Nepal’s recent macroeconomic trajectory has been marked by a post-pandemic recovery tempered by inflationary pressures and external sector volatility. During FY 2021/22 and FY 2022/23, expansionary policies adopted to spur recovery (following the COVID-19 lockdowns) which contributed to rising inflation and a widening trade deficit. Year-on-year consumer price inflation peaked at about 8.6% in mid-2022, up from around 4.4% a year prior. Average inflation for FY 2021/22 reached 6.1% exceeding initial projections, prompting policymakers to shift toward contractionary measures. Broad money and private sector credit growth were reined in sharply as the monetary policy for 2022/23 targeted just 12% broad money growth (down from 18% earlier) and 12.6% private sector credit growth, recognizing that credit expansion had fuelled import consumption and external imbalances. In fact, actual private growth fell well below targets as in FY 2022/23 it was only about 3% year-on-year by mid-June 2023, versus a targeted 12.6%, reflecting tight liquidity and policy restrictions.
