Nepal’s remittance windfall gives it room to invest and a risk to manage

Nepal can use unusually strong remittances to build resilience and finance investment, provided it treats them as income earned abroad whose growth may slow. Nepal Rastra Bank reports that remittances in US dollars rose 31.9 per cent to $11.55 billion in the first nine months of FY2025/26. The IMF’s June assessment projects remittances at 33.1 per cent of GDP for the full year and real output growth of three per cent. These figures are compatible because income sent by migrant workers supports spending and foreign exchange without being domestic output. The policy question is how to improve what the economy can produce while those flows are strong. Nepal Rastra Bank’s nine-month macroeconomic release · IMF’s June Nepal assessment and indicator table

Households earn the flows and decide how to use them

A family may spend a transfer on food, housing, education or repaying debt. Those uses can improve welfare and investment in human capital. A transfer can also finance imports or be deposited at a bank, which may then lend to businesses. The amount converted into investment depends on opportunities, the cost of lending and confidence that a project can earn a return. It would be a mistake to assume that an increase in bank deposits automatically finances productive domestic activity. Some of the proceeds can stay liquid or finance assets whose returns depend on continued household transfers. IMF’s June Nepal assessment and indicator table · Nepal Rastra Bank’s nine-month macroeconomic release

There is a difference between the household’s spending choice and the central bank’s reserve position. A worker sends income, the household receives purchasing power and an intermediary handles the currency conversion. The eventual effect on official reserves depends on net foreign exchange transactions and the policy response. Stronger receipts can help meet demand for imported goods and reduce the need for financing from abroad. They do not put each dollar into the Treasury’s budget. A fiscal strategy should distinguish private remittance income, tax revenue arising from activity and official foreign-currency assets. IMF’s June Nepal assessment and indicator table

How a large flow can cushion a shock and amplify another

Using the IMF’s full-year projection as scale, a hypothetical ten per cent fall in remittances would equal about 3.3 per cent of GDP if nominal GDP were held fixed. This is the size of the gross receipt shock, not a prediction of a 3.3 per cent fall in GDP or reserves. Households could draw savings, lower spending or reduce imports. Exchange rates and other flows could respond. The example shows why changes in employment, wages and living costs in migrant destinations can matter for Nepal’s external account even when domestic production initially changes little. IMF’s June Nepal assessment and indicator table

There are distributional effects even within Nepal. A household with a migrant worker can experience a direct loss when a transfer falls. Another may be exposed through local construction, retail or services that rely on remittance-funded demand. Banks can face repayment pressure if loans were assessed on the assumption of stable foreign income. A stress test should identify which regions and lenders are most exposed to particular labour markets abroad. It should also distinguish a change in how funds are recorded from an actual loss in workers’ income, since greater use of formal channels can raise measured receipts without an equivalent increase in total transfers.

Invest where a productive return is credible

The strongest case for using the moment to invest is that external liquidity can make it easier to import equipment and intermediate goods, while stronger deposits can increase the availability of finance. Nepal can gain if a project expands output, lowers a recurring cost or creates durable earnings in foreign currency. A project funded on the assumption that remittances will permanently sustain demand is riskier. Lenders should test the cash flow under weaker transfers and lower asset prices. Public investment should be judged by the service or productive capacity it creates, with finance sized to the fiscal obligations the project imposes. IMF’s June Nepal assessment and indicator table

A competing argument is that attracting more finance into domestic projects can lower the return migrants and their families earn if promising opportunities are scarce. Families may rationally prefer liquid savings, a home or schooling to a business exposed to uncertain demand and approvals. The appropriate response is to reduce genuine costs of productive activity and improve access to investments with transparent terms. Encouraging borrowers to take more risk because the country has high reserves could leave households worse off. Investment requires a credible project, not simply an available pool of savings.

For public projects, compare foreign exchange earned or saved with the foreign exchange required to build and maintain the asset. A project that imports machinery initially can still improve the external account over its life if it raises reliable exports or reduces recurring imports. A project that mostly increases demand for imported inputs may have a strong domestic social case but a weaker external-financing case. Both belong in the appraisal. When the country’s apparent room to spend depends on unusually strong transfers, showing which projects will remain viable after growth in those flows slows is particularly important.

The timing of flows also matters. A seasonal rise in transfers does not necessarily translate into a similarly timed increase in funds available for a public project or a bank’s long-term lending book.

What the next data should show

Track remittances by destination where possible, the maturity and concentration of bank lending, import composition and evidence of investment coming into operation. A rise in equipment imports and export capacity has a different implication from a rise in consumption imports or land prices. Compare domestic wage and employment opportunities with the income households can earn abroad. If stronger transfers accompany sustainable lending and more domestic productive capacity, the windfall will have broadened the economy’s options. If reserves improve while exposure to the same foreign labour markets and local asset cycle grows, that vulnerability should be priced into fiscal and financial decisions. IMF’s June Nepal assessment and indicator table · Nepal Rastra Bank’s nine-month macroeconomic release