49%, reflecting a temporary stabilization in food prices. December saw a significant spike to 7.11%, likely due to increased demand during the festive season.

• 2022/23: Inflation reached its highest annual average in the series at 7.74%, with the CPI averaging 94.86. September recorded the highest monthly inflation at 8.64%, possibly due to global energy price hikes and domestic supply constraints. Inflation remained consistently high throughout the year, with February at 7.88% and July at 7.44%, indicating sustained price pressures across both food and non-food items.

• 2023/24 (Base Year): As the base year (CPI = 100.00), the average inflation was 5.44%, a decline from the previous year. Inflation peaked at 8.19% in September, reflecting carryover effects from 2022/23, but gradually moderated to 3.57% by July. This downward trend suggests improved supply conditions, possibly due to better agricultural output and global price stabilization. December saw a dip to 4.95%, the lowest in the year, indicating a temporary easing of price pressures.

• 2024/25: For the first eight months (August to March), the CPI averaged 103.99, with inflation averaging 4.72%. Inflation peaked at 6.05% in December, likely due to seasonal demand and rising non-food costs, but moderated to 3.75% by March, aligning with the NRB’s reported rate for FY 2081/82. The lowest inflation was in March at 3.75%, reflecting a cooling of price pressures, while November saw a high of 5.60%, driven by increased consumption.

Broader Economic Context: Growth and Stability

The NRB’s economic report for FY 2081/82 provides a broader context for these inflation trends. Exports surged by 57.2%, significantly outpacing the 11.2% increase in imports, leading to a balance of payments surplus of NPR 310.37 billion. Foreign exchange reserves reached USD 17.27 billion, offering a strong buffer against external shocks. Remittance inflows, a key driver of consumption, grew by 9.4% in Nepali rupees and 6.9% in US dollars, supporting household spending and contributing to price stability in urban areas.

On the fiscal side, government expenditure was NPR 839.36 billion, while revenue mobilization stood at NPR 720.35 billion, indicating a fiscal deficit. Broad money supply expanded by 4.8%, with a year-on-year growth of 9.9%, reflecting increased liquidity. Deposits in banks and financial institutions grew by 4.3%, and private sector credit increased by 6%, with year-on-year growth rates of 9.5% and 7.7%, respectively, suggesting cautious lending amid inflationary concerns.

Regional Context from Previous Data

The regional CPI data (Table 4) complements this national trend, showing a year-on-year inflation rate of 3.75% in March 2024/25, consistent with the national figure. However, regional variations were significant: the Mountain region experienced the highest inflation at 4.77%, driven by a 6.03% rise in non-food and services, while the Kathmandu Valley had the lowest at 3.25%, reflecting better access to goods and services. The national average of 4.72% in 2024/25 (Table 5) indicates that earlier months (e.g., December at 6.05%) saw higher price pressures, which later moderated, aligning with the regional data’s month-on-month declines in food prices (e.g., -0.66% in the Mountain region).

Interpretation: Declining Inflation Amid Economic Growth

The four-year CPI data reveals a clear trend of declining inflation, from an average of 7.74% in 2022/23 to 4.72% in 2024/25. This decline can be attributed to several factors:

• Improved Supply Conditions: The moderation in inflation from 2022/23 to 2024/25 suggests better supply chain dynamics, likely due to improved agricultural output and global price stabilization. The month-on-month declines in food prices in the regional data (e.g., -0.64% in the Hill region) support this, indicating seasonal supply improvements.

• Global and Domestic Factors: The peak inflation in 2022/23 (8.64% in September) was likely driven by global factors such as energy price hikes and supply chain disruptions following the post-COVID recovery. By 2024/25, these pressures have eased, as seen in the lower inflation rates (e.g., 3.75% in March), reflecting global commodity price stabilization and domestic policy measures.

• Consumption and Remittances: The 9.4% growth in remittance inflows has supported household consumption, particularly in urban areas like the Kathmandu Valley, where inflation is lower (3.25%). However, this increased demand may have contributed to the higher inflation in earlier months of 2024/25 (e.g., 6.05% in December), before moderating as supply adjusted.

• Export-Led Growth: The 57.2% surge in exports has strengthened Nepal’s external position, reducing reliance on imports and contributing to the balance of payments surplus. This external stability has likely helped moderate inflation by reducing imported price pressures.

Challenges and Opportunities

Despite the declining inflation trend, challenges remain:

• Regional Disparities: The regional data highlights higher inflation in remote areas like the Mountain region (4.77%), driven by logistical challenges. This contrasts with the national average of 4.72%, indicating the need for targeted interventions to address cost pressures in rural areas.

• Fiscal Deficit: The gap between government expenditure (NPR 839.36 billion) and revenue (NPR 720.35 billion) poses a risk of increased borrowing, which could fuel inflation if not managed carefully.

• Seasonal Volatility: The national CPI data shows seasonal fluctuations, with inflation peaking in December (6.05%) and dipping in March (3.75%). This volatility, also seen in the regional data’s month-on-month food price declines, suggests the need for better price stabilization mechanisms.

On the positive side, the robust export growth and remittance inflows provide opportunities for sustained economic growth. The foreign exchange reserves of USD 17.27 billion offer a cushion against global uncertainties, allowing Nepal to focus on domestic policy measures to address inflation and regional disparities.

Policy Recommendations

To sustain the declining inflation trend and ensure equitable growth, the following measures are recommended:

1. Strengthen Supply Chains: Invest in rural infrastructure, particularly in the Mountain and Hill regions, to reduce transportation costs and stabilize non-food inflation, as seen in the regional data (e.g., 6.03% in the Mountain region).

2. Enhance Agricultural Productivity: Support farmers with better access to inputs and markets to maintain the downward trend in food prices, as observed in the regional data’s month-on-month declines.

3. Monitor Liquidity: With broad money supply growing at 9.9% year-on-year, the NRB should carefully manage liquidity to prevent inflationary pressures, especially in urban areas where consumption is high.

4. Sustain Export Growth: Continue supporting export-oriented industries through incentives and trade agreements to maintain the 57.2% export growth, which strengthens external stability and reduces imported inflation.

Nepal’s inflation has shown a promising decline from 7.74% in 2022/23 to 4.72% in 2024/25, with the March 2024/25 rate of 3.75% reflecting a cooling of price pressures. This trend, combined with strong export growth, rising remittances, and a robust balance of payments surplus, indicates a stabilizing economy. However, regional disparities and seasonal volatility highlight the need for targeted policies to ensure equitable growth. As Nepal navigates global and domestic challenges, balancing inflation control with growth-oriented measures will be key to sustaining this positive trajectory.