Factories Running at Half Speed

Nepal’s industrial sector is ending a clear warning. Average industrial capacity utilisation fell to 44.5% in fiscal year 2024/25, according to Nepal Rastra Bank (NRB) in its Economic Activities (Integrated) 2024/25 report. A utilisation rate below 50% means that a large share of installed machines, plant and labour hours is sitting idle.

The decline is not a one off. NRB’s national series shows utilisation rising from 48.4% in 2019/20 to 52.2% in 2020/21, then peaking at 52.8% in 2021/22. Since then it has weakened for three consecutive years, to 49.8% in 2022/23, 48.3% in 2023/24 and 44.5% in 2024/25. Covid restrictions explain much of the early disruption, but the lack of a durable post pandemic rebound suggests deeper constraints that keep firms cautious about production plans. Capacity utilisation is not just a factory metric, it is a signal with wide economic effects. When plants run close to installed capacity, firms use their assets well, cash flow tends to steady, and managers have a clearer case for maintenance, upgrades, and new technology. Higher utilisation also spreads fixed costs, such as rent, salaries, and loan interest, across more output. That lowers unit costs and supports margins. It can also lift confidence to hire, raise wages, and invest.

When utilisation stays low for long stretches, the maths flips. Fixed costs bite harder on each unit, pushing up unit costs and squeezing profitability. Firms respond defensively. They run down stocks, delay expansion, and cut back variable spending. That quickly spills into the supply chain, with fewer orders for suppliers and less demand for transport and warehousing. The result can become self-reinforcing, weakening the wider industrial base and leaving the economy stuck at low output.

Recent conditions in Nepal point in this direction. The post pandemic rebound has been held back by tight liquidity, volatile interest rates, and high input costs. For an economy that already relies heavily on imports, prolonged underuse risks eroding domestic production capability, and rebuilding that capacity could take decades.

Strong inputs, weak value add

A closer look at the NRB report shows selective resilience rather than a broad based upswing. Some sectors consistently use a large share of installed capacity, while others are close to idle. The contrast matters because high use clusters in core inputs and staples, while low use is concentrated in job rich finished products.

Steel products, electricity, and aluminium products sit at the top of the four year averages, each running at roughly three quarters or more of capacity. They are followed by instant noodles, bricks, thread and yarn, tyres and tubes, concrete, processed tea, and pashmina, mostly clustered around about two thirds to just under three quarters. This mix is telling. It leans on utilities, construction inputs, and everyday goods, with only a small presence of higher value finished manufacturing.

The bottom group is just as revealing. Vegetable ghee is at about four percent on average, with dry syrup and capsules in the mid to high teens. Electric wires and cables are also in that range.
Raw leather and carpet sit in the low twenties. Several of these segments have received investment and policy attention, yet plants are running far below potential. That raises the risk that new capacity is not being matched by market access, pricing power, or stable operations.

The biggest breaks show up inside value chains. In textiles, upstream and intermediate stages hold up better than final assembly. Thread and yarn stays consistently high across the period, hovering around seventy percent, with a clear peak in the mid-seventies. Synthetic fabric also improves and finishes in the high sixties. Garments, however, drop sharply in the final year, falling to below one fifth of capacity after sitting around half earlier, then easing into the mid-thirties. That pattern suggests garment lines run on and off, often limited to small domestic orders or short export runs that do not justify steady, full shift production.

Leather shows an even sharper collapse. Raw leather drops from a little over half of capacity at the start of the period to well under one fifth the next year. It then falls into single digit use in the following year and stays close to that level in the most recent year.

Leather shoes appear in the NRB list only for the latest year, and the reported use is roughly one quarter of capacity. That suggests downstream leather goods are also operating far below potential.

The contrast between upstream processing and weak finished goods points to a clear pattern. Nepal can still handle some intermediate processing, but it struggles to scale finishing work, build brands, and run steady export focused production.

Bhupendra Kumar Basnet, second vice president of the Garment Association Nepal, said garment producers face a mix of policy uncertainty, labour constraints and weak export pull. “Labour shortage is a serious problem as many Nepali workers are going abroad,” he said. “Local garment production has seen slight growth, but exports are facing difficulties.”

Basnet also linked capacity underuse to trade access and buyer confidence. The Nepal Trade Preference Programme in the United States, which provided duty free entry for selected Nepali products, expired on December 31, 2025, removing preferential access for items such as garments and leather goods. Basnet said exports fell after Covid, recovered briefly, and then faced renewed anxiety as costs rose and buyers questioned stability. “They ask whether the situation in Nepal is stable, whether elections will be held or not,” he said. He added that when buyers
are uncertain they tend to stick with established sourcing routes, even when Nepal can offer competitive pricing on paper.

If garments and leather represent the stress points, staple consumer goods show what still works. Biscuits held in a narrow band, from 60.65% in 2021/22 to 65.54% in 2024/25. Instant noodles stayed high, easing from 82.35% in 2021/22 to around 70 in 2022/23 and high 60s in 2023/24, then rebounding to 73.56% in 2024/25. Processed tea stayed near the mid-60s across the full period. Jute goods also remained steady, around 61% to 66% each year.

These industries benefit from demand spread across many buyers and from regular repeat purchases. That helps stabilise production schedules and reduces the risk of long closures.  In a low utilisation environment, that stability preserves industrial capability, supplier networks and regular employment, and can keep smaller suppliers afloat when more volatile sectors contract.

Core sectors keep running 

Steel Products remained the leading performer, at 91.96% in 2021/22 and 82.83% in 2024/25. Even at its low point, steel ran well above the national average. The pattern matches demand driven by construction, fabrication and a steady need for basic industrial inputs. In practice, when steel keeps operating, it supports a wider web of downstream users, even if those users do not all run at the same intensity.

Electricity also stayed in a high band, peaking at 86.20% in 2022/23 and ending at 75.75% in 2024/25. Utilities tend to be less able to pause, and generation and dispatch needs can stay high even when parts of manufacturing are weak. In the NRB dataset, electricity provides a useful baseline, showing that some parts of the economy can operate at high intensity even as production in finished goods becomes uneven.

Aluminium Products is one of the most notable movers. Utilisation rose from 72.16% in 2021/22 and 67.11% in 2022/23 to 83.67% in 2023/24, then held at 81.91% in 2024/25. Two consecutive years above 80% suggests a sustained improvement rather than a temporary surge. Aluminium sits between basic inputs and fabrication, so stronger performance can also signal deeper linkages with construction and consumer goods.

Tyres and tubes provide a clear example of a turnaround. The sector began at 53.75% in 2021/22, fell to 40.87% in 2022/23, then surged to 91.34% in 2023/24 and 90.67% in 2024/25. The key point is durability. Unlike sectors that spike then fall back, tyres and tubes held near capacity for two consecutive years, indicating that demand or competitiveness improved enough to keep lines running at full speed.

Everyday consumer goods industries have maintained notably steady utilisation rates because demand is spread across a broad population. Instant noodles recovered to the low seventies in FY 2024/25 after a brief dip. Its four-year average, also in the low seventies, marks it as a cornerstone of the domestic market. Biscuits show a similar pattern, with capacity utilisation staying in the mid-sixties across the period. Processed tea is also steady, typically in the mid-sixties.

The resilience of these sectors reflects the nature of their market. Demand for food and basic household goods is relatively inelastic, so these factories are less exposed to the prolonged shutdowns that affect discretionary, luxury, or export oriented industries.

Volatility, and what not to overread

Some export facing industries remain volatile. Pashmina surged to 97.85% in 2023/24 then fell to 49.51% in 2024/25. Chiranjivi Kafle, vice president of the Nepal Pashmina Industry Association, said the sector is highly sensitive to global purchasing power because it sells a luxury product. “Since pashmina is a luxury product, its demand is highly sensitive to the purchasing power of international consumers,” he said. He added that a global slowdown quickly reduces export orders and pushes factories back below capacity.

Producers also point to competition from China’s scale and productivity. Kafle said the industry’s reputation suffered in earlier years due to counterfeit pashmina, and rebuilding trust requires time and consistent quality control. Domestic demand has improved, he said, but it cannot sustain the sector on its own.

NRB’s table shows other sharp swings that highlight exposure to policy, trade terms and changing consumer demand. Soybean oil fell from 82.33% in 2021/22 to 14.52% in 2023/24, then recovered to 55.13% in 2024/25. Liquor fell to 18.30% in 2024/25 after staying above 50% in earlier years. Paints fell to 12.57% in 2024/25 after around 40% in the prior two years. Household metal goods climbed to 66.91% in 2023/24 then plunged to 14.32% in 2024/25. These patterns can reflect sudden shifts in trade competitiveness, regulatory pressure, input prices, or simple overbuilding of capacity relative to demand.

Construction inputs cool after early strength

Several construction-linked products were strong early in the period but cooled by 2024/25. Bricks rose to 85.65% in 2022/23 and stayed high at 77.86% in 2023/24, before falling to 56.26% in 2024/25. Concrete declined from 93.80% in 2021/22 to 50.43% in 2024/25. Cement stayed near the mid-40s throughout, suggesting persistent demand constraints relative to installed capacity.

Raghu Nandan Maru, president of the Cement Manufacturers Association of Nepal, said weaker capacity use reflects both policy changes and demand conditions. For years, he said, the government provided cash incentives of up to 8% for cement exports, helping Nepali producers compete in the Indian market. The subsidy has been stopped. “Without this financial cushion, Nepali industries lack a competitive advantage against Indian producers, making it increasingly difficult to export and leading to a significant drop in production capacity,” he said.
 Maru also pointed to under executed public capital spending, which reduces demand from infrastructure projects. “Nepal currently possesses an installed production capacity of approximately 25 million tons per year, yet actual consumption has hovered at only 7 to 8 million tons annually,” he said. He warned that if demand does not improve, some plants may be forced to close. Operationally, he added, firms face delays around mining rights and access to limestone, which can hold up raw material supply and raise costs.

Credit is rising, but factories run slower

A fundamental tenet of industrial economics suggests that an expansion in credit should lead to a corresponding increase in production. In Nepal, however, the data reveals a startling disconnect: industrial credit is rising while output intensity is falling.

This divergence indicates a crisis of productivity rather than a lack of capital, suggesting that access to finance alone is insufficient to drive industrial activity when faced with weak demand and structural bottlenecks.

Industrial credit rose to Rs 1,699.5 billion in 2024/25, up from Rs 1,518.1 billion in 2023/24 and Rs 1,387.44 billion in 2022/23. Rising credit would normally support higher output through working capital, upgrades and expansion. Yet overall utilisation has moved in the opposite direction.

One reason for this could be that credit is increasingly used for liquidity management and survival rather than expansion. Another explanation is that credit growth is concentrated in sectors where output does not lift wider manufacturing demand, particularly utilities and infrastructure.

NRB’s sector wise credit table supports that reading. Electricity, gas and water rose sharply to Rs 446.30 billion in 2024/25. Agriculture, forestry and beverage production rose to Rs 371.31 billion. Construction rose to Rs 198.77 billion. Non-food manufacturing, although still the largest category, rose only modestly in the review year to Rs 599.50 billion. Metal products, machinery and electronics rose slightly to Rs 71.86 billion after a prior decline, while mining related credit fell marginally.

Credit is also concentrated geographically. Bagmati accounted for 71.3% of recorded industrial credit in 2024/25 (Rs 1,211.05 billion). Koshi held 9.5% (Rs 160.65 billion), Lumbini 8.3% (Rs 141.03 billion) and Madhesh 7.5% (Rs 128.10 billion). Karnali remained at the bottom, with Rs 4.04 billion, and Sudurpashchim at Rs 26.72 billion.

These credit figures require caution because many firms register head offices in Kathmandu Valley, so loans can be booked in Bagmati even when production is elsewhere. Province utilisation also shows divergence. Madhesh recorded the highest average utilisation in 2024/25 at 55.02%, followed by Koshi at 50.80% and Lumbini at 48.40%. Karnali is reported only in later years, at 44.80% in 2024/25. Gandaki stood at 39.19% and Sudurpashchim at 37.25%. These differences suggest that the industrial slowdown is not uniform and that location, sector mix and operating conditions still matter.

The NRB report also hints at where the economy is failing to convert capacity into value addition.  Upstream processing in textiles holds above 70% in several years, but garments fall below 20% in 2024/25. That suggests that the constraint is not only machinery. It is also labour availability, export market access, and the ability to meet buyer requirements on price, delivery and compliance. Similar logic applies to pharmaceuticals. The country can invest in plant, but if pricing policy, procurement and scale do not allow viable margins, factories will run well below capacity.

Provincial utilisation trends reinforce the message of uneven industrial health. Koshi stays near or above 50% across most years, while Madhesh rises to 61.7% in 2021/22 and still leads in 2024/25. Bagmati improves after 2019/20 but then slides back, ending at 38.73% in 2024/25. Sudurpashchim also falls sharply in 2024/25. These movements point to differing sector mixes and operating environments across provinces. They also suggest that location matters for labour supply, logistics and access to markets, not only for credit.

Pharma underuse, oil volatility

The four year averages show persistent underuse in pharmaceuticals. Dry syrup averaged 16.37% and capsules 19.51%. Ointment averaged 26.20% and liquid medicines 27.26%. Tablet production fluctuated but remained below 50%, ending at 46.40% in 2024/25. Mahesh Prasad Pradhan, former president of the Association of Pharmaceutical Producers of Nepal, said that despite roughly Rs 80 billion invested in domestic pharmaceutical production, low utilisation reflects weak profitability and policy constraints. He pointed to pricing rules that do not keep pace with costs, leaving returns far below what investors expect in the sector.

Edible oil processing shows how quickly utilisation can move when it is exposed to external trade decisions. Subodh Kumar Gupta, immediate past president of the Association of Nepali Rice, Oil and Pulse Industries, said capacity utilisation depends heavily on India’s tariff and quota policies for vegetable oil. “Sometimes it reduces customs duties. When duties are reduced on raw materials, exports from Nepal decline. When duties are increased, exports rise,” he said, adding that quotas can also cap export volumes.

The NRB numbers back up that sensitivity. Soybean oil fell sharply in 2022/23 and 2023/24 before recovering in 2024/25. Vegetable ghee, in contrast, has been near idle for years, staying close to 1% in the last two fiscal years, which suggests a segment where installed capacity far exceeds viable demand or competitiveness.

Gupta also linked low utilisation to cautious investment sentiment. “Even maintaining existing units involves continuous costs,” he said. “Businesses are reluctant to take loans. The direct impact is reduced borrowing from banks. The logic is simple, why take loans when there is no income? This shows that industrial morale is very low.”

Why utilisation keeps falling

NRB flags constraints that go beyond finance. Firms cite procedural complexity in setting up and operating industries, which raises costs and delays investment decisions. Delays in road reconstruction disrupt raw material supply and the movement of finished goods, increasing transport costs and making delivery less reliable. Labour shortages driven by outward migration reduce shift capacity and limit productivity, especially in labour intensive sectors. NRB also links weak capacity use to low public capital spending, which reduces demand and slows the pace of infrastructure improvement that would otherwise support industrial activity.

The Risk of a Low-Output Equilibrium

The four-year trajectory of Nepal’s industrial sector reveals a profound strategic threat: the risk of the nation settling into a permanent state of underperformance. While the industrial core of steel, electricity, and basic staples remains functional, the broader ecosystem is visibly weakening. The current national capacity utilization of 44.5% is more than just a low number; it is a clinical sign of expanding idle capacity and a loss of momentum that could take years to reverse. If left unaddressed, this stagnation suggests that Nepal is no longer just facing a temporary downturn, but is instead drifting toward a low-output equilibrium.

The NRB report shows the country is struggling with an incomplete transition to a modern manufacturing economy. This failure is most evident in the collapse of job-rich downstream sectors like garments and leather, which were once the backbone of domestic employment.

To prevent this state of underperformance from becoming the new normal, the government must tackle procedural complexity by reducing transaction costs and bureaucratic delays, specifically the forest-mining dual-clearance bottleneck that prolongs investment timelines and deters capital. Second, infrastructure speed must be prioritized; completing road reconstructions and ensuring energy reliability are essential to lowering the high cost of transporting raw materials and finished goods.

The third challenge is the human element of industry. Labor retention has become a primary obstacle, as the mass migration of the youth workforce has left factories unable to run at full shift capacity despite high unemployment rates elsewhere in the country.

Without these targeted interventions, Nepal risks maintaining a hollowed-out industrial base. It faces a future where credit continues to grow and physical capacity exists, but where the factories themselves continue to run at half speed. In this scenario, the nation becomes increasingly dependent on external markets for even the most basic finished goods, sacrificing its economic sovereignty to a cycle of industrial inertia.

(This report was originally published in February 2026 issue of New Business Age magazine.)