The Forex Paradox

A month ago, Nepal Rastra Bank (NRB) Governor Bishwo Nath Poudel stirred an unexpected debate with a statement that sounded reassuring—but to many, alarmingly simplistic. In a YouTube podcast, the governor claimed that Nepal need not worry about its rising public debt because the central bank’s foreign exchange reserves were sufficient to service it.

Nepal currently owes around $10 billion in foreign debt, while its reserves stand at about $21 billion. The statement drew swift backlash from economists and policy observers, who described it as “fundamentally flawed” and “superficial”. Several experts, including a central banker, who requested anonymity, told New Business Age that the governor’s claim lacked “both factual and conceptual base”. They argued that a nation’s foreign reserves are not meant to repay public debt but to stabilize the economy, maintain investor confidence, and finance essential imports. Using them otherwise, they warned, would signal poor policy understanding at the very top of Nepal’s monetary authority.

Economists say the governor’s statement reflects a basic misunderstanding of the purpose of foreign exchange reserves. These reserves, held by the central bank, serve as a financial safety buffer—not a repayment fund. Their role is to ensure import stability, bolster investor confidence, and help manage currency stability, not to service government loans. As one economist put it, “If paying debt were that easy, Sri Lanka would never have defaulted.”

Foreign exchange reserves are not like a government savings account to be tapped at will. They function more like an insurance fund—designed to protect the economy during crises, finance essential imports, stabilize the currency, and reassure investors. According to the International Monetary Fund (IMF), reserves are “liquid assets readily available to meet balance of payments needs”, not a pot of money for settling sovereign debt. Legally and operationally, most central banks—including Nepal’s—cannot use these reserves directly for fiscal obligations.

Sri Lanka’s experience is a stark warning. Between 2015 and 2018, Colombo used its reserves to service external debt, temporarily avoiding default. But as reserves dwindled, the island nation was left without enough dollars to import fuel and medicine, plunging into economic collapse by 2022. The Central Bank of Sri Lanka later admitted that using reserves for debt repayment had been unsustainable.

Nepal’s reserves, too, are composed of foreign assets—held partly in US Treasuries, gold, and Special Drawing Rights (SDRs)—not instantly usable cash. Depleting them would risk destabilizing the Nepali rupee and eroding public trust.

According to Keshav Acharya, former Executive Director of the NRB, Nepal currently enjoys a comfortable cushion of foreign reserves, which has helped boost investor confidence. “When you have foreign reserves, investors feel assured that they can repatriate their money, which in turn encourages further investment,” Acharya explained. But he warned that Nepal remains vulnerable to external shocks and that the current stability should not be taken for granted. “We are enjoying the benefits of strong reserves now, but not long ago, Nepal worried about their depletion—at one point, reserves could sustain imports for only six to seven months,” he recalled.

In the fiscal year 2021/22, Nepal’s reserves came under severe pressure due to a sharp decline in remittance inflows, the near absence of foreign tourists during the pandemic, and soaring international oil prices triggered by the Russia–Ukraine war. “That episode reminds us how quickly external factors can strain the economy—and why maintaining healthy reserves is critical for resilience and investor trust,” Acharya said.

“It is remarkable that our foreign exchange reserves are this strong,” said Nara Bahadur Thapa, a former central banker. “Theoretically, strong reserves should coincide with economic expansion. But why not in Nepal? That’s the concern. Despite rising reserves, consumption and investment—the major drivers of growth—have not increased.”

Thapa cautioned that large reserves could appear “fancy” without accompanying confidence in the private sector. “Reserves are only meaningful if people and businesses feel secure enough to consume, invest, and demand more,” he added.

The record-breaking reserves have been largely driven by surging remittance inflows, which have also hit new highs. In the first two months of the current fiscal year alone, remittance inflows surged 27.6% to $2.52 billion, according to the central bank. Gunakar Bhatta, another former NRB Executive Director, said strong reserves not only provide macroeconomic stability but also enhance investor confidence. “They assure investors that they can repatriate their money anytime,” he said, adding that countries with weak reserves face stringent conditions from international lenders. “Sri Lanka, Bangladesh and Pakistan all faced that reality. Strong reserves give a nation better bargaining power when dealing with multilateral donors.” Still, economists argue that the challenge ahead is turning this financial strength into real economic growth. “The cushion of forex reserves should be used to spur investment, consumption, and confidence across the economy,” they say.

Low growth, consumption, and investment 

Nepal’s expanding reserves may appear to reflect economic health, but economists warn that they reveal a deeper problem. When growth and investment slow, imports decline, and reserves build up—not because the economy is vibrant, but because it is stagnant. According to economists, household consumption has declined, driven by the outmigration of young workers and growing uncertainty among those who remain. Many fear the future and prefer saving over spending.

Although merchandise imports rose by 16.2% to Rs 305.16 billion during the first two months of 2025/26—compared to a modest 1.1% a year earlier—the increase was largely due to palm-oil imports for re-export.

“Consumption in Nepal has shrunk,” Thapa observed. “In the US, people consume confidently, knowing the government will back them up. Here, it’s the opposite—people park their money in banks because they fear uncertainty. Nepalis are saving more than they should.”

A central banker echoed this sentiment, noting that excessive saving is also tied to the obsession with home ownership. “Real-estate prices in Nepal are far beyond their actual value. Unless the government intervenes with affordable-housing or apartment projects, the problem of oversaving will persist,” he said. “Billions are parked in banks because neither the public nor the private sector feels confident.” Economists argue that the reserves should be strategically leveraged to accelerate stalled national-pride and infrastructure projects. “The government must first restore private-sector confidence,” Thapa said. “Once entrepreneurs start investing again, the reserves will indirectly fuel growth.”

Bhatta also urged the government to prioritize project development and revive business sentiment. Once a key driver of post-liberalization growth, the private sector has become increasingly cautious amid policy uncertainty, political instability, sluggish demand, and rising insecurity.

“Many industries have halted expansion, while several projects are stuck due to bureaucratic delays and infrastructure bottlenecks,” said an economist from a leading think tank. “A large reserve with slow growth is not a success story; it’s a symptom of economic inactivity.” At a time when the economy is already sluggish—partly due to recent Gen Z protests—the government’s decision to cut power supplies to 25 industries over electricity-tariff disputes has further shaken confidence. “There’s a time for everything,” another economist warned. “Moves like these only discourage expansion.”

Invest in return-giving projects Roughly 60% of Nepal’s foreign reserves are currently held in highly liquid US dollars, while the rest are invested in foreign bonds—such as US, European, and Chinese securities—along with gold and Indian currency. These instruments offer safety but deliver very low returns. According to Bhatta, who retired recently from the central bank, Nepal earns an average of just 4–5% interest from such investments.

With the US Federal Reserve beginning to lower interest rates, yields on these assets are expected to fall further—reducing potential income from Nepal’s holdings. Economists argue that this is the time for Nepal to channel part of its reserves into higher-yield, return-generating domestic projects, particularly those that create jobs, income, and long-term productivity.

Projects such as the Budhigandaki Hydropower Project, which promises both economic and social returns, could serve as models. “Channeling a portion of foreign reserves through a sovereign investment fund or public-private partnerships into such infrastructure would not only generate income but also strengthen the country’s growth base,” said Acharya.

However, investments in non-productive projects should be reconsidered. The largely idle Pokhara and Bhairahawa airports, for example, illustrate the high cost of poor planning and resource misallocation. In a resource-scarce economy like Nepal’s, the opportunity cost of underutilized assets is significant.

Globally, several countries have turned excess reserves into productive capital. China channels part of its massive reserves through sovereign funds that invest worldwide. Norway’s sovereign wealth fund has become a model of productive, transparent investment. Even Kenya recently established an infrastructure fund to direct reserves toward agriculture and power projects.

For Nepal, adopting a similar approach could be transformative. “By prudently using part of its reserves for productive ventures—while maintaining sufficient liquidity for external shocks—Nepal can convert financial strength into tangible development outcomes,” Acharya added. “Investing in projects that yield income, employment, and exports would ensure that record-breaking reserves do more than sit idle—they would fuel the next phase of national growth.”

Stuck in a vicious cycle

Economists describe Nepal’s external position as paradoxical: a mountain of reserves but a valley of growth.

Despite record-high foreign exchange holdings, domestic investment remains sluggish, tepid, industries are cautious, and imports—an indirect indicator of productive demand—are subdued.

This imbalance, experts warn, has trapped Nepal in a “forex trap”. The country is accumulating reserves faster than it can productively deploy them, while weak domestic activity and a narrow export base leave the economy heavily dependent on remittance inflows.

“Nepal’s foreign reserves are not a product of productive capacity or export competitiveness,” said Bhatta. “They largely reflect remittance inflows and low import levels. This is not a sustainable growth model.” Economists say the pattern has become cyclical: when remittances rise, imports increase temporarily—often in unproductive goods. When imports decline, reserves accumulate, but growth slows. “Nepal’s economy has become externally buoyant but internally stagnant,” noted economist Acharya. “High reserves now signal weak domestic spending, not strength.”

Remittances, which contribute over one-fourth of the GDP, finance nearly two-thirds of household consumption, and serve as the country’s largest source of foreign exchange, are Nepal’s economic lifeline. In the first two months 2025/26 alone, remittance inflows jumped 27.6% year-on-year to $2.52 billion, according to the central bank. The number of Nepalis leaving for foreign employment also rose by 13.9% to 106,710 during the same period. Yet the way these inflows are used is concerning. Instead of being invested productively, much of the money goes into consumption, real estate, and imports. “Remittances are keeping Nepal afloat, but not helping it grow,” said an economist at a Kathmandu-based think tank. “They plug the balance-of-payments gap but fail to expand the productive base.”

This overreliance also heightens vulnerability to external shocks—such as oil price spikes or labor-market slowdowns in the Gulf and Malaysia, where most Nepalis work. “A global downturn or tighter immigration policies could instantly strain Nepal’s external stability,” the economist warned.

Private-sector confidence remains weak in Nepal. Entrepreneurs cite policy unpredictability, bureaucratic delays, and frequent regulatory shifts as major deterrents. “Policy inconsistency has made long-term planning nearly impossible,” said an industrialist involved in hydropower and manufacturing. “Even with ample liquidity and lower interest rates, investors hesitate because the rules keep changing.”

That hesitation has created a disconnect: banks are flush with deposits, yet credit growth is sluggish. According to the central bank, lending to the private sector grew just 4.5% in the first two months of the current fiscal year, compared to 10% in the same period a year earlier.

“The irony is that Nepal is not short of money—it is short of confidence,” said a senior banker. “Liquidity is high, but risk appetite is low. Without policy stability and security, this cycle of savings without investment will persist.” The current account surplus has widened as remittance inflows outpace imports. In the first two months of 2025/26, imports rose 16.2% while exports grew 9.8%. The trade deficit widened slightly to Rs 260.79 billion, but the current account still recorded a Rs 30.31 billion surplus thanks to strong remittance inflows. As a result, the balance of payments (BoP) remained comfortably in surplus at Rs 50.65 billion, pushing foreign exchange reserves to $20.41 billion (Rs 2,731.16 billion)—up from $19.50 billion (Rs 2,603.55 billion) in mid-July 2025. While this external comfort has stabilized the currency and contained inflation, it has also masked the lack of structural reform. Economists warn that reserves built on remittance inflows and import compression cannot sustain long-term stability. “A healthy reserve should stem from exports and investment inflows, not from weak domestic demand,” said Thapa. 

Breaking the forex trap

Experts caution that Nepal can no longer depend solely on remittances and import compression to sustain its foreign exchange reserves. To transform this external strength into tangible economic growth, they argue, the country needs a multi-pronged strategy. One key recommendation is to channel part of the reserves into productive investment. Rather than leaving funds parked in low-yield foreign assets, Nepal could establish a sovereign development fund or a national infrastructure bank. Such institutions could finance commercially viable projects across sectors with proven returns—hydropower, tourism, agriculture, and technology—turning idle capital into engines of growth.

Equally critical, according to economists, is the need to rebuild private-sector confidence through policy stability. For investment to pick up, businesses must be assured that fiscal, monetary, and industrial policies will remain predictable over at least a medium-term horizon.

Consistent rules, faster project approvals, and stronger contract enforcement are essential to create an environment where entrepreneurs are willing to deploy capital rather than sit on it.

Strengthening the export base is another cornerstone of this strategy. Nepal needs a structural shift toward value-added exports, which will require targeted investment in digital infrastructure, logistics, trade facilitation, and cross-border energy trade—areas where the country’s potential remains largely untapped. Finally, economists suggest using reserves as leverage, not merely as a safety cushion. “They must serve as leverage for growth—used strategically in projects that yield social and economic returns,” said Acharya. In other words, the country’s record reserves should act as a springboard for development rather than a passive shield, turning financial strength into concrete economic outcomes.

From safety to strategy

Nepal’s record reserves are a double-edged achievement—offering external comfort but revealing domestic inertia. The challenge now is to transition from forex safety to economic strategy.

The reserves should no longer be seen merely as a shield against crises but as capital for national transformation. A clear policy framework that mobilizes even a fraction of the reserves into productive sectors—without jeopardizing external stability—can unlock growth, create jobs, and restore confidence in the economy. Unless Nepal converts its reserves into results, it risks remaining what economists call “liquid but lifeless”—a nation rich in savings but poor in progress.

(This report was originally published in November 2025 issue of New Business Age Magazine.)