Overview: According to the 1990 constitution, the government has a fundamental economic responsibility to create an independent and self-reliant economy through equitable distribution of economic resources and gains, prevention of economic exploitation, and the advancement of private and public enterprise. However, according to observers, such changes require economic reforms that have yet to materialize. Prior to 1990, the economy, like the country, was essentially closed to the world, and international economic relations were largely in the form of cross-border trade with India and China. Since 1990, the government increasingly has adopted market-oriented policies with greater liberalization of the domestic economy and trade. These policies have focused on privatizing state industries and creating joint-venture projects, particularly in financial institutions. Liberalization policies, however, have been criticized for benefiting primarily urban areas and rural elites. The economy is still characterized by central planning. Indeed, the government is the main source of domestic investment, and five-year plans direct such investment. However, five-year economic development plans alternately emphasize various sectors, and as a result, development has been uneven.
The economy has been—and continues to be—characterized by dependence on agricultural output, a poor export base but strong reliance on trade, unbalanced regional development, dependence on foreign aid, excessive government control and regulation, and inefficient public enterprises and administration. The agricultural sector has employed most of the labor force and provided the largest share of gross domestic product (GDP), but the sector’s shares of the labor force and GDP have declined since the 1970s. Industry and manufacturing have provided lower portions of GDP, employed fewer people, and expanded little. Services, particularly those related to tourism, have grown in importance, but the civil conflict has hurt this and other sectors.
Gross Domestic Product (GDP)/Power Purchasing Parity (PPP): World Bank and Nepal government data indicate that from 1960 to 2004 total GDP grew from US$1.4 billion to US$6.2 billion, averaging 3.6 percent annual growth for the period. From 1960 to 2000, GDP per capita increased from US$139 to US$240; it was US$271 in 2004. From 1975 to 2004, PPP per capita grew from US$344 to nearly US$1,470. In terms of sectoral composition, World Bank data suggest that from 1965 to 2004 the agricultural sector decreased from 65.5 percent to 40.3 percent of GDP (37 percent in 2004 according to the Nepal government), while services increased from 23.5 percent to 36.7 percent of GDP (38.7 percent according to the government), manufacturing from 3.3 percent to 9 percent (7.4 percent according to the government), and industry from 7.7 percent to 14 percent (12.6 percent according to the government). Since the intensification of civil conflict in 2002, projections of GDP growth often have hinged on forecasts of the security situation.
GOVERNMENT Budget: The Ministry of Finance and the National Planning Commission establish the budget with guidance from five-year plans drafted by the National Development Council. In July 2004, the government reclassified budget categories from regular and development expenditures to current expenditures for administration and security matters, capital expenditures on programs and projects for production and output, and loan repayment expenditures. From 1972 to 2004, total expenditures grew from US$879 million to US$1.2 billion and were estimated to be US$1.4 billion in fiscal year (FY) 2005. Current expenditures were 61.5 percent of total expenditures in FY2004 (US$746 million), with most allocated to social services (37.5 percent), general administration (13.2 percent), and defense (11.9 percent). Capital expenditures constituted 26.5 percent of total expenditures in FY2004 (US$310 million), with most allocated to economic services (56.8 percent) and social services (30.9 percent). Finally, since FY1999 repayment expenditures have doubled, amounting to 12 percent of total expenditures in FY2004 (US$145 million), with 53.4 percent for external loans and 46.6 percent for internal loans.
From 1972 to 2000, fiscal deficits increased from US$125 million to US$12 billion but declined to US$208 million by FY2004. Moreover, the first quarter of FY2005 showed a budget surplus of US$42.7 million. These changes are largely due to substantial increases in government revenues and foreign grants. Public-sector funds traditionally have suffered from a narrow tax base and numerous tax exemptions, but government revenues have increased as a result of improvements in revenue administration and governance. In FY2004, government revenues totaled US$837.8 million—77.3 percent tax revenue and 22.7 percent non-tax revenue.
Inflation: According to World Bank figures, inflation averaged nearly 9 percent from 1965 to 2000. From 2000 to 2004, inflation declined to between 4 and 5 percent. According to Nepal’s central bank, from 2000 to 2004 the consumer price index ranged from 2.5 to 5.7 percent and averaged 4.5 percent for fiscal year 2005.
Agriculture, Forestry, and Fishing: Agriculture is probably Nepal’s most important economic sector. According to available data, since at least the 1960s this sector has often provided nearly half of the gross domestic product (GDP) and employed most of the population. However, the sector’s contribution to the economy has declined. According to World Bank data, from 1965 to 2004 the agricultural sector declined from 65.5 percent of GDP to nearly 40.3 percent. Moreover, the percentage of the labor force employed in agriculture fell from 94.4 percent in 1971 to approximately 65.7 percent in 2001. Forestry and fishing often are categorized as agriculture in government statistics, and each accounts for less than 1 percent of GDP and the labor force.
As a result of low agricultural growth rates and high population growth rates, Nepal has not been self-sufficient in food grain production since the 1980s. Low growth rates generally are seen as a result of limited use of agricultural technologies and declining landholding sizes. From 1962 to 2002, the total agricultural area increased about 57 percent, and the number of landholdings grew approximately 120 percent, but the population increased by 146 percent. In the same period, the amount of agricultural land declined from 0.18 to 0.13 hectares per person, and the average size of holdings has declined from 1.1 to 0.8 hectares. In 2002 nearly 60 percent of holdings did not produce sufficient food to feed a household, and almost 97 percent of these holdings were two hectares in size or smaller. Furthermore, tractors or threshers are used on less than 10 percent of total holdings, and approximately 65 percent of landholdings are rain-fed rather than irrigated. The use of pesticides, fertilizers, high-yielding seeds, and irrigation has increased but mostly by owners of landholdings larger than two hectares. Cropping intensity has increased, with adverse environmental consequences, such as soil erosion.
Mining and Minerals: This sector has traditionally been one of Nepal’s weakest. Most minerals are used domestically, often for construction. The value of mining and quarrying output increased from US$15.3 million in 1990 to an estimated US$31.1 million in 2004. The percentage of the labor force employed in mining and quarrying increased from statistically 0 percent in 1971 to 0.2 percent in 2001. Despite these increases, the sector remained at 0.5 percent of gross domestic product from 1990 to 2004. Furthermore, mining of all metallic minerals has declined with the exception of small alluvial deposits of gold accessed during short periods of time when river levels are low. The sector’s decline reflects the lack of commercial viability for most minerals as a result of the high costs of accessing and marketing minerals in Nepal. Mineral deposits are often small, scattered, and in areas far from domestic markets, and transportation is generally inadequate and relies on costly, imported fuels.
Industry and Manufacturing: Industry and manufacturing have grown but lag behind other economic sectors. Indeed, observers often contend that Nepal’s industrial and trade policies require further reforms if this sector is to grow. Manufacturing is often regarded as sluggish in both output and growth, and the limited industrial base relies on agricultural products and imported inputs, particularly from India. In fact, most industrial output is provided by traditional cottage industries such as basket-weaving and cotton fabric production. Most large plants are in the public sector and produce items such as jute, sugar, cigarettes, and chemicals. Smaller industries generally process minerals, which are often consumed domestically. From 1965 to 2004, manufacturing grew from 3.3 percent of gross domestic product (GDP) to approximately 9 percent, and industry grew from 7.7 percent of GDP to approximately 14 percent. From 1971 to 2001, the percentage of the labor force employed in manufacturing increased from 1.1 percent to 8.8 percent, and the percentage employed in industries other than manufacturing increased from 0.1 percent to 4.5 percent.
Energy: Most energy is derived from traditional sources, particularly fuelwood. However, traditional fuel consumption has fallen as a percentage of total energy requirements, from nearly 95 percent in the 1980s to an estimated 88 percent in 2001. Nepal relies heavily on hydropower, but its tremendous potential for increasing hydroelectric output is limited by difficult terrain, lack of infrastructure, insufficient capital investment, and civil conflict. According to the World Bank, commercial energy production has consistently lagged behind commercial energy use, and the gap appears to be growing. From 1971 to 1999, commercial energy production increased from 2,506 kilotons of oil equivalent to 7,035 kilotons, and commercial energy use increased from 2,570 kilotons of oil equivalent to 8,051 kilotons. In the same period, the amount of commercial energy that was imported increased from 2.5 percent to 12.6 percent. Finally, from 1971 to 2001 the percentage of the labor force employed in “electricity, gas, and water” increased from 0.04 percent to 1.5 percent.
Services: Services grew from 23.5 percent of gross domestic product in 1965 to 36.7 percent in 2004. Average annual growth in services was 4.9 percent from 1965 to 2000 but 6.2 percent in the 1990s. Furthermore, the percentage of the labor force employed in the services sector increased substantially, from 4.4 percent in 1971 to 18.3 percent in 2001. No particular industry accounts for a great percentage of the overall services sector’s total value. Indeed, in 2004 the total value of the services sector was nearly evenly divided among finance and real estate (27 percent); trade, restaurants, and hotels (25.8 percent); community and social services (24.3 percent); and transportation, communication, and storage (22.8 percent).
Banking and Finance: The central bank, the Nepal Rastra Bank (NRB), has authority over the banking system, development capital mobilization, and monetary policy. However, its capacity to perform these functions was not independent of the state’s commercial interests until the bank gained autonomy from the Ministry of Finance in 2002. From 1960 to 2004, the NRB’s total assets grew from US$11.2 million to US$4.2 billion. In July 2004, nonperforming assets were 28.8 percent of total assets. In 2005 Nepal had 17 commercial banks with 382 branches, 18 insurance companies, 20 financial cooperatives, 59 finance companies, and 25 development banks, with 11 offering microcredit services; 47 nongovernmental organizations were licensed to be intermediaries for microcredit services. However, civil conflict has reduced banking and financial providers in some rural areas. As of July 2005, 128 companies were listed on the Nepal Stock Exchange.
The government’s strong influence over many major financial institutions is often cited as a major reason for the sector’s poor performance, but the World Bank contends that recent reforms have yielded improvements. In 2001 foreign banks were permitted to have majority ownership in joint ventures, but foreign investment has been low because of security and other concerns. In 2005 the government banned many loan defaulters from employment in government ministries, yet because royal family members and high-level politicians were among the defaulters, questions were raised about this directive’s implementation. Moreover, the government has major shareholdings in the two largest commercial banks, which possess 50 percent of total banking assets and thus provide the state a near monopoly on credit. Like many major financial institutions in Nepal, these banks have operated at a loss for years. In 2003 their nonperforming loans were more than 50 percent of loans, which was an improvement over previous years. Subsequent restructuring has had some positive results, and, for example, the two aforementioned banks earned net profits in 2004.
Tourism: Tourism is an important component of the economy, but although the government has undertaken various measures to increase tourism, the deteriorating security situation has hurt the industry. Since the early 1990s, the government has abolished travel restrictions in some remote areas, constructed numerous tourist centers, and allowed access to an additional 103 mountains (a total of 263 mountains can be accessed). Tourist expenditures grew from US$43.2 million in 1980 to US$162.4 million in 2001, declined sharply to US$102.3 million in 2002 but recovered to US$166.8 million in 2004. Similarly, the number of tourist arrivals increased from 163,000 in 1980 to 492,000 in 1999 but declined to 288,356 in 2004. From January to June 2005, tourist arrivals were 25 percent lower than for the same period in 2004.
Labor: In 2001, 58.2 percent of the population age 10 and older was economically active. Officially, 2 percent of the population was unemployed, and 4 percent of the employed were involuntarily underemployed. According to the government’s statistics, most persons aged 15 years and older in 1999 were employed in the agricultural sector (65.7 percent), followed by commerce (9.9 percent), manufacturing (8.8 percent), personal and community services (6.7 percent), construction (2.9 percent), and tourism (2 percent). In addition, government figures suggest the informal sector accounts for 73 percent of employment in “main jobs” outside the agricultural sector.
Labor regulations and conditions have shown mixed signs since the early 1990s. Since the establishment of democracy in 1991, the government has passed several labor laws. Limitations on labor unions have been reduced, and union publications suggest slight improvements in labor practices and worker treatment. However, problems such as child and bonded labor persist. In 1999 nearly 21 percent of children five to nine years old were in the labor force, as were nearly 61 percent of children 10 to 14 years old. This situation may change as a result of a 1999 ordinance banning employment of persons less than 14 years of age, and since 2000 the government has outlawed human trafficking, forbidden a prominent form of bonded labor (kamaiya), and increased the number of countries in which Nepalese could legally seek employment (from 25 to 108). However, enforcement and implementation of labor laws are weak. For example, many labor restrictions do not apply to businesses that are unregistered or that have 10 or fewer employees, and many Nepalese work in the unregulated informal sector.
Foreign Economic Relations: The country’s landlocked position and mountainous terrain limit trade to cross-border traffic, and most goods come either from or through India. Trade relations with India are occasionally contentious, and Nepalese policymakers have argued that Nepal’s ability to independently create and implement economic policies is restricted by the long and open border with India and dependence on Indian export markets. Since the late 1980s, trade disputes with India have exacerbated a perpetual trade deficit and reduced Nepalese exports to India. Nepal gained member status with the World Trade Organization on April 23, 2004.
Imports: Nepal’s imports of goods and services (in current U.S. dollars) grew steadily from US$102.4 million in 1965 to US$1.8 billion in 2004, and increases in oil costs have been a major contributor to growth in imports. From 1965 to 2004, imports of goods and services increased as a percentage of gross domestic product from 13.9 percent to 31.7 percent, averaging 20.7 percent for the 1965–2004 period. Major imports include petroleum products, textiles, vehicles, fertilizer, crude palm oil, and machinery. More than 50 percent of imports come from India, and other important sources of imports are Singapore, China, Malaysia, and Indonesia.
Exports: Exports of goods and services (in current U.S. dollars) grew from US$57.1 million in 1965 to US$712 million in 2004 and increased as a percentage of gross domestic product from 7.8 percent to 16.8 percent, averaging 13.2 percent for the period. Major exports include garments, carpets, grain, vegetable oil (ghee), pashmina wool, jute goods, and leather goods. Approximately 50 percent of exports go to India, and other important export markets are the United States and Germany.
Trade Balance: According to the World Bank and Nepal’s central bank, Nepal has had a trade deficit every year since 1965. From 1965 to 2004, the trade deficit grew from US$45.3 million—about 6 percent of gross domestic product (GDP)—to about US$1.1 billion—nearly 18 percent of GDP.
Balance of Payments: According to World Bank and Nepal government figures, Nepal had a current account deficit every year from 1977 to 2003. Current account deficits averaged US$153.5 million in the 1980s and US$327 million in the 1990s. However, in fiscal year (FY) 2004, the current account had a surplus of US$197.3 million and also is expected to post a surplus in FY2005, although lower than in FY2004. The improvement is largely attributed to lower trade deficits and increased remittances from Nepalese working in foreign countries.
External Debt: Government debt has grown substantially since at least the 1970s. According to the World Bank, central government debt was 5.9 percent of gross domestic product in 1975, 66.2 percent in 1995, and 51.8 percent in 2004. In dollar amounts, external debt was US$33.7 million in 1975, US$2.4 billion in 1995, and US$3.5 billion in 2004. According to Nepal’s Ministry of Finance, outstanding foreign loans totaled US$3.2 billion in 2004.
Foreign Investment: Foreign direct investment (FDI) commenced in the 1980s and has fluctuated tremendously. FDI increased from US$7 million in 1996 to US$28.4 million in 1997, declined to US$3.4 million by 2000, and then increased to US$35 million in 2004. In 2004 the greatest proportion of FDI came from India, with 37 percent of total fixed capital investment, followed by the United States, with 16 percent of total investment. The government is eager to increase FDI, particularly in the energy and transportation sectors, but corruption, a large and slow bureaucracy, bank lending policies, the tax structure, and civil conflict have undercut investment appeal and made foreign companies cautious about investing in Nepal. Furthermore, journalists, academics, and others have criticized the concentration of investment in urban areas as exacerbating economic and infrastructural disparities between urban and rural areas.
Foreign Aid: Nepal relies heavily on foreign aid, and donors coordinate development aid policy through the Nepal Development Forum, whose members include donor countries, international financial institutions (such as the World Bank), and intergovernmental organizations (such as the United Nations). Japan is Nepal’s largest bilateral aid donor, and the World Bank and Asian Development Bank are the largest multilateral donors. Donors have been reported as losing confidence in Nepal as a result of political interference and corruption in poverty relief efforts as well as the country’s apparently poor capacity to utilize aid. According to World Bank figures, official development assistance increased from US$8.2 million in 1960 to US$369 million in 2003 and then fell to US$177 million in 2004. According to Nepal’s Ministry of Finance, total foreign aid committed in fiscal year (FY) 2003 was US$555 million, with 63.3 percent in grants and 36.7 percent in loans. In FY2004, total foreign aid committed was US$320 million, of which 37.7 percent was grants and 62.3 percent, loans. In June 2004, active World Bank credits totaled US$302 million, with the greatest portions allocated to the financial sector (US$91.5 million) and to energy and mining (US$75.6 million).
Currency and Exchange Rate: The official currency is the Nepalese rupee (NPR). In early November 2005, the exchange rate was approximately NPR73=US$1. For domestic usage, the Nepalese rupee has a fixed exchange rate with the Indian rupee. The two currencies are freely convertible in Nepal but have different international exchange rates.
Fiscal Year: Nepal’s fiscal year runs from July 16 through July 15.