Nepal's economy hit by three credit booms followed by downturns

Nepal's economy has experienced severe instability over the past three decades, marked by three distinct periods of rapid credit expansion followed by sharp downturns, according to a research paper from the nation's central bank, Nepal Rastra Bank (NRB).

These "credit busts" have consistently weakened the country's macroeconomic health, leading to ballooning balance of payments and current account deficits, a significant depletion of foreign exchange reserves, and a subsequent contraction in credit growth. Recovering from these cycles has proven challenging for Nepal's fragile economy.

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Our internal assessment indicates that a substantial portion of the credit disbursed, particularly during the post-Covid period, diverted directly into speculative areas like real estate and the secondary stock market rather than productive industrial sectors.

The research, titled "An Anatomy of Nepal's Credit Boom 1990–2025," identifies volatile credit cycles between 1994-1996, 2008-2010, and 2020-2022. The study links these aggressive lending periods to expansionary fiscal policies, prolonged loose monetary regulations, and unmanaged financial sector liberalization. During these peaks, stock markets saw artificial surges, systemic risks for commercial banks multiplied, and foreign currency reserves plummeted, ultimately forcing the real economy into a prolonged slowdown.

Financial stakeholders acknowledge that while credit growth is essential for economic expansion, the misdirection of capital has been a historical problem. Santosh Koirala, president of the Nepal Bankers' Association, stated that a substantial portion of credit disbursed, particularly post-Covid, flowed into speculative areas like real estate and the secondary stock market instead of productive industrial sectors. Industrialists, however, argue that private borrowers responded to government incentives, and both borrowers and institutions are now more cautious of speculative risks.

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At those junctures, some credit undoubtedly flowed into sectors that are now classified as unproductive. However, the current financial landscape is entirely different. Both borrowers and financial institutions have become far more cautious and aware of the systemic risks associated with speculative investing.