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With increasing global awareness of eco-friendly products, demand for sustainable goods is on the rise, leading to a significant growth in Nepal’s exports of such items. According to the Trade and Export Promotion Center (TEPC), products like Amriso (broom grass), jute, and other plant-based commodities are gaining popularity in international markets.

Nepal’s Amriso exports, once valued in millions, have now reached the billion-rupee mark. TEPC data reveals that in the fiscal year 2019/20, Nepal exported Amriso worth Rs 557.4m, which increased to Rs 658.8m in 2020/21 and Rs 699.8m in 2021/22. The export value saw a significant jump in 2022/23, reaching Rs 1.88bn. In the latest fiscal year 2023/24, Amriso exports further grew by 31.37 percent, reaching Rs 1.32bn.

Despite the growth in demand for some eco-friendly products, certain trade barriers have hindered their full market potential. Jute, once a major export commodity for Nepal, has experienced fluctuations. While Nepal exported jute fiber worth Rs 18.77m in 2022/23, the figure rose to Rs 151m in 2023/24. Overall, the export of jute products increased from Rs 3.18bn in 2019/20 to Rs 6.13bn in 2021/22. However, in the last two fiscal years, exports have declined, with jute product exports standing at Rs 1.45bn in 2022/23 and Rs 842m in 2023/24.

While Nepal has the potential for jute production, high non-tariff barriers in India have posed challenges. Nepal imports most of its raw materials from India and Bangladesh for processing and exporting eco-friendly products. Previously, the Morang Jute Mill played a crucial role in Nepal’s jute industry, but its closure affected production. Currently, Raghupati Jute Mill remains active in jute exports.

Environmental experts highlight the need to replace plastic with nature-based alternatives. Climate expert Dharma Upreti emphasizes, “Plastic must be phased out in favor of natural products. For instance, alongside Amriso and jute, Nepal has started producing eco-friendly plates from areca palm leaves.” He further noted that promoting nature-based products could not only reduce Nepal’s dependency on plastic imports but also boost sustainable economic growth.

Similarly, entrepreneur Darshana Shrestha, who specializes in skin care products, stressed the increasing consumer preference for eco-friendly goods. “People are actively looking for sustainable products. I have transitioned from plastic packaging to biodegradable alternatives,” she said.

Experts suggest that Nepal should revisit its policies and regional trade agreements to harness the full potential of its eco-friendly exports. Political economist Soumitra Neupane advocates for stronger government intervention to support the industry. “Countries across South Asia are making rapid advancements in sustainable production. Nepal must strengthen its policies and trade agreements to remain competitive,” he stated.

Eastern Nepal, including Ilam, Panchthar, and Taplejung, is known for Amriso production. Historically, jute was a dominant crop, but the rise of plastic usage led to a decline in jute farming. Dr Ram Krishna Shrestha, Joint-secretary at the Ministry of Agriculture and Livestock Development, explains that water scarcity and labor-intensive processing have contributed to the decline in jute production. “Jute processing requires large water reservoirs, but with decreasing water availability, production has suffered,” he said.

While Nepal has yet to implement a dedicated program to promote eco-friendly production, some policymakers and experts advocate for greater investment in the sector. Agriculture expert Dr Krishna Paudel stresses the environmental and economic benefits of Amriso and jute farming. “Amriso is not just an agricultural product; it also plays a vital role in soil conservation. Its deep roots help prevent erosion, making it an environmentally valuable crop,” he noted.

As global demand for sustainable goods rises, Nepal has an opportunity to strengthen its eco-friendly production and exports. Experts and entrepreneurs alike call for policy support and investment to maximize the country’s potential in the green economy.

Unseasonal rains have severely damaged physical infrastructure at Rasuwa and Tatopani, Nepal’s main customs checkpoints with China, leading to significant trade losses. According to the Nepal Himalayan Cross-Border Chamber of Commerce, floods have washed away roads and bridges, stranding imported goods. Around 300 to 400 containers remain stuck at Tatopani, while about 700 are stranded at Kerung. Even when the checkpoints were operational, 40 to 50 customs clearances remained incomplete daily.

Business owners have suffered heavy losses as perishable goods spoiled and items purchased on credit could not be sold on time. With prolonged delays, imported goods became more expensive, directly impacting consumers and reducing market activity. Consequently, businesses did not meet expected sales during the festive season. Additionally, export disruptions have affected national revenue and the livelihoods of workers dependent on the production of export goods. Despite these issues, the government has yet to devise short- or long-term strategies to ensure road connectivity after checkpoint blockages.

Repeatedly, disasters—including the 2015 earthquake and annual heavy rains—have disrupted these vital trade routes. Their geographic vulnerability to landslides and floods exacerbates the problem, with roads deteriorating every rainy season. However, the lack of durable infrastructure forces traders to rely on makeshift roads, posing significant risks. Reflecting on past conditions, former Industry Secretary Purushottam Ojha stated, “This did not happen before, but climate change has intensified floods and landslides. The government must adopt a strategic approach to maintaining supply chains considering climate change impacts.”

Every year, traders face financial losses due to supply delays caused by checkpoint blockages during the monsoon. Ahead of Dashain, they urged the government to invest in sustainable infrastructure, emphasizing the chronic lack of development at northern checkpoints. Nepal has 41 customs offices, of which only 28 to 29 operate regularly. The most rain-affected ones are the Rasuwa Customs Office in Timure, Rasuwa, and the Tatopani Customs Office in Larcha, Sindhupalchowk. According to Customs Department data, Rasuwa accounts for about four percent of Nepal’s total imports annually, while Tatopani handles around three percent. In the current fiscal year, Nepal’s total imports stood at Rs 988.58bn, with Rasuwa accounting for Rs 47.9bn and exports worth Rs 1.66bn. On average, Rasuwa contributes about one percent of Nepal’s total annual exports to China. Meanwhile, Tatopani recorded imports worth Rs 27.25bn in the first seven months of this fiscal year, though no exports have been reported so far.

Despite Tatopani’s significance as Nepal’s primary trade border with China, it perennially faces road infrastructure challenges. Floods and landslides frequently wash away the main road connecting Tatopani, forcing traders to transport goods at great risk. Business owners lament the government’s failure to conduct long-term repairs on the Barabise-Tatopani road. The route’s precarious location along the Bhotekoshi River, flanked by steep mountains, further heightens the risk of road collapses.

This recurring issue has worsened in recent years, especially during major festivals, leaving imported goods stranded for months. Such disruptions challenge the government’s revenue targets while raising business costs. Supply chain delays ultimately burden consumers with inflated prices.

Climate change has intensified extreme weather patterns, leading to increased incidents of floods and landslides that obstruct trade routes. Over the past three to four years, Nepal has experienced heavy rains from the monsoon through the festival season, worsening the situation at northern customs checkpoints. These unnatural floods have repeatedly collapsed roads and bridges, paralyzing trade.

Despite ongoing appeals, traders argue that the government has not prioritized road maintenance at Tatopani. This year, checkpoint blockages caused massive financial losses due to shipment delays. Kamlesh Kumar Agrawal, president of the Nepal Chambers of Commerce, highlighted the dire state of infrastructure, stating, “The northern border lacks proper infrastructure, and the temporary roads and bridges are inadequate due to natural disasters. This adds to traders’ expenses.”

Following a 26-day blockade during Dashain, traders met with the Commerce Minister to demand sustainable infrastructure development. Agrawal noted, “The government never outright rejects business concerns, but bureaucratic delays ultimately shift the burden onto consumers.”

Bhoj Bahadur Tamang, 33, is known as a young agricultural entrepreneur in Machhapuchhre-4, Lahanchowk, Kaski. He graduated with a first division in management but couldn’t continue his education due to family issues. Later, he underwent hotel training and started working as a waiter, but he felt the urge to do something on his own. With help from friends and family, he ran a restaurant at Pokhara Engineering Campus.

However, he didn’t find happiness there either. He then went to Kuwait to work as a waiter. After 10 months, he returned to Nepal, realizing that if he could work so hard abroad, he could do better in his own country. At that time, his son-in-law was cultivating vegetables in tunnels in the village, which inspired him to try commercial farming. He initially rented land in Ghalegaun with his sister and started cultivating vegetables in eight tunnels.

“The villagers were angry, saying that if I farmed like this, none of the young people here would go abroad to earn a living,” said Bhoj Bahadur. “The opposition from locals only fueled my determination. So, I added 15 more tunnels.” However, the locals released buffaloes into the tunnels, destroying his crops. Fearing further sabotage, he decided to relocate his farming operations.

He then built 23 tunnels in a nearby settlement. Around this time, he won a lottery for the Israeli government’s “Learn and Earn” program, which proved to be a turning point in his life. The 11-month training taught him about plants, agricultural systems, technology, and entrepreneurship. Upon his return to Nepal, he began farming around his own house in Lahanchowk.

While many people from hilly areas moved to the valley, he rented land from others and engaged in integrated farming on about 104 ropanis (5.4 hectares) of land, of which only seven ropanis are his own.

Tamang produces grass for goat farming on 60 percent of his rural organic agriculture and livestock farm, with the remaining 40 percent dedicated to vegetables, including off-season varieties that fetch good prices. After returning from Israel, he also completed the Agricultural Technician (JTA) course through an 18-month program at CTEVT. Out of 100 students, he was the only one to complete the course.

Despite challenges like water, electricity, and transportation, he has successfully established his agricultural business. He credits the Lahanchok Small Farmers Agricultural Cooperative, under the Small Farmers Development Microfinance Institution, for helping him secure a Rs 3.2m loan. This loan, combined with his own capital, allowed him to expand his business. From June to November, he sells vegetables by hiring workers, typically selling 2,000 to 3,000 kg of vegetables daily. This year, he also sold 50 goats and still has 58 remaining. He employs four people regularly and up to 15-20 during peak seasons. He says his annual profit is Rs 1.8m. OGT students also come to his farm for training.

In recognition of his achievements, the province awarded him the title of Best Farmer in 2023. His wife, Shanti Bhattarai, has been by his side in all his successes. They fell in love while he was taking agricultural training in Israel and later had an inter-caste marriage.

Similarly, 62-year-old Pipla Bhandari faced difficulties in traditional rice farming, particularly with straw rotting. Five years ago, she decided to switch to fish farming. Having started 15 years ago, she has successfully turned it into a commercial venture in Madi Municipality-4, Chitwan. Initially, her sons dug the ponds, but they abandoned the project. Undeterred, Pipla and her 70-year-old husband, Kulprasad Bhandari, took over the project.

Just five days after her mother’s death, they resumed their work and formed a group to secure a loan from the cooperative to dig fish ponds. With a rural enterprise loan of Rs 5m, she expanded her fish farming business. From 31 kathas of land, she now operates on 11 bighas, with 12 ponds. The ponds can accommodate up to 350 large fish and 500 smaller ones in each katha.

Because the ponds have a natural water supply, she faces no water shortage, making her business easier to manage. She currently provides employment to three people on her fish farm, where she raises species such as Labeo rohita, Cirrhinus mrigala, mrigal carp, Bigat, and Grass.

In the same way, 32-year-old Birendra Thapa Magar from Kaski Madi Rural Municipality-5 Madibensi is a passionate farmer. After completing class 12, he began bee farming and expanded his business to include a variety of agricultural activities. He operates a multi-purpose agricultural farm in Bangurpalan, about 12 km from Pokhara.

While many of his friends went abroad, Magar chose to build his future in Nepal. Initially investing Rs 60,000 to raise two pigs, the income was enough to support his family of five. He expanded his business by raising more pigs and investing further in the same land.

He became a member of the Sana Kisan Agricultural Cooperative, following in his father’s footsteps. By mortgaging his land, he took a rural enterprise loan of Rs 1.5m to expand his business. “I spent Rs 1.3m on infrastructure, and despite the lockdown, I continued working because I couldn’t give up,” he says. He now raises 51 pigs and sells the meat in the Pokhara market at Rs 580-600 per kg.

From the income, he built five vegetable tunnels and paid off Rs 1.2m of his loan, leaving only Rs 300,000 to pay off. “The subsidized loan made it easier. Without it, we would have had to pay 16 percent interest from others,” he explains. Magar hopes to further expand his business with additional loans in the future.

As the only son in his family, he values the ability to stay in Nepal and support his parents while earning income from his agricultural enterprise. “My friends now admire my hard work and want to follow my example,” he adds. He encourages other young people to stay in Nepal, as they can earn more than abroad.

Chandra Bahadur Shahi, after many years of working in the Gulf countries, decided to invest in agriculture upon returning to Nepal. He used the money he earned abroad to buy real estate, but it wasn’t enough to start his business. However, with his wife Anita being a cooperative member, he secured a loan from the cooperative and also received a concessional loan through the Asian Development Bank’s Rural Agricultural Enterprise Project.

Chandra Bahadur now owns three cows and seven buffaloes, selling 50 liters of milk daily. He earns over Rs 170,000 a month from milk sales, employing one person. Anita says, “From agriculture, we have food for our family, and we don’t have to look elsewhere for our children’s education. We are content.” Chandra Bahadur adds, “It’s better to be my own boss here than work for someone abroad.”

The rural enterprise financial project aims to transform subsistence farming into commercial agriculture, reduce poverty, empower women, and teach farmers to develop business plans. More than 2,000 people across the country have benefited from enterprise loans at subsidized interest rates.

Launched in 2019, the project, supported by ADB, aims to disburse Rs 6.126bn over five years. By 2024, Rs 4.32bn had been distributed, although the goal was delayed due to the pandemic. The deadline for completing the project has been extended to 2026.

Navraj Simkhada, Deputy Chief Executive Officer of Sana Kisan Bikas Laghubitta Bittiya Sanstha Ltd., notes that 2,008 personal and institutional loans have been disbursed across 550 municipalities. A total of Rs 3.86bn in personal enterprise loans has been provided to 1,970 individuals, and Rs 46.6m in institutional loans to 38 entities.

Due to incessant rainfall, the supply of fresh vegetables in Kathmandu has drastically reduced. According to data from the Kalimati Fruit and Vegetable Market Development Committee, the daily import of 600 to 700 tons of vegetables has now been limited to 150 tons. As the supply decreases, there are signs that prices will rise.

On Sept 27, 571,912 kilograms of vegetables were imported to Kalimati, the main market for vegetables brought in from outside. However, on Sept 28, only 156,992 kilograms of fresh vegetables arrived, marking a 72.56 percent reduction. Binay Shrestha, the Information Officer of the Kalimati Fruit and Vegetable Market Development Committee, stated that while the usual daily intake is around 700 tons, it has now dropped to just 100 to 150 tons.

He explained, “The demand from consumers remains the same, but when the supply weakens, prices are naturally affected. The prices of fresh vegetables have increased, though the prices of potatoes and onions have not risen as much.” Shrestha added that if the shortage persists, prices will continue to be impacted.

Which vegetable supply has decreased?

In the Kalimati market, the supply of small tomatoes, red potatoes, dried onions, cabbage, brinjal, beans, bitter gourd, sponge gourd, okra, spinach, mushrooms, cucumber, ginger, chilies, and green coriander has significantly decreased.

Compared to the previous day, these vegetables have seen reductions of up to 96.77 percent. Capsicum is in particularly short supply. On Sept 27, 1,550 kilograms of mutton chilies were brought to Kalimati, but only 50 kilograms arrived on the 28th, with the average price at Rs 125 per kilogram.

With the reduced supply in Kalimati, a wider shortage has begun. In addition to fresh vegetables, the entry of red potatoes and dried onions has also fallen, with decreases of 67.21 percent and 63.17 percent, respectively. The wholesale price of red potatoes now averages Rs 78 per kilogram, while dried onions are priced around Rs 119. The supply of small tomatoes has dropped by 4.66 percent, with only 14,625 kilograms being imported, compared to 15,340 kilograms the previous day. Its price has risen to Rs 100 per kilogram.

Other fresh vegetables have seen similar declines: cabbage by 93 percent, brinjal by 86.40 percent, peas by 75.22 percent, chickpeas by 54.33 percent, sponge gourd by 95.14 percent, okra by 91.16 percent, spinach by 35.66 percent, mushrooms by 87.83 percent, cucumber by 90.17 percent, ginger by 40 percent, and green coriander by 94.33 percent.

Despite these reductions, the supply of snake gourd, green pumpkin, chayote, tofu, and green chilies has increased at a good pace. With these vegetables in peak season, their prices remain relatively low. Green pumpkin, for instance, is being sold at wholesale prices of Rs 50 to Rs 60 per kilogram.

Minister’s directive to collect data on agricultural damage

Agriculture and Livestock Development Minister Ramnath Adhikari has directed ministry officials to formulate a new strategy after assessing the damage caused by recent floods in the agricultural sector.

In an emergency meeting held at the Ministry of Agriculture and Livestock Development on Sunday, the minister urged the swift collection of data on the damage inflicted by Saturday’s floods.

The minister emphasized, “It has been reported that the floods have severely impacted agricultural production, and this needs to be addressed.” The ministry has decided to promptly gather accurate data on the damage and develop a corresponding strategy.

The government decided to establish Special Economic Zones (SEZs) in the early 2000s with the objectives of increasing production, promoting exports, creating employment, attracting domestic and foreign investment, and achieving economic prosperity.

However, even after 20 years, neither have SEZs seen sufficient industries, nor has employment been generated as expected. So much so, the work of establishing SEZs in Biratnagar, Dhangadhi, Panchkhal and Gorkha has not gained momentum. Although some industries have opened in Simara and Bhairahawa SEZs, the results are not as expected.

Industrialists and businesspeople complain that the government built SEZs but did not create a conducive environment for establishing industries and factories. High rental fees, lack of favorable supply-related policies, bank guarantee requirements, and cumbersome administrative mechanisms make it difficult to set up industries in SEZs, they added.

The government is preparing to organize the Nepal Investment Summit on 28, 29 April 2024, with the objective of attracting domestic and foreign investments.

Although 49 industries have been given permission in the Bhairahawa SEZ, only nine are currently in operation. These industries employ around 500 people.

The government has invested Rs 13.68bn in Bhairahawa and Simara SEZs. If these two SEZs operate to their full capacity, they alone can generate 34,374 jobs. But due to a lack of private sector investments in SEZs, production and employment opportunities have been lost.

Tulsi Ram Marasini, acting executive director of the Special Economic Zone Authority (SEZA), said although the government has announced plans to establish SEZs in all seven provinces, work has not progressed due to difficulty in raising investment.

Bhairahawa SEZ had generated interest from the private sector initially. As many as 25 companies have received permission to set up their plants in the Bhairahawa SEZ. However, only seven are currently operational. They include Shakti Minerals, V-star Global, Tirupati Metal, Brilliant Lighting Industries, Panchakanya SS, S Plastic Production and Jaya Buddha Metal Craft. Each of these industries employs around 100 people.

According to SEZA officials, some industries have stopped production citing problems in power supply among other issues. Fifteen companies had applied at SEZA to set up industries in Bhairahawa SEZ. However, they have not opened industries even though they received permission four months ago. Now, the SEZA is preparing to terminate their contracts.

Sagar Silwal, the senior assistant spokesperson for SEZA, said most of the companies have not been able to operate industries due to a provision that requires industrial enterprises in SEZs to export at least 60 percent of their total productions. “Companies have complained to us that they are not being able to operate industries due to the mandatory export requirement and high rental fee,” he said, adding: “The government is preparing to show some flexibility.”

Likewise, only two industries out of 11, which have received permission, are currently in operation in the Simara SEZ. Nine more industries are at different stages of receiving approval.

Pashupati Ceramics and Lalita Kumari Srivastav Company are the two companies currently in operation in the Simara SEZ. These companies employ some 250 people.

Although the Panchkhal SEZ has been under construction in Kavre for the past five years, work progress has not been satisfactory. Since the SEZ lies 70 km south of the Nepal-China border in Kodari, it is expected to attract companies targeting the Chinese market.

The government has acquired 1,000 ropani of land for the Panchkhal SEZ. Officials say construction work has been affected due to a lack of approval for forest clearance.

Works on the other four SEZs are in the preliminary phase. Engineering studies have been completed at the SEZ planned in Burju Rural Municipality of Sunsari district, while feasibility studies have been completed at the SEZ in Palungtar of Gorkha. Likewise, detailed engineering studies have been completed for the SEZs planned in Kanak Sundari Rural Municipality of Jumla and Dhangadhi of Kailali.

Meanwhile, the government is reducing the mandatory export requirement for industries in SEZ to 30 percent of the existing 60 percent. Although the provision was introduced through the budget for the fiscal year 2023/24, it has not come into implementation yet. “We are amending legal provisions to reduce the mandatory export requirement to 30 percent. The amendment bill is likely to be approved before the Investment Summit,” Silwal said.

SEZA charges a rental fee of Rs 20 per square meter on industries in SEZ. The authority has acknowledged that this is the highest rental fee in the entire South Asia.

The informal economy of Nepal is growing larger than the formal one. The average size of the informal economy was 42.66 percent of the gross domestic production in the past 11 years, according to a study conducted by the Central Department of Management under Tribhuvan University.

According to National Income Accounting, the average size of the informal economy was 42.66 percent between 2010/21 and 2020/21. In the fiscal year 2020/21, it was 38.66 percent. This means Rs 1,441.78bn of the total GDP is from the informal economy. The GDP size in 2020/21 was Rs 3,733.27bn.

Stating that an informal economy size of 40-42 percent of GDP is very high, it has recommended to the government a gradual reduction of the informal economy.

According to the International Monetary Fund, an informal economy ranging from 29.8 percent to 37.5 percent is considered appropriate. An informal economy beyond this size poses risks for the country. Given the changes in economic dynamics in Nepal post-2015, the study has called for the need for a detailed study to measure the size of the informal economy.

Shivaraj Adhikari, chief of the Central Department of Economics, attributed factors such as frequent policy changes and high bank interest rates to the expansion of the informal economy. “The Covid-19 pandemic has also contributed to the recent growth in the informal economy,” he added.

He underscored the need for a detailed study to obtain accurate data about the informal economy, also known as the black economy, underground economy, shadow economy, or parallel economy. “Sectors still outside the tax net are considered part of the informal economy,” he added.

The study utilized the Currency Demand Approach and National Income Accounting methods to analyze the informal economy. A comprehensive estimate of GDP covers shares of both formal and informal sectors. Under the National Income Accounting method, economic activities are measured indirectly, and some methods are not disclosed publicly. The study suggests deploying an econometric model to obtain accurate data.

Although National Income Accounting suggests that the informal economy is shrinking gradually, it expanded in the past two fiscal years. The informal economy is increasing in aspects not covered by the national accounts.

More prevalent in real estate, agriculture sectors

The agriculture sector contributes about 25 percent to GDP, but it remains outside the formal economy. The study reports that 96.48 percent of the agricultural sector (including forestry and fisheries) operates in the informal economy as most production activities are conducted by households.

Likewise, about 99.97 percent of real estate transactions in Nepal fall under the informal economy. According to the study, owned or leased properties, fees and agreements, and services received by households in their residences are not considered part of the formal economy. The study also highlights a significant amount of revenue evasion through undervaluation of properties and during land transactions. It states that land transactions have become a medium to utilize black money.

Similarly, 50.42 percent of the housing and food services sector is in the informal economy. This is primarily due to the fact that only a few family-run lodges and tea shops are registered with government institutions. Restaurants, cafeterias, and tea and coffee shops are major activities in the food service sector. Most lodges and tea shops are out of the formal economy as they are run by households and not registered with any government organization.

Prof Dr Kusum Shakya, the dean of Tribhuvan University, said that the size of the informal economy grew as almost all sectors were affected by the Covid-19 pandemic. “Many women became a part of the labor force during the covid. But this study didn’t include the contribution of women in the labor force,” she added.

Former Chief Statistics Officer of the National Statistics Office, Ishwari Prasad Bhandari, argued that the size of the informal economy is shrinking in recent years as many informal businesses are being formally registered to take advantage of government facilities.

Likewise, Associate Professor Resham Thapa said that the average size of the informal economy globally is 33 percent. “It has expanded in Nepal in recent years due to the trend of undervaluation and weaknesses in anti-money laundering measures,” Thapa added.

Economic expert Dilli Raj Khanal said that expansion of the informal economy could have multidimensional impacts. “We need to simplify the taxation system so that more businesses are encouraged to come under the tax net,” he added.

Tax collection was encouraging in the past two decades after the government adopted the Tax Reforms Policy in the 1990s.  In recent years, however, revenue has consistently fallen short of the set targets. Deviations in tax administration, economic sector challenges, and changes in the leadership of revenue administration are some of the factors that have contributed to the decline in tax collection.

According to the Financial Comptroller General's Office, the government has only achieved 22 percent progress in revenue mobilization in the first five and a half months of the current fiscal year. The government has set a target to raise Rs 1,472bn in the fiscal year 2023/24. The slow pace of revenue collection indicates that the government is likely to miss its targets for the current fiscal year. In the fiscal year 2022/23, the government achieved only 68.21 percent progress in revenue collection, raising only Rs 957bn out of the targeted Rs 1,403bn. This is the lowest collection in the past five years in terms of revenue targets.

In previous years, the government consistently raised revenue equivalent to 20 percent of its GDP. This rate, however, plummeted drastically in the previous fiscal year.

The Covid-19 pandemic, coupled with import restrictions and the Ukraine war, significantly slowed revenue growth. As a result, revenue collection is now well below the level of recurrent expenditure. This has had adverse effects on revenue and resulted in excessive dependence on imports. Economist Dr. Dilliraj Khanal commented that there has been a lack of concrete efforts to control recurrent expenses or expand the revenue base.

 "Apart from some initiatives to bring about changes in tax policy at the global level, no such measures have been taken in Nepal so far," he said. Dr. Khanal added that the tax revisions in the current budget have given negative protection to vital industries. “As a result, it is estimated that there has been some impact on the revenue.” 

In 2021, the World Bank said that Nepal had the highest tax-to-GDP ratio in South Asia. During the year, Nepal’s tax-to-GDP ratio was 17.5 percent, compared to 13 percent of Bhutan, 12 percent of  India, 9.1 percent each of the Maldives and Pakistan, and 7.6 percent of Bangladesh—the lowest in South Asia.

The tax-to-GDP ratio reflects a country's ability to provide public services, infrastructure, and meet mandatory obligations. A high tax-to-GDP ratio indicates a heavier burden on taxpayers and suggests adequate public infrastructure in the country. Tax-to-GDP ratio is lower in countries relying on their own income.

In its recent Nepal Development Update, the World Bank has proposed various measures to increase revenue in Nepal. These measures include expanding the scope of taxation, plugging loopholes, and reducing special exemptions and concessional rates of existing taxes. The World Bank also recommended prioritizing businesses in the formal sector, stating that revenue is adversely affected by large informal economies.

During a panel discussion organized during the launch of the update, Dr. Ramesh Chandra Paudel, a member of the National Planning Commission, highlighted that Nepal has failed to align its school education with productivity. He emphasized the need to remodel the education system, giving emphasis to technical and vocational education, stating, "We are preparing manpower only for Europe and the Gulf countries."

The impact of structural changes in the global tax system has also affected Nepal's revenue system, as outlined in a report submitted by the Revenue Advisory Committee last year. According to the report, there is a gradual shift from tax revenue based on imports to internal revenue. The share of customs duty in total revenue was 31 percent in the fiscal year 2002/03, but it declined to 23 percent in the fiscal year 2020/21. In the fiscal year 2020/21, income tax, customs duty, and excise duty have emerged as the primary sources of revenue after VAT, the report states.

While Value Added Tax (VAT) has become the largest source of revenue, its share in total revenue has not experienced a significant increase. Following the implementation of federalism in Nepal, the collection of vehicle tax, real estate registration tax, and house rent tax has been decentralized to subnational governments. This has also brought some changes in the overall tax structure.

The committee also recommended the introduction of a revenue policy so that Nepal, an import-oriented and revenue-dependent economy, can promote domestic industry, ensure productive investment, and encourage exports.

Economist Dr. Khanal  said major reforms are needed in the tax system to concurrently mobilize resources at all three levels and address the expanding resource gap. He argued that such reforms would broaden the scope of taxation, curtail tax leakage and evasion, and augment the proportion of direct taxes, introducing progressivity to the tax system.

He further proposed the implementation of a nationwide equity funding formula explicitly designed to combat discrimination and fortify the equity dimension in development, presenting a viable option for enhancing resource allocation decisions. “The huge socio-economic development gap in the provinces also justifies the need for such a formula,” he added.

In 2015, the High-Level Tax System Review Commission underlined the need to modernize Nepal's taxation system, making it practical and aligned with international standards. Based on principles and international good practice, it suggested that the federal government collect customs duties, value-added tax, excise duty, corporate income tax, personal income tax, natural resource tax, social security tax, forest production fee, and carbon tax. It proposed granting provincial and local governments the authority to collect taxes under 29 different headings. The recommendations of the commission have yet to come into implementation.

Bankers have claimed that the banking sector is healthy, despite a drop in profits during the first quarter of fiscal year 2023/24.

While financial experts have termed the performance of commercial banks disappointing based on their first-quarter financial statements, CEOs of commercial banks refuse to acknowledge the results as such. Bankers argue that the reduction in profit in the first quarter is primarily due to increased loan loss provisioning, which they view as a positive step for the future. The increase in loan loss provisions, coupled with a rise in non-performing loans, has impacted the profitability of commercial banks, they say.

Ashoke SJB Rana, Chief Executive Officer of Himalayan Bank Ltd, believes that the level of loan loss provisioning and the capital funds maintained by banks indicate that the banking sector is healthy. “The non-performing loans are unlikely to increase further; instead, they will be effectively managed,” Rana said, adding that both the banks and the central bank have tightened lending due to pressure on the Nepali economy.

Sunil KC, President of the Nepal Bankers Association, the umbrella organization of commercial banks in the country, attributed the challenges faced by the banking system to global economic recession, conflicts, a slowdown in the private sector, and the resulting increase in non-performing loans. KC expressed confidence that non-performing loans have peaked and will now be gradually managed, mentioning that banks have set aside a substantial amount, Rs 16bn, for loan loss provisioning. “While significant funds have been allocated for provisioning, credit disbursement has not increased as per our expectation,” KC added.

According to KC, as of Nov 3, total deposits in commercial banks have increased by Rs 120bn, while loan disbursements have risen by Rs 84bn since the beginning of the fiscal year in mid-July. “We had anticipated higher credit disbursements, but it did not materialize,” he added.

The financial statements released by banks indicate that non-performing loans in commercial banks now stand at 3.06 percent, up from 2.9 percent in mid-June. KC attributed the high non-performing loan levels to the Covid-19 pandemic. “We kept on restructuring loans, now we need to be careful to manage the situation,” KC said. “Although some loans have defaulted due to portfolio diversification, the chances of them turning into bad loans are minimal.”

Commercial banks have reported a drop in profit for the first time compared to previous fiscal year.. During the review period, banks did not see growth in their interest income. Their income from other fees also grew by only Rs 1bn. Meanwhile, commercial banks have pledged to contribute more than Rs 50m to the government’s relief fund for Jajarkot earthquake survivors.