The industrial sector faced significant challenges across the country in the last fiscal year, with the economic slowdown, persistent electricity supply issues and the ineffective use of capital expenditure by the government taking a toll on productivity. According to the Provincial Economic Activities Report (Integrated) 2023/24 released by the central bank, average industrial capacity utilization declined across all provinces except Koshi during the fiscal year 2023/24.

Manufacturing industries have been grappling with significant challenges for the past five years. The Covid-19 lockdowns in 2019/20 and 2021/22 severely disrupted industrial operations and production. In 2022/23, the sector faced additional hurdles, including a prolonged liquidity crunch, volatile interest rates, and rising raw material costs, further hampering industrial performance. The previous fiscal year, 2022/23, proved no different, as sluggish demand and the ongoing economic slowdown continued to weigh on industrial output.

The central bank report highlighted that industrial capacity utilization across all seven provinces remains below satisfactory levels. Even the three provinces housing the nation's largest industrial hubs—Koshi, Madhesh, and Lumbini—saw industries operating below their potential. Koshi and Madhesh host the country's two major industrial zones—the Morang-Sunsari Industrial Corridor and the Bara-Parsa Industrial Corridor, while Lumbini is home to the Rupandehi-Nawalparasi Industrial Corridor. The underperformance in these key regions underscores a broader decline in the country’s overall industrial environment.

Sugar industries have been unable to fully utilize their production capacity, according to industrialists. Rajesh Kedia, Managing Director of Indushankar Chini Udyog (Sugar Mill) in Hariwan, Sarlahi, said that the industry was only able to crush 2.9 million tons of sugarcane during last year's crushing season, despite having a capacity of 5 million tons. "Due to a shortage of sugarcane, the industry was able to utilize only 60% of its capacity," Kedia explained.

The situation for the edible oil industry in the Bara-Parsa Industrial Corridor has been even more challenging. After India implemented a zero customs duty policy on oil imports from third countries, Nepali industries suffered significant setbacks last year. Due to these high import duties in India, Nepali industrialists, who were importing semi-refined oil from third countries and exporting refined oil at zero customs duty to India, found themselves unable to export to India.

Nikhil Chachan, the promoter of Narayani Oil Refinery in Bara, said that the oil industries were only able to operate at 30-35% of their installed capacity last year as exports to India nearly came to a halt. "As our production was exceeding domestic demand, the only option was to reduce production," Chachan said. However, he also mentioned that the oil industry in the country has begun to recover after India recently raised import duties for third-country imports.

Infrastructure-related industries, including cement, steel, bricks, and GI wire, were particularly affected by the economic slowdown and inadequate government spending in 2023/24. Additionally, the edible oil sector, particularly palm oil and soybean oil, faced challenges due to tariff changes introduced by the Indian government in 2022.

As industries struggled to ramp up production, industrial loan growth slowed to 9.37% in 2023/24, down from 10.8% in the previous fiscal year. This decline reflects reduced credit demand or reluctance among businesses to take on new loans for expansion. Notably, industrial credit flow in the Gandaki and Sudurpashchim provinces recorded negative growth during the fiscal year, highlighting the severe challenges faced by industries in these regions amid weaker economic activity.

Garment Industry sees Huge Growth

In 2023/24, Koshi Province saw a slight improvement in industrial capacity utilization, rising to 52.7% from 51.1% in the previous fiscal year. Several industries operated near full capacity, including tire and tube (91.3%), bricks (84.5%) and animal feed (84%). Other strong performers were yarns (75.6%), noodles (76.0%), garments (77.5%) and mustard oil (79.0%).

The central bank's report highlighted robust utilization in biscuits (59.1%) and plastic products (59.9%), while traditional sectors like sugar (65.7%) and jute products (65.8%) also performed well. Processed tea (67.7%) and sandals (73.1%) also maintained competitive capacity levels.

However, some industries recorded moderate utilization rates, such as rice production (30.6%), iron rod and sheet manufacturing (38.1%) and GI wire (39.1%). Slightly better performance was seen in processed milk (41.3%), paper (50.9%) and synthetic fabric (55.3%).

On the other hand, several sectors faced alarmingly low utilization rates, reflecting significant challenges. Vegetable ghee production operated at just 4.4%, while soybean oil (17.5%) and household metal goods (18.0%) struggled due to weak market demand. Other underperforming sectors included raw leather (20.2%) and cement (20.8%).

Garment Industry Leads Growth

The garment industry recorded the most significant growth in 2023/24, with production surging by an impressive 202.1%. This remarkable increase was driven by rising global demand for Nepali garments, fueled by production disruptions in Bangladesh. In contrast, domestic metal goods production experienced the sharpest decline, falling by 45.7%, largely due to reduced demand and competition from cheaper imports. Several other industries posted positive growth. Wooden products led the gains with a 65% increase, followed by tires and tubes (62.2%), bricks (39.5%), sugar (26.1%), and iron rods, sheets, and related products (23.8%). Other sectors with increased production included slippers (9.2%), animal feed (7.7%), plastic products (1.5%) and noodles (0.2%).

But, many industries faced declines. Cement production dropped by 35.4%, soybean oil by 33%, rice by 29.5%, raw leather by 17.2%, biscuits by 13.5%, synthetic fabric by 10.6%, soap by 8.7%, vegetable ghee by 6.4%, paper by 5.9%, processed milk by 5.5%, GI wire by 3.5%, processed tea by 1.1% and mustard oil by 0.2%.

The decline in cement production was primarily attributed to a slowdown in public construction projects. Meanwhile, jute production improved, supported by high inventory levels from previous years.

Industrial Credit Intake Sees Growth

Industrial credit in Koshi Province grew by 8.11% in 2023/24, reaching Rs 139 billion by mid-July 2024, compared to the same period in 2023. This marks an increase from the 6.64% growth recorded in the previous fiscal year. The rise in credit intake was driven by increased lending to non-food industries, which account for the largest share of industrial credit, as well as to agriculture, forestry and beverage production sectors.

Among industrial sectors, credit to electricity, gas and water production industries saw the highest growth, surging by 42.67%. In contrast, credit to mining industries declined by 15.06% compared to the previous year. The industrial sector represents 24.12% of the total credit flow in the province. Within this sector, non-food industries received the largest share at 53.34%, while mining industries accounted for the smallest share at 0.47%.

Industrial Hubs Struggle with Low Capacity Utilization

The average capacity utilization of industries in Madhesh Province stood at 51.03% in 2023/24, down from 54.2% in 2022/23, reflecting moderate industrial activity across key sectors. Madhesh is home to the country’s major industrial hub—the Bara-Parsa Industrial Corridor—where the majority of the nation’s large industries operate.

Among the industries, the light beverage sector leads with the highest capacity utilization at 97.78%, while the vegetable ghee industry has the lowest at just 0.40%.

The vegetable ghee industry’s extremely low capacity utilization has led to reduced domestic and industrial use of vegetable ghee in recent years. This trend has been accompanied by a growing shift toward substitutes like soybean oil and palm oil. As demand for vegetable ghee has declined, its production has gradually decreased.

In 2023/24, cigarette, sugar and paper industries saw an increase in capacity utilization, while the cement, iron rod and sheet, soap, vegetable ghee, animal feed and dry syrup industries experienced a decline. The largest reductions in capacity utilization were noted in the iron rod and sheet, vegetable ghee, and animal feed industries.

Industries in the province with higher capacity utilization included rice, aluminum, cigarette, steel, wheat flour and household metal products. According to the report, the rice industry operated at 93.44%, the aluminum industry at 85.75%, the cigarette industry at 87.44%, the steel products industry at 76.60%, the wheat flour industry at 73.69% and the household metal products industry at 68.60%.

Likewise, industries with moderate utilization rates included animal feed, synthetic fabric, yarn, cement, sugar, chemical liquid material, and iron rod and sheet. The capacity utilization of the animal feed industry stood at 65%, the synthetic fabric industry at 60.39%, the yarn industry at 52.67%, the sugar industry at 46.77%, the liquid material industry at 43.26%, the iron rod and sheet industry at 41.25% and the cement industry at 37.69%.

In contrast, several industries faced significantly lower capacity utilization. The dry syrup industry operated at only 7.33%, the soybean oil industry at 14.23%, the soap industry at 29.19%, the paper industry (excluding newsprint) at 29.83% and the mustard oil industry at 33.80%.

Industrial Credit Flow Increases by 11.2%

In 2023/24, the total credit flow from banks and financial institutions to the industrial sector in the province increased by 11.2%, reaching Rs 121.87 billion, compared to Rs 109.59 billion in the same period of the previous fiscal year.

Among the districts in Madhesh Province, Parsa district received the highest share of industrial credit at 63.49%, while Saptari received the lowest at 2.45%. This can be attributed to Parsa’s status as the province’s primary industrial hub, hosting the largest concentration of industries. This concentration of industries attracts a larger share of financial resources, enabling further industrial development and economic activity in the district. On the other hand, Saptari’s minimal share of industrial credit highlights the challenges faced by less-industrialized areas in securing financial support.

Non-Food Sector Leads Credit Distribution

Of the total Rs 121.87 billion in industrial credit provided by BFIs in Madhesh, 53.68% was directed to the non-food manufacturing industry, followed by 34.55% allocated to agriculture, forestry and beverage manufacturing. Likewise, 5.67% went to the construction industry, 4.37% to metal manufacturing, machinery, electronics and metal products, 0.46% to electricity, gas, and water industries, and 1.25% to mining.

In 2023/24, credit to the construction industry experienced a modest decline of 0.89%, while the electricity, gas, and water industries saw a more significant drop of 12.32 percent. The mining industry faced the steepest reduction, with credit shrinking by 38.63%.

In contrast, several sectors experienced growth in credit flow. The metal manufacturing, machinery and electronics sector recorded a 7.14% increase, and the non-food manufacturing industry saw an 8.07% rise in credit. The most substantial growth occurred in the agriculture, forestry and beverage production industry, where credit expanded by 23.95%, reaching Rs 42.11 billion during the review period. This sector's remarkable growth underscores its growing prominence and financial support compared to the previous fiscal year.

Kathmandu gets Highest Chunk of Credit

In 2023/24, industries in Bagmati Province reported an average capacity utilization of 43.4%, down from 46.7% in 2022/23. Among the industries, the pashmina sector achieved the highest capacity utilization, while the dry syrup segment within the pharmaceutical sector recorded the lowest.

In 2023/24, production increased in industries such as processed milk, pashmina, cement, and certain pharmaceutical products, including tablets, capsules, dry syrup. Conversely, production declined in industries like noodles, soft drinks, beer, paint, garments, cloth/shoes, animal feed, cigarettes, bricks, transformers, electricity, and ointments within the pharmaceutical sector.

Industrial Credit Expands by 11.5%

In 2023/24, credit extended by BFIs to the industrial sector in the province grew by 11.5%, reaching Rs 1,063.94 billion, compared to Rs 954.1 billion in the previous year, which had recorded a higher growth rate of 13.2%.

The electricity, gas, and water sector accounted for the largest share of industrial credit at 34.3%, narrowly surpassing the non-food manufacturing industries which received 34.2%. The agriculture, forestry, and beverage manufacturing industries represented 14%, while the construction industries comprised 12.6%. Meanwhile, metal products, machinery, and electronics received 4.1% of the credit, and mining industries accounted for 0.8%.

While the mining sector share is the lowest in 2023/24, industrial credit to this sector saw the highest growth in Bagmati Province. Credit to mining industries increased by 21.1%, followed closely by the electricity, gas and water sector, which grew by 21%. The agriculture, forestry and beverage manufacturing industries also experienced double-digit growth, with credit increasing by 13.4%.

In contrast, the construction and non-food manufacturing industries saw moderate growth at 7.8% and 6.4%, respectively. Meanwhile, the metal products, machinery and electronics industries faced a decline, with credit decreasing by 8.1%.

Out of the total credit provided by BFIs to the province, the industrial sector accounted for 35.6%. Among the districts, Kathmandu district received the highest share of industrial credit at Rs 974.26 billion (91.6%), while Rasuwa district received the lowest at Rs 0.17 billion (0.02%). This disparity is attributed to the fact that the central offices of most industrial establishments are located in Kathmandu, making it the primary recipient of industrial credit.

Major Industries' Growth Fall

In 2023/24, the average capacity utilization of industries in Lumbini Province remained at 46.41%, down from 56.36% in 2022/23. Among the industries, the rosin production industry recorded the highest capacity utilization at 92.43%, driven by the availability of raw materials and increased market demand. On the other hand, the soap industry had the lowest utilization rate at 2.41%, primarily due to a decline in raw material quality.

The electric wire industry recorded the largest production increase, with a 55.43% rise compared to the previous year. In contrast, the soap industry saw the steepest decline, with production dropping by 85.64%, largely due to challenges in sourcing quality raw materials.

Industrial Credit Grew by 4.44%

The loans disbursed by banks and financial institutions in Lumbini Province to the industrial sector increased by 4.44%, reaching Rs. 131.88 billion by mid-July 2024. This follows a 5.95% increase in the same period of the previous year.

Credit to the agriculture, forestry and beverage production industries and the non-food production industries saw an increase, while loans to all other sectors declined. Industrial loans accounted for 23.51% of the total loans disbursed in the province during this period.

Of the total industrial loans, the non-food production industries received the largest share at 42.72%, while the electricity, gas and water-related industries received the smallest share at 0.81%.

Industrial Credit fall by 17%

In 2023/24, the average capacity utilization of industries in Gandaki Province declined to 39.2%, down from 42.4% in 2022/23.

The biscuit industry recorded the highest utilization at 69.49%, followed by the beer industry at 57.54%, liquid medicine at 50.79% and mustard oil at 50.09%. Other industries with above-average utilization included cigarettes (49.63%), chocolate (49.06%), cement (45.63%) and bricks (41.02%).

Conversely, some industries experienced below-average capacity utilization. The tablet medicine industry recorded 36.63% and the capsule medicine industry 34.49%. While capacity utilization by the processed milk industry stood at 25.41%, the noodles industry reached just 21.71%. The lowest rates were observed in the ointment medicine industry (11.28%) and dry syrup medicine industry (6.09%).

The central bank report emphasizes that, given the low production capacity of most industries, it is crucial to ensure the provision of essential resources such as reliable electricity, access to raw materials, markets for domestic production and adequate physical infrastructure to enable them to operate at full capacity. A shortage of skilled and efficient manpower for industries, workforce migration abroad and high land prices have also emerged as challenges to the industrial sector.

The study concluded that manufacturing industries, including cement and steel, are not operating at full capacity due to the economic slowdown, issues with the supply of essential electricity, and the government's inability to effectively utilize capital expenditure.

Cement Production Sees Growth

Industrial production in Gandaki Province, during the year, showed notable disparities across different sectors. While some industries saw growth, others experienced significant declines. The cement industry led the growth with a 12.10% increase, followed by the ointment medicine industry at 11.07%, the biscuit industry at 10.65%, the processed milk industry at 4.81%, the mustard oil industry at 3.11% and the cigarette industry at 2.32%.

On the other hand, several sectors faced downturns. The brick industry recorded the sharpest decline at 36.46%, trailed by the chocolate industry at 34.20%, the noodles industry at 25.95% and the dry syrup medicine industry at 18.73%. The beer industry saw a 9.93% decrease, while the tablet medicine and liquid medicine industries fell by 8.63% and 7.84%, respectively. The capsule medicine industry experienced a relatively smaller decline of 3.65%.

Industrial Credit Plunges by 17.27%

In 2023/24, the flow of industrial credit in the province declined by 17.27%, amounting to Rs 31.01 billion. This represented 8.88% of the province’s total credit flow. 

The allocation of industrial credit across sectors revealed distinct investment priorities. The non-food products sector secured the largest portion at Rs 9.34 billion (30.14%), followed by the construction sector at Rs 9.11 billion (29.38%), and the agriculture, forestry and beverage production sector at Rs 8.98 billion (28.98%). Smaller allocations were directed to the metal products, machinery and electronic products sector at Rs 2.59 billion (8.38%), the electricity, gas and water production sector at Rs. 0.590 billion (1.92%), and the mining production sector at Rs. 0.370 billion (1.21%).

Capacity Utilization Declines in Karnali

While Karnali Province has limited industrial base, the average capacity utilization of industries in Karnali Province was 48.51% in 2023/24, a decrease from 52.29% in 2022/23.

Among the industries studied, the plastic products sector recorded the highest capacity utilization at 100%, while the flour production industry (under grain and animal feed) had the lowest at 15%.

Capacity utilization rates varied significantly across industries producing paper, wood and wood products, processed tea, textiles, and livestock feed. The rice production industry led with a utilization rate of 90%, indicating a strong production efficiency. It was followed by the processed milk production industry at 52%, while the livestock feed industry recorded a utilization rate of 51.11%. Conversely, the paper and textiles industries had lower utilization rates of 21.23% and 16.67%, respectively.

The processed milk industry saw a 3.33% increase in production. Among the grain and animal feed industries, production of rice, wheat flour and animal feed rose by 66.67%, 28.57% and 15.38%, respectively.

Conversely, in the cloth and textile sector, production of other cloth and paper products decreased by 15% and 12.5%, respectively.

Industrial Credit Flow Surges 3.33%

Total industrial credit in Karnali Province increased by 3.33%, rising from Rs 3.98 billion in mid-July of the fiscal year 2022/23 to Rs 4.11 billion by mid-July of 2023/24. Credit to industries related to electricity, gas and water saw the highest increase, rising by 29.17%, while credit to agriculture, forestry and beverage production industries experienced the largest decline at 7.85%.

Among the districts, Surkhet received the highest amount of industrial credit at Rs 2.60 billion, while Dolpa had the lowest, with just Rs 0.016 billion. The non-food manufacturing sector received the largest share of total industrial credit, accounting for 30.92%. In contrast, the mining sector received the smallest share, at 1.84%.

Similarly, the construction industry received 25.01%, agriculture, forestry and beverages got 28.22%, metal products, machinery and electronics was allocated 9.83%, and the electricity, gas and water sector received 4.63%.

Industry Efficiency Down by 4 Percentage Points

The industries in Sudurpashchim Province had an average capacity utilization of 48.96% in 2023/24. During the review period, the highest capacity utilization was observed in the brick, sugar and wheat flour industries. In contrast, the capacity utilization of the soap, rosin and rice industries was relatively low. During 2023/24, rice production increased by 36.69%, while wheat flour production grew by 21.78%. Conversely, the production of mustard oil, soap, bricks, sugar and rosin declined by 50.68%, 23.77%, 22.22%, 16.16% and 3.47%, respectively. This decline in production has been attributed to the reduced capacity utilization of the industries producing these goods.

Industrial Credit Flow Declines

In 2023/24, bank credit to the industrial sector decreased by 4.79% compared to 2022/23, totaling Rs 25.60 billion. This contrasts with a 4.70% increase in credit during the same period last year. The industrial sector's share of total credit extended was 16.75%. Among the various industrial sectors, the metal products, machinery and electronics industries saw the highest increase in credit, rising by 3.20%. In contrast, the electricity, gas and water-related industries experienced the largest decrease, with a decline of 12.13%.

Of the total industrial loans, 41.26% were allocated to the agriculture, forestry and beverage manufacturing industries; 28.35% to non-food-related industries; 21% to construction-related industries; 7.55% to metal manufacturing, machinery and electronics industries; 1% to electricity, gas, and water industries; and 0.80% to mining-related industries.

(This report was originally published in  February 2025  issue of New Business Age Magazine.)