Chapter 4 · Week 4 — Remittances, the Balance of Payments and Reserves
Remittances, the BoP and Reserves
How a country with a 21-percent-of-GDP trade deficit runs a current account surplus, and what that dependence costs.
Last week ended with a Rs 1,397 billion hole. This week you find out who fills it, and why the answer makes Nepal's economy work in a way that is unusual, and in one specific respect precarious.
4.1 The structure of the balance of payments
The BoP records every transaction between Nepal and the rest of the world. It is built in three layers, and the arithmetic is closed by construction.
┌──────────────────────────────────────────────────────────────┐ │ │ │ 1. CURRENT ACCOUNT │ │ goods (exports − imports) │ │ services (tourism, transport, education) │ │ primary income (wages, investment income) │ │ secondary income (REMITTANCES, grants) │ │ │ │ 2. CAPITAL ACCOUNT │ │ capital transfers │ │ │ │ 3. FINANCIAL ACCOUNT │ │ FDI, loans, portfolio flows │ │ │ │ ═══════════════════════════ │ │ OVERALL BALANCE → change in reserves │ │ │ └──────────────────────────────────────────────────────────────┘
The 2025/26 outcome:
ELEVEN MONTHS 2025/26
Trade balance (goods) Rs −1,397.23 bn
... plus services, income, and
above all remittances
────────────────
CURRENT ACCOUNT BALANCE Rs +321.74 bn ← SURPLUS
OVERALL BOP Rs +491.44 bn ← SURPLUS
Gross foreign exchange reserves Rs 2,569.38 bn
USD 18,653.87 mnStop and look at that. A country with a trade deficit of 21% of GDP is running a current account surplus. Almost no economy does this. Nepal does it for one reason.
4.2 Remittances
Workers' remittances, eleven months 2025/26
Rs 1,534.16 billion
For scale:
Remittances Rs 1,534.16 bn ██████████████████████████
Exports of goods Rs 247.57 bn ████
Trade deficit Rs 1,397.23 bn ███████████████████████
Remittances are 6.2× the value of everything Nepal exports.
Remittances alone are 109.8% of the trade deficit.┌───────────────────────────────────────────────────────────┐ │ THE NEPALI EXTERNAL MODEL, IN ONE DIAGRAM │ │ │ │ Nepalis work abroad │ │ │ │ │ ▼ │ │ Rs 1,534 bn sent home ─────────┐ │ │ │ │ │ goods exports Rs 248 bn ───────┤ │ │ tourism, services ─────────────┤ │ │ ▼ │ │ pays for imports │ │ Rs 1,645 bn │ │ │ │ │ ▼ │ │ surplus → RESERVES │ │ Rs 2,569 bn │ │ │ │ Labour is the export. Goods are a side business. │ └───────────────────────────────────────────────────────────┘
Remittances are 23.2% of GDP. That is the number to remember for the rest of the course, because it propagates into every other block: into deposits (Week 5), into interest rates (Week 6), into land and share prices (Week 8).
4.3 Where the workers go — and the concentration risk
NEPALIS TAKING FOREIGN EMPLOYMENT APPROVALS, eleven months country 2023/24 2024/25 change ───────────────────────────────────────────────────── UAE 117,310 179,414 +53% Saudi Arabia 65,294 71,160 +9% Qatar 38,096 43,954 +15% Romania 10,659 20,226 +90% Other 34,569 36,017 +4% Malaysia 81,304 5,442 −93% ◄──── ─────────────────────────────────────────────────────
Malaysia fell by 93% in a single year — from the second-largest destination to a rounding error. Gulf destinations absorbed the flow, and the total held up.
WHY THAT LINE IS THE RISK, NOT THE REASSURANCE The total was maintained because ONE destination expanded fast enough to absorb the collapse of another. That worked. It is not a guarantee that it works again. ┌────────────────────────────────────────────────┐ │ A remittance-funded economy has a policy │ │ dependency it does not control: the labour │ │ and visa rules of five or six other countries. │ │ │ │ Nepal's balance of payments can be changed │ │ more by a rule change in Kuala Lumpur or Abu │ │ Dhabi than by anything NRB does. │ └────────────────────────────────────────────────┘
4.4 Reserves and import cover
Reserves are the buffer. The standard way to size them is not in rupees but in months of imports they could pay for.
┌──────────────────────────────────────────────────────────┐ │ │ │ gross reserves │ │ IMPORT COVER = ────────────────────────── │ │ average monthly imports │ │ │ └──────────────────────────────────────────────────────────┘
Worked example.
Gross reserves Rs 2,569.38 bn
Imports, eleven months Rs 1,644.80 bn
Average monthly goods imports = 1,644.80 / 11
= Rs 149.53 bn
Import cover (goods only) = 2,569.38 / 149.53
= 17.2 months
NRB reports cover on goods AND services, which is a
larger denominator and therefore a smaller number —
but on any measure this is a comfortable buffer. [R]For context on why that matters, look back at the crisis years in Table 1:
RESERVES, THE RECENT HISTORY (USD million) 2018/19 9,500 ▄▄▄▄▄▄▄▄▄ 2019/20 11,646 ▄▄▄▄▄▄▄▄▄▄▄ 2020/21 11,752 ▄▄▄▄▄▄▄▄▄▄▄ 2021/22 9,512 ▄▄▄▄▄▄▄▄▄ ◄── the squeeze 2022/23 11,708 ▄▄▄▄▄▄▄▄▄▄▄ 2023/24 15,270 ▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄ 2024/25 19,502 ▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄ 2025/26 18,653 ▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄ 2021/22 is the year to study. Reserves fell about 19%, BoP swung to a deficit of Rs 252 bn, and the policy response included import restrictions and sharply higher interest rates. Everything you learn in Weeks 5 and 6 was set in motion by this block.
4.5 The exchange rate
Nepal pegs the rupee to the Indian rupee. That is not a detail; it is the central constraint on macroeconomic policy.
WHAT A PEG COSTS AND WHAT IT BUYS ┌─────────────────────────┬──────────────────────────────┐ │ BUYS │ COSTS │ ├─────────────────────────┼──────────────────────────────┤ │ Price stability with │ No independent monetary │ │ the dominant trade │ policy. NRB cannot set │ │ partner │ interest rates freely │ │ │ without pressure on the │ │ Predictability for │ peg. │ │ remittance senders │ │ │ and importers │ No devaluation available │ │ │ as an adjustment tool. │ │ A simple, credible │ Adjustment happens through │ │ nominal anchor │ reserves and quantity │ │ │ restrictions instead. │ └─────────────────────────┴──────────────────────────────┘ With the peg fixed, the ONLY shock absorber for an external imbalance is the reserve stock — and when that runs low, the tools left are import restrictions and interest rates. That is exactly what happened in 2021/22.
4.6 Tourism and the invisible exports
Services are the part of the current account people forget. Travel earnings — tourists spending inside Nepal — are recorded as a service export, and in the BoP table they run to tens of billions of rupees.
WHY TOURISM IS AN EXPORT A German tourist in Pokhara pays rupees for a hotel room. Nothing crosses the border. But foreign currency was converted into rupees and a Nepali service was sold to a non-resident. In the balance of payments that is economically identical to shipping a carpet to Frankfurt. goods export ─── carpet leaves ────► money comes in service export ─── money comes in ───► tourist leaves Same effect on reserves. Different table.
The BoP travel line also splits personal travel into health-related, education-related and other. Education-related travel is a debit — Nepali students paying foreign universities — and it is one of the fastest-growing outflows in the whole account. It is worth watching precisely because it looks like consumption and behaves like capital flight.
4.7 Putting the external sector together
THE FULL EXTERNAL ARITHMETIC, ELEVEN MONTHS 2025/26
Goods exports + 247.57
Goods imports − 1,644.80
───────────
Goods balance − 1,397.23
Services (net), income,
and secondary income
of which remittances + 1,534.16
───────────
CURRENT ACCOUNT + 321.74
plus capital and financial
account flows
───────────
OVERALL BOP + 491.44
───────────
RESERVES 2,569.38
(USD 18,653.87 mn)Formulas from this week
Current account = goods + services + primary income
+ secondary income
Overall BoP ≈ current + capital + financial account
→ change in reserves
Import cover = gross reserves ÷ average monthly imports
(months) average monthly imports = imports ÷ months
Remittance ratios = remittances ÷ GDP
remittances ÷ goods exports
remittances ÷ trade deficit
Reserve adequacy → compare cover in months against the
threshold NRB states in the release [R]What you should be able to do now
- Lay out the three layers of the balance of payments and say what closes it.
- Explain how a country with a 21%-of-GDP trade deficit runs a current account surplus.
- Express remittances as a share of GDP, of exports and of the trade deficit.
- Compute import cover in months from reserves and the import bill.
- Explain what the Malaysia collapse shows about concentration risk.
- State what a pegged exchange rate buys and what it costs, and name the shock absorber it leaves.
- Explain why tourist spending is an export and foreign tuition is an outflow.
Next week: money and banking — where all those remittance rupees actually land, and what the banking system does with them.
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