Traditional banks have historically been the backbone of Nepal's financial system. There are a number of Class A commercial banks operating in the country, which play an important role in providing credit to the economy and facilitating payments. However, Nepalese banks need to undergo a major modernization to support sustainable economic development and enhance the country’s competitiveness in the global arena. Nepal’s lagging economic growth can be partly attributed to the inefficiency and limited reach of the traditional financial sector. If the financial system, which is the lifeblood of the economy, is inefficient or inaccessible to a significant portion of the population and businesses, it inevitably hinders investment, trade, and innovation. Digital transformation of the banking sector is not just a technology upgrade, but a potential tool to accelerate the country’s overall economic development.

Kathmandu, the capital of Nepal, is rapidly transforming into a vibrant South Asian metropolis, attracting population and capital. This growth is accompanied by a booming real estate market, which, as of 2025, is expected to show significant changes driven by rapid urbanization, economic recovery and policy reforms. However, behind the facade of dynamic growth lies a complex picture, characterized by obvious paradoxes. The Nepalese real estate market in general, and Kathmandu in particular, is an attractive but also challenging field for investment and analysis.

The central paradox, which has become particularly apparent by 2025, is the apparent disconnect between several key indicators. On the one hand, there is a rapid, almost dizzying rise in land and housing prices. On the other hand, this rise appears to have little correlation with actual rental yields. And, most importantly and socially acutely, it is dramatically out of touch with the actual purchasing power of the vast majority of the local population. Kathmandu’s rapid urbanization is not simply an increase in the number of residents; it is a concentration of economic aspirations and, as a result, significant speculative pressure on the valley’s limited land resources. The geographic isolation of the Kathmandu Valley makes matters worse, as land supply is physically limited while demand, fueled by both natural increase and migration, is steadily increasing. This creates ideal conditions for a price rally that can attract speculators, driving prices further away from their fundamental value.

The term “skill drain” itself highlights that the country is losing not just a portion of its population, but precisely those sections of it that have the greatest potential to contribute to innovation, productivity growth, and the development of key economic sectors. We are talking about the loss of “brains” – people who are capable of generating new ideas, developing advanced technologies, and managing complex processes. Since this drain is “ongoing,” its negative effects are not limited to the immediate moment, but tend to accumulate, creating a cumulative effect of talent shortage and exacerbating the country’s development problems in the long term. This threatens Nepal’s ability to modernize and its competitiveness in the global arena.

The Nepal Stock Market (NEPSE) has been experiencing increased volatility in recent times, causing concerns and questions among investors. The fluctuations in the index, sometimes sharp and unpredictable, have left many wondering about the reasons behind what is happening and how to act in the current situation. The purpose of this article is to provide retail investors with a clear understanding of the current market situation, expert analysis of the prospects of key sectors of the Nepalese economy, and practical investment strategies for the second half of 2025. In this uncertain environment, it is especially important not to give in to emotions, but to rely on knowledge and balanced analysis to make informed investment decisions. Understanding the underlying causes of market fluctuations is the first step to successful investing.

Nepal, a developing country whose economy relies heavily on agriculture and remittances from migrant workers1, faces a range of economic challenges. Among them is moderate gross domestic product (GDP) growth, projected at 4.5% in fiscal year (FY) 2025, inflation pressure reached 6.05% in mid-December 20244, and a persistently large trade deficit.5In this context, the National Bank of Nepal (NBN), as the country’s central bank, plays a key role in maintaining macroeconomic stability. Its efforts are aimed at managing foreign exchange reserves, controlling inflation, and promoting economic growth through monetary policy.

The economy of Nepal, classified as a least developed country (LDC) by the United Nations, faces a unique set of challenges and opportunities. Gross domestic product (GDP) per capita is estimated at $1,460 (nominal) and $5,720 (PPP) in 2025.3The economy grew at an average annual rate of 4.2% in real terms between 1996 and 2023, a respectable rate given internal conflicts and numerous external shocks, but lagging behind that of its regional peers. Forecasts for the 2023/24 financial year indicated growth of 3.3%, and for the 2024/25 financial year, 4.5%.

A key feature of the Nepalese economy is its high dependence on remittances from migrant workers. By 2023, remittances accounted for about a quarter of Nepal’s GDP1and were projected to exceed 30% of GDP in fiscal year 2014. During the first nine months of the fiscal year 2024/25, remittances reached NPR 1,191.31 billion (approximately US$8.74 billion), an increase of 10% in rupee terms compared to the same period of the previous year. According to the World Bank, in 2023, remittances accounted for 26.89% of GDP. This significant reliance on remittances plays a key role in supporting the economy and reducing poverty. However, this economic structure also has a downside. Large inflows of foreign exchange in the form of remittances, while critical for poverty reduction and ongoing economic stability, can inadvertently hinder the development of a competitive domestic manufacturing sector. This phenomenon, similar to the “Dutch disease,” can lead to real exchange rate appreciation (as discussed in1 as a deterrent to exports), making local goods more expensive relative to imported ones and hampering export competitiveness. Thus, one of the key pillars of Nepal’s economy (remittances) may indirectly undermine efforts to strengthen domestic supply chains and reduce import dependence in the consumer goods sector, creating a difficult policy dilemma.

Nepal, blessed with abundant water resources due to its unique mountainous terrain, is actively seeking to establish itself as a significant player in the regional energy market of South Asia. Hydropower is seen not only as the key to economic prosperity and self-sufficiency, but also as an important source of export revenues capable of transforming the national economy. However, despite the enormous potential, the implementation of ambitious plans to build large hydropower projects (HPPs) faces numerous and multifaceted challenges.

The central question facing Nepal and its international partners is the viability of these capital-intensive megaprojects. This article offers an in-depth analysis of this question through the lens of three interrelated and critical factors: Nepal’s own internal challenges and barriers to hydropower development; the rapidly changing energy needs and import policies of neighboring countries, most notably India and Bangladesh; and, importantly, the often cautious and selective attitude of foreign investors weighing the potential benefits against the significant risks.

To provide a comprehensive coverage of the topic, the paper is structured by providing an overview of Nepal’s current hydropower landscape, a detailed analysis of key mega-projects under construction and planned, an assessment of the prospects and conditions of regional power markets, and an examination of the investment climate, associated risks, and lessons learned. The paper concludes with a comprehensive assessment of the factors affecting project viability and a strategic outlook for sustainable hydropower development in Nepal.

Despite its importance, Nepal’s agricultural sector faces a number of serious challenges. One of the key ones is low productivity and crop yields. This is largely due to the prevalence of small-scale farming – the average landholding size ranges from 0.5 to 5 hectares, making it difficult to apply modern technology and achieve economies of scale. Traditional farming methods are widespread, which are less efficient compared to modern agricultural technologies. An additional factor that aggravates the situation is the significant dependence on monsoon rains, which makes production vulnerable to weather fluctuations, as well as the shortage of labor in rural areas caused by the outflow of young people to cities and abroad in search of work. Land fragmentation, where farms consist of several small, scattered fields, also reduces the efficiency of agricultural production.

Nepal today is a complex mosaic of narratives shaped by a decade-long transition from a monarchy to a federal republic, the aftermath of a devastating civil war, and its position between two giants, India and China. A close analysis of dominant discourses in society reveals a country in active search for national identity, economic prosperity, and social equality, while political instability and external influences remain defining factors.

Summary

• Key takeaway: Nepal’s small and medium enterprises (SMEs) face a multifaceted crisis in mid-2025, driven by persistent, albeit moderate, inflation. This is reflected in significantly higher transaction costs (especially for imported raw materials and selected services), persistent supply chain vulnerabilities exacerbated by both domestic and global factors, and cautious consumers whose purchasing power is waning.
• Main problems: The combination of these pressures reduces SME profitability, complicates financial planning and threatens business continuity, especially for enterprises with limited financial reserves or high dependence on imports.
• Adaptive measures for SMEs: SMEs are actively, albeit to varying degrees, implementing strategies that include tight cost control, finding alternative sources of supply, adopting digital tools to improve efficiency and market expansion, and in some cases innovating their product offerings. However, the ability to adapt is uneven.
• Support Ecosystem: Government and institutional support (e.g. FY2025-26 budget incentives, FNCCI/CNI initiatives, development partner projects such as REED) offer some relief, but gaps remain in coverage, awareness and comprehensiveness, particularly with regard to access to affordable finance and practical support for supply chain diversification.
• Prospects and key recommendations: The outlook for Nepalese SMEs beyond mid-2025 is assessed as cautiously optimistic, but depends on sustained economic stability, effective implementation of supportive policies, and continued SME resilience. Key recommendations will focus on increasing access to finance, targeted capacity building for supply chain resilience and digitalization, promoting a more stable policy environment, and promoting domestic value chains.