Kathmandu. Every credit boom in Nepal over the past three decades has led to a slowdown in the economy, an external crisis and a financial imbalance rather than the expected economic growth. Released by Nepal Rastra Bank

According to a study titled ‘Analysis of Credit Expansion in Nepal (1990-2025)’ prepared by Birendra Bahadur Budha, Acting Director of the Nepal Rastra Bank, Nepal witnessed three rapid credit expansions: 1994-1996, 2008-2010 and 2020-2022.

The study categorizes all three phases as “bad credit booms”. After each of these phases, economic growth has weakened, productivity has declined, and the external sector has been in crisis, the report said.

According to the report, the rapid credit expansion is mainly due to financial sector reforms, prolonged loosening monetary policy and regulatory easing post COVID-19. The report states that the expansion of loans invested by the government is focused on construction, finance and consumption-oriented loans rather than productive sectors, which has not yielded long-term economic benefits. According to the report, these sectors have been the most affected by the expansion of such loans given by the government.

According to the study, the NEPSE index will rise sharply with the rapid loan expansion followed by a sharp fall in the market. This indicates a direct correlation between credit expansion and the stock market.

According to the NRB’s study, the last two loan expansion phases ended in external regional crises. The report states that increasing current account deficit, weak balance of payments and decreasing foreign exchange reserves have put pressure on the economy.

In 2022, the current account deficit stood at 12.5 per cent of GDP, while the adequacy of foreign exchange reserves also declined significantly, the study said.

The study has concluded that Nepal’s economic growth has been weaker than the long-term average in the three years after the credit expansion, and the economy has been pushed towards recession after every credit expansion.

It suggests that monetary and macroprudential policies should be effectively implemented to control excessive credit expansion in a timely manner.