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Nepal’s manufacturing sector has shrunk significantly over the past decade, with its contribution to GDP declining from 15 percent to 12.8 percent, according to a new macroeconomic report by Nepal Rastra Bank (NRB).

Unveiling its latest Macroeconomic Report on Tuesday, the central bank said Nepal’s economy grew at an average potential rate of 4.2 percent between fiscal years 2014/15 and 2024/25. However, growth has remained moderate and uneven across sectors, and the economy has yet to fully regain its pre-COVID momentum.

Structural Shift Toward Services

The report shows a steady structural shift toward the service sector.

In 2014/15, agriculture, industry and services contributed 30.3 percent, 15.0 percent and 54.7 percent to GDP, respectively. By 2024/25, agriculture’s share had declined to 25.2 percent, industry to 12.8 percent, while services expanded to 62.0 percent.

The NRB noted that aggregate demand remained subdued over the decade due to weak consumption, sluggish investment and poor fiscal performance. Consumption remains the primary driver of aggregate demand, followed by private investment and government expenditure.

Monetary and Fiscal Conditions

The monetary sector presents a mixed picture. Excess liquidity has pushed interest rates to historically low levels, but credit growth remains sluggish. The NRB said open market operations have helped stabilize interest rates.

The report states that the central bank mainly implements monetary policy through interest rates. It uses the interest rate corridor to influence the interbank rate and steer short-term market rates in line with its policy goals.

On the fiscal front, the report notes gradual improvement following the COVID-19 pandemic, including a reduction in the fiscal deficit. However, revenue mobilization remains weak compared to international standards, and capital spending continues to lag, with high seasonality in government expenditure.

Inflation, External Sector and Financial Stability

Nepal’s inflation has stabilized over the past two decades and remains closely aligned with Indian inflation due to the exchange rate peg, strong trade dependence and unrestricted labor mobility with India.

The external sector remains robust, supported by recovering international trade, a positive balance of payments and record foreign exchange reserves. Remittance inflows continue to drive the current account surplus.

The financial system also remains resilient. The overall capital adequacy ratio (CAR) is above the regulatory threshold, with the core capital-to-risk-weighted assets ratio standing at 9.80 percent, according to the NRB.