Gold, Oil, and the Nepali Economy: Understanding a Fragile Triangle

The Gold-Oil Nexus: A Macroeconomic Primer

The relationship between gold and oil prices is one of the most studied and consequential linkages in commodity economics. Both assets are globally priced in US dollars, both are acutely sensitive to geopolitical risk, and both respond — often in tandem — to shifts in monetary policy and inflation expectations. The empirical literature, including research published by the IMF and the World Bank, consistently documents a strong positive correlation between crude oil and gold prices, particularly over medium- to long-run horizons.

The transmission mechanism operates through several channels. First, oil is a primary input cost across the global production chain; when oil prices rise, general price levels follow, eroding the purchasing power of fiat currency and driving investors toward gold as an inflation hedge. Second, both commodities are denominated in dollars, meaning a weaker dollar simultaneously inflates the price of oil and makes gold cheaper for non-dollar buyers — reinforcing demand for both. Third, geopolitical shocks — wars, sanctions, and supply disruptions — tend to elevate risk premiums across all commodity markets simultaneously, as observed during the 2022 Russia-Ukraine conflict when both Brent crude and gold surged within the same trading window, per Reuters and Bloomberg market data.

A 2023 study in the Journal of Commodity Markets found a co-integration relationship between gold and oil prices over the 1990–2022 period, with a long-run elasticity of approximately 0.6 — meaning a 10% sustained increase in oil prices is historically associated with a 6% increase in gold prices. This relationship, while not perfectly stable, has proven remarkably persistent across multiple commodity supercycles.

Nepal’s Structural Vulnerability to Commodity Price Cycles

Nepal occupies an acutely precarious position within this global commodity dynamic. As a landlocked, energy-importing, remittance-dependent economy, Nepal absorbs external commodity shocks almost entirely as a cost — with virtually no capacity to hedge, offset, or benefit from rising prices on the supply side.

Nepal imports nearly 100% of its petroleum requirements, predominantly through the Nepal Oil Corporation (NOC), a state-owned entity that purchases refined petroleum products from Indian Oil Corporation at import-parity prices indexed to global crude benchmarks. According to NOC financial reports and the Nepal Rastra Bank (NRB), petroleum imports consistently constitute 20–25% of Nepal’s total import bill — a figure that swells dramatically during periods of elevated crude prices.

The consequences cascade predictably: higher oil prices raise transportation costs across the domestic economy, push up prices for goods reliant on diesel-powered supply chains, inflate fertiliser costs for agricultural households, and widen Nepal’s trade deficit. The Kathmandu Post and independent budget analyses have documented how NOC losses during high-price periods require direct government transfers, crowding out capital expenditure on infrastructure and social services.

Gold presents a parallel — and largely underappreciated — pressure point. Nepal is one of the largest per-capita gold importers in South Asia relative to its GDP, driven by deep cultural demand for gold jewellery in wedding ceremonies and festival gifting, as well as its historical role as a store of value in households with limited access to formal banking. The NRB Annual Report 2024 recorded gold imports exceeding NPR 180 billion in the fiscal year 2023/24 — a figure that places extraordinary pressure on Nepal’s foreign exchange reserves and contributes materially to the current account deficit. When global gold prices rise, as they did sharply through 2024 and into 2025 per World Gold Council data, Nepal’s import bill for gold rises in lockstep, draining foreign currency reserves that are already under structural pressure.

The Current Economic Situation

Nepal’s macroeconomic position as of 2025–2026 reflects the compounded impact of these twin commodity pressures. GDP growth has remained sluggish at approximately 3.5–4%, well below the government’s 7% target and the rate required to meaningfully reduce poverty and absorb a growing labour force. Inflation, while easing from its 2022–2023 peak, remains elevated in food and transport categories — both of which are directly linked to oil price transmission. The IMF Article IV Consultation for Nepal, 2024 flagged persistent current account pressures and called for more active management of import demand, particularly in non-productive categories — a pointed, if diplomatically worded, reference to gold.

The banking sector has also felt the strain. Credit growth slowed sharply as the NRB tightened monetary policy to defend the exchange rate peg with the Indian rupee — a peg that itself depends on adequate foreign reserve coverage. Businesses report constrained access to working capital, and private investment as a share of GDP has declined for the third consecutive year according to Ministry of Finance Budget Documents 2025.

Toward Structural Solutions

Addressing Nepal’s commodity vulnerability requires interventions at multiple levels. In the energy sector, accelerated investment in hydropower — Nepal’s single most significant comparative economic advantage — offers the most durable long-term insulation from oil price shocks. Nepal’s theoretical hydropower potential exceeds 83,000 MW, yet installed capacity remains below 3,000 MW. Closing this gap, through both public investment and transparent private sector participation, would reduce petroleum dependency structurally rather than at the margins.

On gold, the NRB has experimented with import quotas and duty adjustments, with mixed results given the persistent informal smuggling channels that activate when formal import costs rise. A more effective approach may involve deepening financial inclusion — offering households credible, accessible savings instruments that can compete with gold as a store of value, thereby reducing culturally embedded demand at the source rather than attempting to suppress it at the border.

Broader fiscal reforms — reducing subsidies on petroleum products in favour of targeted cash transfers, strengthening revenue collection, and rationalising capital expenditure — would improve Nepal’s macroeconomic resilience to future commodity cycles, per recommendations consistently advanced by the World Bank Nepal Economic Update series.

(Sources: IMF Article IV Consultation, Nepal 2024, World Bank Nepal Economic Update, Nepal Rastra Bank Annual Report 2024, Nepal Oil Corporation Financial Reports, Ministry of Finance Budget Documents 2025, Journal of Commodity Markets, 2023 World Gold Council, Reuters, Bloomberg, The Kathmandu Post)