Liquidity Returns: Nepal’s Narrow Money Growth Back in Positive

Nepal’s Narrow Money (M1) growth has shown notable volatility over the past several years, reflecting shifting trends in monetary liquidity, cash in circulation, and public financial behavior. As a key indicator of the financial sector's performance, changes in M1 provide critical insights into the effectiveness of monetary policy and the state of economic momentum.

In the fiscal year 2019/20, the M1 growth stood at 17.8%, indicating a healthy expansion of money supply in the economy. This momentum further accelerated in 2020/21, reaching a peak growth rate of 22.8%, suggesting strong liquidity and possibly expansionary monetary conditions during that period. However, the situation took a sharp downturn in 2021/22, when M1 contracted by -9.3%. This negative growth hinted at tightening liquidity, cash withdrawal from the economy, and potentially stricter monetary measures or declining public confidence in spending.

In 2022/23, the growth recovered slightly to a modest 1.2%, but it was insufficient to signal any strong reversal of the previous year’s contraction. The downward trend resumed in 2023/24 with a further dip to -1.7%, indicating a prolonged phase of weak liquidity growth. The mid-April data of 2023/24 painted a bleaker picture, with M1 shrinking by -5.5%. Such a decline pointed to sluggish deposit mobilization, weak cash flow within the economy, and an overall tightening of financial conditions.

However, a dramatic turnaround is seen in the mid-April data for the current fiscal year 2024/25, with M1 growth rebounding sharply to 14.7%. This is the highest growth rate in the last three years and indicates a significant recovery in the money supply. The rise may be attributed to improved remittance inflow, increased public spending, higher banking transactions, and a more accommodative monetary environment created by Nepal Rastra Bank.

This recent upswing in narrow money growth may signal improving investor and consumer confidence, a rebound in economic activity, and the easing of previous financial constraints. Still, it remains to be seen whether this recovery is sustainable or merely a short-term correction. Future policy decisions, inflation control, and the external trade environment will play a crucial role in maintaining this momentum.