From weak public investment and a misaligned credit system to a collapsing real estate cycle and rising student migration, the signals of a demand crisis are unmistakable
The vegetable vendor in Butwal, the factory owner in Birgunj, the garment shop in Kathmandu and the returnee migrant in Dhangadhi all have something in common: fewer customers, thinner margins and growing uncertainty. Across sectors, sales are slowing, and business sentiment is deteriorating. These microeconomic anxieties reflect a deeper macroeconomic truth: Nepal is in a demand shortfall.
Nepal's growth model is overwhelmingly consumption-driven. As of July 2024, private consumption accounted for 86.1 per cent of nominal GDP-well above the South Asian average of around 60 per cent-continuing a decade-long trend where consumption has consistently comprised over 80 per cent of Nepal's GDP. This structural reliance on consumption-much of it sustained by remittance inflows-makes demand fluctuations particularly consequential for overall growth.
According to the World Bank, remittances compare to 25 per cent of Nepal's GDP, with around 70 per cent used for daily consumption, followed by education and loan repayment. Only a small share goes towards business or investment. The paradox is clear: if the economy is consumption-driven and remittances fuel household spending, why is demand weakening?
In theory, steady remittance inflows should sustain aggregate demand. Yet businesses across sectors report shrinking sales. So, has Nepal reached the limits of its consumption-led growth model?
Structural transformation hinges on robust investment. While public investment rose to Rs. 36,275 crores by FY 2021/22, private investment still made up 76.85 per cent of total investment in FY 2022/23-highlighting Nepal's reliance on the private sector for growth. But private investment depends on confidence, and confidence stems from public investment. In FY 2022/23, private investment stagnated as public investment fell sharply to Rs. 31,389.6 crore, signaling rising uncertainty.
The broader fiscal stance remains contractionary at precisely the wrong time: capital expenditure dropped from 4.9 per cent of GDP in FY 2019/20 to 3.4 per cent in FY 2023/24, and recurrent spending from 20.2 per cent to 16.7 per cent.
Delays in payments to contractors worsen the situation. In January 2025, tensions escalated when contractors threatened a nationwide halt to construction works, citing unpaid dues of Rs 40 billion. The Ministry of Finance acknowledged only Rs 8 billion in arrears and blamed documentation delays, but the damage was already done: stalled projects, cost overruns and dampened private sector confidence.
Timely payments aren't just a contractual matter-they sustain the money multiplier effect. When capital spending stalls, contractors face liquidity crunches, triggering wage delays, job losses and defaults. This slows the velocity of money as spending and investment grind down. As of May 2024, only 41.67 per cent of capital expenditure had been utilised, undermining the very objective of fiscal stimulus.
The real estate sector highlights the fragility of Nepal's economic model. During the 2019-2021 credit boom, banks disproportionately expanded credit against fixed assets-especially land-rather than productive working capital. Fixed asset lending surged from Rs. 2,206.62 billion in 2019 to Rs. 3,749.32 billion in 2023. Loans against current assets barely rose, peaking at Rs. 578.05 billion in 2022 before declining.
This credit skew reflects a preference for speculation over production. When Nepal Rastra Bank tightened the monetary policy in 2022 to fight inflation, the bubble burst. Property transactions collapsed-by 38 per cent in FY 2022/23, with further declines in FY 2024/25. In just the first quarter, property transfers dropped 6.68 per cent year-on-year.
The fallout has been significant: rising non-performing loans, especially those of cooperatives and development banks, and a wealth effect drag as households-whose primary asset is often land-cut back spending. The result: contracting consumption, slower construction and weaker job creation.
Another strain on demand is the surge in student migration, which has risen nearly 1,000 per cent-from around 10,000 in 2011/12 to over 112,000 in 2023/24. Education-related remittance outflows have soared, and education loans doubled from Rs. 23.6 billion in 2019 to Rs. 55.4 billion by late 2024.
To finance overseas education, families divert income, liquidate assets and incur debt. These funds are effectively withdrawn from the domestic economic cycle, and spent instead on foreign tuition, rent and living costs. More importantly, Nepal loses its young, aspirational, high-spending demographic. These students drive demand in retail, hospitality and services-and are the very people who fuel entrepreneurship, digital adoption and innovation. Their departure weakens consumption today and erodes the growth engine of tomorrow.
In essence, Nepal is not just exporting talent-it is exporting demand.
Nepal's macroeconomic challenge is no longer theoretical-it's a demand crisis hiding in plain sight. From weak public investment and a misaligned credit system to a collapsing real estate cycle and rising student migration, the signals are unmistakable.
Reviving momentum requires a coordinated, demand-led stimulus: frontload capital expenditure, accelerating payments and unlocking private sector energy through high-return infrastructure-roads, irrigation, energy. Retain the aspirational class with stronger education, flexible labour markets and youth entrepreneurship. This is not a technical adjustment. It is a macroeconomic reset. Without it, Nepal risks mistaking stagnation for stability.
Thapa is an economic policy analyst based in Nepal. She holds a master's in economics from Vanderbilt University and has worked with the World Bank, DC
