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Anga Raj Timilsina is currently the UNDP global program advisor on governance, financial integrity and sustainable development, who leads a global program and network on integrity, anti-corruption and sustainable development. He is responsible for coordinating UNDP’s policy and program support for governance reforms and the achievement of sustainable development in more than 60 countries, including support for strengthening the capacity of government and financial institutions, business sector, CSOs, media, youth and women’s networks. Timilsina has edited, authored and co-authored more than two dozen publications on governance, sustainable development, financial integrity, risk-based compliance and auditing, transparency, accountability, anti-corruption and anti-the role of new technologies. He also sits on the boards of over 10 international organizations and institutions.

Timilsina has a PhD in Policy Analysis from the Pardee RAND Graduate School and a master’s degree in international development from the International University of Japan where he was in a dean’s list for academic excellence in economics and international development. He also has a master’s degree in economics with distinction from Tribhuvan University Nepal. He was also a gold medalist from Trichandra College when he received Bachelor of Arts (BA) degree in the humanities with majors in economics and mathematics. 

First wave of economic reforms

Until the mid-20th century, Nepal remained a closed, isolated country, with a largely agrarian economy, minimal industrial base, and limited trade, mainly with India and Tibet. In the 1980s, early signs of economic liberalization emerged as the IMF and World Bank introduced structural adjustment programs to address trade deficits, stagnating growth, and rising aid dependency. However, weak institutional capacity and limited public support stalled key reforms—including currency devaluation, subsidy cuts, financial sector liberalization, and public enterprise privatization. After the restoration of multiparty democracy in 1990, Nepal embarked into its first wave of market-oriented reforms, including trade liberalization, financial sector deregulation, privatization of state enterprises, and investment liberalization. While early progress was made, political instability and a decade’s long Maoist insurgency stalled reforms, delayed infrastructure projects, increased fiscal pressures, and deepened the economy’s reliance on remittances.

The second wave

Nepal’s 2015 constitution offered an opportunity for economic reforms but also introduced challenges, including an unclear fiscal decentralization framework, strained intergovernmental financial relations, and persistent administrative inefficiencies. In response to the 2015 earthquake, the Covid-19 pandemic, and widening trade and current account deficits, Nepal has launched a second wave of reforms backed by the IMF’s Extended Credit Facility (2022–2025) and coordinated support from development partners to harmonize disbursement procedures to improve operational efficiency and fast-track development outcomes. Reform priorities include strengthening financial sector governance, modernizing tax and public financial management, accelerating infrastructure investment, improving the investment climate, and promoting economic diversification and digital transformation.

Progress made

The first wave of economic reforms, guided by structural adjustment programs, left a mixed legacy across many Sub-Saharan countries, often criticized for neglecting social aspects of development. In Nepal’s case, economic reforms introduced during the last 30 years make a classic case of ‘half-success’. Nepal liberalized trade by reducing tariffs and modestly integrating with regional economies. Privatization and regulatory reforms in the 1990s spurred the growth of banking, insurance, and financial services, increasing public access to credit through banks, microfinance, and cooperatives. Unplanned but impactful, the opening of Nepal’s labor market for foreign employment drove a surge in remittance inflows, contributing 25 percent of GDP, which helped the country weather foreign exchange pressures during crises like Covid-19. Additionally, privatized enterprises such as Ncell, private banks, airlines, and hospitals have emerged as success stories, improving services, competition, and market efficiency. Economic reforms, however, failed to deliver broader industrial expansion and job creation.

Falling short

Bureaucratic inertia, regulatory overlap, policy unpredictability, and weak contract enforcement keep Nepal near the bottom of global ease-of-doing-business rankings. According to Nepal Rastra Bank, Nepal’s FDI realization rate meaning the percentage of pledged or approved FDI actually materialized—remains low at 34 percent, highlighting the challenges Nepal faces in attracting and realizing foreign investments. Crucially, economic governance—including institutional capacity, regulatory oversight, anti-corruption, and judicial efficiency—lags behind market liberalization. The collapse of microfinance institutions and cooperatives exposes weak financial oversight. The privatization of several state-owned enterprises was undermined by non-transparent, politically motivated rent-seeking, ultimately resulting in the failure of those firms. Unlike global norms of leasing land during privatization, Nepal sold public land cheaply, prompting firms to prioritize land sales over production as real estate values rose. Federalism further added complexity, with provincial and local governments often lacking planning capacity. Frequent political turnover—13 governments in last16 years—undermines policy continuity, while reforms are sometimes viewed as externally imposed. Nepal struggles to diversify its economy, boost labor productivity, and create more jobs. Industrial growth is stagnant, and reliance on agriculture and remittances remains high. Infrastructure has improved but suffers from poor quality (e.g., no highway in Nepal offers reliable, year-round service). The above-mentioned challenges are worsened by a vast informal economy—more than 40 percent of GDP, among the highest globally—complicating taxation and planning. High youth unemployment, migration, and brain drain further threaten Nepal’s long-term development.

Escaping from a middle-income trap

Nepal is set to graduate from the United Nations’ Least Developed Country (LDC) category on 24 Nov 2026—a milestone that brings both opportunities and challenges. While graduation could enhance investor confidence and allow Nepal greater policy autonomy, including negotiating new trade agreements, it will also mean the loss of preferential trade benefits, concessional financing, and increased competition for Nepali products in global markets. The bigger risk lies in Nepal potentially falling into a ‘middle-income trap’ if it fails to enhance competitiveness, diversify exports, attract investment, and shift toward higher-value industries and services. As of 2023, out of 108 middle-income economies, only 34 have advanced to high-income status since the 1990s—underscoring how difficult this transition can be. A few major pillars of Nepal’s current economy act as double-edged swords. Remittances, for instance, are vital for foreign exchange and poverty reduction but have entrenched a consumption-driven, import-reliant, and migration-dependent economy. Reliance on import tariffs provides fiscal stability but discourages domestic production and perpetuates import dependence. Nepal’s rapidly increasing public debt—projected to hit 50 percent of GDP in a few years—could support economic growth and development if invested in productive sectors. If mismanaged, however, it will constrain fiscal space, limiting resources for social safety nets, human capital, and crisis response. 

‘What’ and ‘how’ of economic reforms?

The success of economic reforms relies on both sound policy choices and strong institutional capacity. Effective outcomes require aligning the ‘what’ (policy priorities) with the ‘how’ (institutional strength). Governance diagnostics have gained importance in developing economies alongside IMF and World Bank programs. These assessments identify how governance weaknesses and corruption risks hinder economic performance. In 2023, Sri Lanka became Asia’s first country to implement recommendations of an IMF Governance Diagnostic to aid economic stabilization. For Nepal, addressing gaps in public financial management, tax administration, procurement, state-owned enterprises, central bank oversight, and Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) frameworks is critical. Strengthening governance and reducing corruption is essential to enhance Nepal’s institutional integrity and accountability to exit the Financial Action Task Force (FATF) gray list.

Fiscal sector and budgetary reforms

Nepal’s fiscal sector struggles with a low tax-to-GDP ratio of 13–14 percent, compared to 25–35 percent in advanced economies. Inefficient tax administration, widespread exemptions, and a narrow tax base constrain revenue mobilization, contributing to persistent fiscal deficits and rising public debt. In Nepal, debt servicing consumes about 25 percent of the annual government budget, while high spending on subsidies, fragmented safety net programmes, and recurrent costs limit fiscal space. Weak public financial management—including chronic underutilization of capital budgets, delayed contractor payments, and loopholes in procurement—slows infrastructure delivery and timely construction of national projects. Frequent government changes further weaken fiscal discipline, creating a disconnect between five-year plans and annual budgets. Nepal’s sub-national governments rely on the federal treasury for over 90 percent of their revenues, compared to 60–75 percent in OECD federal systems, reflecting weak local revenue capacity and wide horizontal disparities across provinces. Loss-making state-owned enterprises (SOEs) drain public resources and distort fiscal management. The International Budget Partnership’s 2023 Open Budget Survey gave Nepal a fiscal transparency score of 50/100—below the threshold of 61 needed for informed public debate. To improve fiscal governance, Nepal should adopt a medium-term budget framework, linking three to five year rolling budgets to national priorities for better predictability. Revenue forecasts must be evidence-based, with program-based budgeting focused on outcomes and performance targets. Public financial management reforms should include real-time treasury systems, stronger audit functions, and mandatory follow-ups on Auditor General recommendations. Crucially, Nepal needs to institutionalize fiscal discipline by assigning key officials for multi-year mandates tied to performance goals, as practiced in countries like New Zealand, to break the cycle of frequent transfers and short-term policymaking.

Banking and financial sector reforms

Nepal’s monetary policy is constrained by weak fiscal coordination, federalism challenges, and an open border with India. Post-covid government refinancing schemes fueled rising non-performing loans (NPLs), causing banks to hesitate despite ample liquidity. Weak credit appraisal, political interference, and credit favoring consumption and speculation over productive investment have worsened the problem. Widespread financial misconduct in cooperatives, microfinance, and non-bank institutions exposes serious regulatory and supervisory gaps. Fragmented oversight by the NRB, the Department of Cooperatives, and others, plus lax enforcement of prudential norms, have increased vulnerabilities in the financial sector. Nepal urgently needs an integrated supervision across all financial institutions, improved credit information systems, and asset management reforms to tackle NPLs. Strengthening public-private dialogue on financial strategies is also critical. While mobile banking, wallets and fintech have grown, Nepal’s investment in financial digitization remains modest. with cybersecurity infrastructure lagging behind, raising digital risks. NRB must modernize regulations by aligning AML/CFT rules with FATF standards, enforcing strict customer due diligence, enhanced scrutiny of high-risk clients, and real-time screening of politically exposed persons and sanctions lists. Mandatory beneficial ownership transparency is required for banks to collect and verify ultimate ownership data. Supervisory capacity should be bolstered with risk-based, proactive inspections—focusing on vulnerable sectors like real estate and cross-border remittances.

Emerging issues on economic governance 

Emerging economic reforms in many developing countries now go beyond fiscal and monetary policies to include effective climate finance management, comprehensive disaster insurance, and leveraging digital transformation to enhance financial integrity. Strengthening public sector capacity for greater efficiency, transparency, and accountability is also critical. Nepal must urgently invest in ICT and new technologies like AI, blockchain, and big data to avoid falling behind in the Fourth Industrial Revolution.

Ensuring genuine political will

Economic reforms often stall due to a lack of genuine political will. Traditional politics clings to old rules, while true reform requires bold vision and a willingness to innovate. Nepal’s youthful population demands greater transparency, accountability, and effective governance. Amid societal disruption, new leadership will eventually emerge to transform Nepal’s development from slow progress to rapid growth.