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Reforms for digital development seem to be expanding in Nepal–foreign direct investment (FDI) is being allowed into domestic payment companies, the new budget has proposed to lower the FDI threshold for digital companies, while subsidized start-up funding is finally set to resume. Yet the track record of Nepali bureaucracy has always been mixed. Are these initiatives enough? Can they really provide the building blocks for rapid digital transformation of the economy? What is within the capabilities of the government? We need bolder steps, and I suggest three ways in which our imagination for such reforms must change. The payments ecosystem needs depth and more opportunities to open the local financial markets for digital services. We need higher-quality FDI that will bring in strong capabilities, not low-quality FDI, which has a risk of being tainted with money laundering issues. And finally, our start-ups need international market access and international know-how to be able to compete globally. If that market failure is addressed, I believe that the financing space will open. Depth in the payment ecosystem Recent reforms by the Nepal Rastra Bank (NRB) have raised the paid-up capital requirements for payment companies and opened up to 15 percent FDI in such companies. However, these measures appear insufficient to build depth in the financial ecosystem and expand financial inclusion. The first reform is a risk-based approach suitable for traditional financial companies, but inappropriate for technology-oriented companies. Why not create a fintech regulatory sandbox to enable the payments ecosystem to expand the scope of opportunities? Nepal’s digital payment ecosystem is saturated with companies all of which do the same thing. We have 10 Payment Service Operators and 27 Payment Service Providers, with little differentiation among them. This is expected: The country’s consumer base is of low value and there is little space for innovation. Our digital ecosystem has yet to see unique services such as escrow-based debiting or push payments, which can significantly accelerate e-commerce. A prominent player in the ecosystem has introduced payday loans, EMI loans, and buy-now-pay-later loans through a banking partner, and this is a good starting point. However, the NRB needs to open more opportunities to improve the capabilities of our banking ecosystem and deepen financial inclusion. The second reform—the FDI threshold of 15 percent in payment companies—falls into no-man’s land. For foreign strategic investors, a 15 percent stake is too low of an allocation in the capitalization table to impact company governance. While for financial investors, a 15 percent stake does not present much of a financially appealing investment in Nepal’s competitive payments industry. Remittance capture cannot be the only domain for players to compete in. The focus must shift toward improving access to existing financial and insurance services, introducing newer more appropriate products, and improving the services to consumers to cover the breadth of their transactions and over their lifecycle. High quality FDI, not sources for AML risks The new announcement for a lower FDI threshold for technology companies is welcome, and we will wait for whether NRB and other government agencies can execute this. Government bodies haven’t been able to execute past FDI commitments and have failed to attract FDI into the country even after recently lowering the minimum FDI threshold from Rs 50m to Rs 20m. FDI flows sharply declined over the current fiscal year. Even committed capital is weary to enter the country, while new FDI pledges have dropped drastically. Global macroeconomics alone is not responsible for this scenario. Nepal needs high-quality FDI to help bring in strong standards and connectivity to the rest of the world. I believe that near-term goals for the local digital ecosystem should be to attract small to mid-sized technology companies, which are willing to invest $5 million to $10 million in Nepal to set up research labs, build local teams, and set up offshore implementation offices. Ideally, most of this allocation will go toward high-value activities such as research and development, training, and technology transfer, and less toward buying property. Such high-quality FDI also helps set strong precedents for Nepali officials to understand technology companies and investments in the digital domains. The lower FDI limit, and potentially lower limit for technology companies, may help international entrepreneurs experiment in Nepal, but I worry that it will introduce significant money laundering risks. Nepal’s international reputation for managing such risks have seriously deteriorated over the past year, and the public has not had any reassurances from the NRB that they have boosted their global anti-money laundering capabilities. If our government is serious about encouraging global investors and operators to come and invest in Nepal’s digital economy, it also needs to improve the immigration system. Work visas for foreigners are notoriously difficult to get. Bringing international talent to come work in Nepal is one of the best ways of technology transfer, but we need to make it easier for international talent to come and discover Nepal’s technology scene, the companies, and possibilities, before expecting them to make sizable investments and consider Nepal as their base. Market access and global exposure Startups have long been promised loans of up to Rs 2.5m at 3 percent interest, yet the Ministry of Industry, Commerce and Supplies (MoICS) has been unable to execute this program. It needs to be re-imagined. Undoubtedly, Nepali digital companies need concessionary support. Many young companies in the world need this concessionary support to build their products, acquire customers, expand, and thrive. There can be a better way to mobilize concessionary support. We have private equity fund managers in the country, who have pioneered impact investing. Such investors prioritize the impact created by their investments alongside financial returns. Start-up funding can be more effectively channeled through impact fund managers, and Nepal can focus on bringing in international experts in impact investing from Asia, Europe, and the US to scale this ecosystem. Improving this investment ecosystem will not only spur new ventures, but also help digital companies become more competitive. More sophisticated fund managers can help local companies compete globally. They can inform and lobby the government to identify reforms that can move the needle, such as helping technology companies sell their products and services globally. This means allowing companies to set up branches overseas, letting them make payments to consultants and employees internationally, and enabling partnerships with other technology companies in South Asia or across the world. Helping digital companies become more globally competitive will eventually create a virtuous cycle to improve the venture financing ecosystem in the country, as founding team members of successful companies recycle capital domestically. Nepal needs higher-quality reforms to improve the state of our digital ecosystem. Some reforms that are floating around such as negligible FDI thresholds for technology companies, higher capital requirements for payment companies, and government concessional financing programs sound progressive. However, if the government wants to be taken seriously, more substantive efforts are needed. Some of these efforts include building regulatory sandboxes for payment companies, sourcing-in higher-value FDI into the country, and enabling market access for digital companies with the help of local fund managers. The author, a Senior Fellow with the Nepal Economic Forum, leads the Digital Chautari, a platform to facilitate conversations on creating a Digital Nepal

Nepal can leapfrog legacy technology and networks and follow many emerging economies to rapidly improve digital connectivity across the country. In fact, several efforts from both the government and the private sector are underway to expand digital connectivity, provide customers with more value, and encourage more technology-enabled innovation and entrepreneurship. The regulatory and policy environment must reflect these aspirations and goals. Reforms and institutional design need to focus on methods to expand and maximize consumer welfare. How can Nepal improve connectivity to benefit more people at the base of the pyramid? I discuss three priority areas to start with, focusing mainly on the end consumer and a human-centric perspective. Coverage and quality Nepali companies and the government have made considerable progress over the past decade to improve internet connectivity. Telecommunication services grew over the pandemic and the government, through the Rural Telecom Development Fund (RTDF), began investing to expand coverage to households and institutions such as government offices, schools, and hospitals. Households subscribing to fixed broadband increased from 7 percent in 2018 to 33 percent by the end of 2021; almost 90 percent of those were fiber optic connections.  According to the 2021 census data, 73 percent of households have a phone, 38 percent have internet access, and 15 percent have a computer or a laptop. At the same time, differences in telecom coverage and device ownership between urban and rural areas are stark; women and other vulnerable members in households typically have less access to a phone, leave alone the internet. Nepal is yet to meet its goal of 90 percent broadband penetration. Infrastructure sharing is one area that can improve coverage and quality of broadband networks, while maximizing citizen welfare. In the same way, the Nepal Telecommunication Authority (NTA), Nepal’s telecommunications regulatory authority, has introduced and set interconnection charge and protocol among wireless voice operators and enabled voice interoperability, similar regulations are now vital. Rather than engaging in costly tower building, regulations can encourage wireless operators to lease and share tower infrastructure with each other. They can then improve the coverage and quality quickly and cheaply. If fixed broadband players share their infrastructure, they can collectively invest in high-speed fiber optic networks in more areas of the country. A new telecommunications act may open pathways to enabling these new models, while also mobilizing private investment. With the guiding principle of consumer welfare, this can have a massive impact on accelerating high-quality internet coverage. Affordability When it comes to entry-level data plans, Nepali telecommunication and internet services are within the affordability standards of the UN Broadband Commission at 5 percent of average monthly income (GNI per capita). The commission has introduced 2025 targets for entry level plans (at least 1GB) to be less than 2 percent of monthly GNI per capita.  According to the Alliance for Affordable Internet, Nepal is within the affordability threshold for fixed and wireless broadband, but the country can do better.  If operational issues and costs hampering the sector are reduced, savings could be passed directly to end-consumers. However, mobile broadband data costs are relatively higher per unit in comparison to fixed broadband. If Nepal is to achieve wireless data affordability targets, we need to incentivize more competition and investment into the wireless telecom sector. Importantly, the government must accept that telecommunications infrastructure, unlike large projects in energy, require regular investment and upgrade because of the advancements in the underlying technologies that enable the network. Policy reforms related to local ownership requirements and licensing fees must reflect goals to expand competition and encourage foreign direct investment (FDI) to help improve the country’s wireless network, service quality, and next-generation capabilities. These upgrades will help Nepal to hit the UN Broadband Commission’s 2025 goals. In fixed broadband, on the other hand, data costs have been driven lower because Internet Service Providers (ISPs) have been able to piggyback off affordable equipment and the Nepal Electricity Authority’s (NEA) established electricity distribution infrastructure. However, investments have been overlapping. Industry players point out that existing fixed-broadband service coverage in Nepal could have been achieved with half or even quarter of the current accumulated aggregate level of capital expenditure. Again, savings made through sharing of infrastructure could be passed to consumers. Two other features of Nepal’s internet sectors are the relatively high international internet costs because of insufficient collective bargaining from our service providers, as well as excessively high government taxes on internet service providers. Both are contributing to creating a sector that may be characterized with low financial viability and little incentive for innovation. Value-added services (VAS) While the overarching investment focus of the government is currently on hardware infrastructure and connectivity, value-added services can further advance the goal of internet coverage. I am referring less to the legal definition of VAS under the telecommunications act, a category under which most ISPs fall into, but in general to services that can complement internet and voice telecom services. VAS are enhanced or improved services provided over telecommunication networks other than core network services. These are services from content providers, network aggregators, application providers, etc. In Nepal (rural areas and urban peripheries in particular), there is a need for services that contribute toward socio-economic development. With greater internet access, more people have signed on to social media and now have better access to information. By producing and monetizing online digital content, many Nepalis have also started doing well in the Creator Economy. However, connectivity goals must also focus on enhancing financial literacy and cybersecurity, better health and educational outcomes, and more opportunities for entrepreneurship. Rural broadband programs currently under execution in Nepal provide free physical broadband connections and free internet access; they are great starter programs to digitally connect more of the population. But Nepal needs internet access to improve tangible socio-economic indicators and contribute to economic prosperity. It is remarkable that the average 35-year-old woman in Nepal's mid-hills can go online and use Facebook, TikTok, and YouTube today. However, she and her family should also be able to use digital financial services, tele-health services, online education for the children, and improve marketability of whatever the family produces. Conclusion In the past few years, significant effort in Nepal has gone toward improving access to internet connectivity. This is a welcome effort, and one that needs to continue. Policymakers and regulators exploring reforms to the telecom sector and other sectors focused on service-delivery must place consumer welfare as the guiding principle for these reforms. Such focus can make regulations more dynamic and forward-looking, especially for industries prone to disruption. The author, a Senior Fellow with the Nepal Economic Forum, leads Digital Chautari, a platform to facilitate conversations on creating a Digital Nepal     

Estimates for Nepal’s software and IT services industry’s annual revenues range from $200 million to $1 billion. The sector is ideal for exports–IT services can be easily sold across borders, capital expenditure needs are low, and demand is globally ubiquitous and growing. A vital element for growth and higher export revenues in the sector is a robust talent pool and regular upskilling of that pool. Technology changes rapidly, therefore, skilling and reskilling is a constant. In fact, conversations with industry players indicate that the skills shortage in Nepal’s local ecosystem is such that even young employees can command a 100-200 percent hike when they switch jobs. This is good for the employee in the short-term but is not healthy for the industry. While Nepali companies can tap into regional and global talent pools to solve immediate human capital constraints–hiring from South Asia, the African continent, Latin America, or Eastern Europe–more should be done to improve the local talent pool for sustainable development. The government, in partnership with the private sector and development partners, can develop and implement a digital skills action plan. Important pillars of this action plan are: rolling out accredited digital training programs, building closer industry partnerships, and improving access to training and opportunities. This will have a profound impact on creating and providing jobs for more Nepalis. Vocational programs Nepal has a population with an average age under 25 years and they can rapidly upskill to integrate into the global digital value chain. About 50 lakhs students took the SEE (10th grade) examinations in 2022. Even if only 20 percent develop industry-relevant digital skills, they can boost our software and IT industry, currently estimated to employ less than 100,000 people. A vocational component at the secondary level—a technical SEE or a technical +2 level course—can expand the talent pipeline and sensitize students to a global industry at an earlier age. The software and IT industry does need a broad range of basic and advanced digital skills. Service exporters in countries like Bangladesh, the Philippines and Indonesia utilize a much broader array of digital skill sets in job roles such as sales associates, account managers, graphic designers, marketing specialists, customer service representatives, financial advisors, and social media managers.  Vocational programs ranging from a couple of weeks to a few months could fill a vital gap to supply the needed workforce in Nepal. Nepal needs more software engineers and project managers, but not everyone needs and wants a 4-year college degree to work in the software and IT services industry. Intensive 6-month vocational courses that teach students specific tools, such as JavaScript or SQL, can provide a higher return on investment for the students as well as employers. Industry partnerships Close collaboration between the public and private sectors, and academia is vital for a digital skills action plan to work. This is because of the fast-changing nature of the industry as it relates to skills and demand. Nepal’s IT companies are already building such partnerships: Fusemachines has partnered with Kathmandu University to promote Artificial Intelligence in curricula; Deerhold Ltd sources its employees extensively from its relationship with Deerwalk Institute of Technology; and Leapfrog Technology has an internal learning academy and strong emphasis on internships and apprenticeships. Many other local companies are also building such partnerships. Such lateral partnerships are needed with government bodies as well. Private companies have recently come together to establish a software association (Nepal Association of Software & IT Services Companies—NASIT) to advocate appropriate policy. NASIT identifies talent development as a key pillar of work and could serve as a key stakeholder in this conversation, along with other organizations. Government-academia-civil society roundtables can inform and support implementation of a digital skills action plan. Such roundtables would provide policymakers and academia with important insights into the nature and future of the digital industry. Local industry players can inform academic and public sector institutions on what demand exists—in terms of quality and quality—in verticals for IT services where Nepal can compete globally. More industry meeting platforms are needed. Industry interaction and collaboration events such as hackathons, meetups, or other events that support and promote learning and upskilling create much-needed public benefit and social good. Private companies, wanting to do more of such industry events, need more support to maintain platforms to regularize meetups and learning events. Public support for platforms will be vital in encouraging industry linkages, especially with government schools and universities in cities outside of Kathmandu. Better Access  A digital skills action plan should prioritize equity to ensure that the digital opportunity in Nepal is inclusive. Interventions of a digital skills action plan, therefore, must ensure that people have access to content, facilities, and services for career development. There is a lot of content and learning material freely available on the internet, and there is no need to reinvent the wheel. To enable more people across Nepal to learn and pick up digital skills, it is important to ensure that such materials are accessible to as many people as possible and as cheaply as possible. Hardware solutions means that Nepalis, especially those that are poorer and outside of core cities, need access to cheap mobile devices and internet services. More schools, TVET training institutes, and colleges also need to be linked with reliable broadband connections. The hardware agenda is important because of low device penetration outside of cities. Various government bodies have already helped build computer labs in government schools, yet the efficacy of these labs and hardware-based programs is unclear. Such efforts need to be strengthened, accompanied by strong frameworks to assess efficacy. Software solutions include access to high-quality and accessible training programs—TVET programs, coding bootcamps, or other digital skills bootcamps—and mentorship networks. There is a lot of content and learning materials freely available on the internet already and an agile solution would enable access to this online content. Basic English language courses, for example, can be very effective because much of the digital world operates in English. As a starting point, support may be extended to establish computer clubs across schools and colleges in the country. Each school or college with a computer club can then come together under a national-level mentorship network. These clubs and mentorship networks can, in turn, help improve the use of technologies in the classroom itself. Ultimately, mentorship networks should allow students to build and visualize their careers and career roadmaps. A Nepali student’s educational and professional journey is fragmented. Such fragmentation is likely to continue as newer technologies disrupt traditional industries and the ways people work. Career guidance roadmaps, tools, and counseling support may, therefore, be as important as teaching hard skills. Conclusion Nepal will benefit from a digital skill agenda that will fuel an export-based software and IT services industry. This will produce strong and deep spillover impacts on local digital transformation as well. Key policy interventions for a digital skills plan include building a vocational education program starting from the SEE level up, fostering industry collaborations to make policymaking more responsive, and improving access to training programs and job opportunities. The government, in partnership with the private sector and development partners, needs to develop and implement a digital skills action plan. The author is a Senior Fellow with the Nepal Economic Forum and leads the Digital Chautari, a platform to facilitate conversations on creating a Digital Nepal. 

Over the past 2.5 years since the start of the Covid-19 pandemic, Nepal’s software and services offshoring industry has mushroomed. The pandemic accelerated the demand for digital services across many countries, and global technology companies and start-ups rapidly expanded their talent base. Many sought to build teams internationally or supplement their home-country teams with international talent. As a result, hundreds of companies and thousands of freelancers from Nepal were able to join the global industry. However, in the short term, technology companies around the world that rely on software and services are facing a difficult winter that may last the next few months or years. Rising interest rates and the end of easy money, combined with the collapse of the cryptocurrency market, have dampened the optimism with which large and small technology companies were investing in growth. While the impact on different technology companies varies, it is likely that many will seek to maintain smaller, high-quality teams for targeted efforts. As wage differences with other outsourcing hubs in Emerging Asia and Africa disappear rapidly, it is uncertain how Nepal’s emerging software industry will continue to develop. To remain competitive during this anticipated tech winter, Nepal’s local offshoring units will need to improve their quality. By focusing on quality, companies can target larger, longer-term contracts and build expertise in specific industry verticals. While larger offshoring companies in Nepal may be able to address quality issues on their own, there is a need for industry-wide efforts. To improve quality, the local offshoring software and services industry must work on increasing its capacity. This involves establishing a baseline for the industry to measure its size and position relative to similar industries in other countries. The industry should also collaborate to enhance Nepal’s branding in international circles and ecosystems. Finally, it is important to develop mentorship and peer-learning networks within the industry. Baseline It is essential to have a baseline understanding of the outsourcing industry in order to identify and implement supply-side interventions. Currently, there is a lack of comprehensive and definitive data on the size of the industry, the number of offshoring companies, the number and type of talent they hire, or their total earnings. This information will be crucial for evidence-based advocacy efforts with the government and Nepal’s development partners, as well as for designing capacity-building programs. Having a coherent baseline would allow industry players to advocate favorable policies such as tax incentives on earnings, simplified periodic reporting to the government, and policies that encourage domestic and foreign investment. It would also enable more informed discussions about the types of non-vocational and vocational training programs needed. For example, should the industry prioritize building a strong supply of advanced skills in areas like data science, dev-ops, and animation, or focus on creating a stronger supply of labor for areas like customer support or digital micro-tasks? Branding Collective branding efforts can help the local software and services industry secure international contracts and, in turn, achieve further capacity building. In 2021, Coursera listed Nepal among the top 10 emerging countries in technology and data science skills. This was a welcome surprise for local and international ecosystems, as Nepal is not typically considered a top destination for software development and services. However, Nepal ranks poorly on international indices related to the ease of doing business or digital entrepreneurship. For example, the Asian Development Bank’s 2021 index on digital entrepreneurship placed Nepal among the worst in Asia due to informal institutions, low human capital, and underdeveloped market conditions. Nepal’s emerging outsourcing IT industry must be able to promote itself externally. In addition to its lower cost base compared to other Asian countries, Nepal can differentiate itself through its diverse talent pool, hospitable culture, and unique cultural offerings. Branding efforts can lead to a direct impact on sales for companies, and attract digital nomads and service providers to further enhance the ecosystem’s capacity. This collective branding effort can also give Nepal’s globally dispersed, technically skilled diaspora a sense of identity and belonging, many of whom are eager to engage with and contribute to the development of their home country. The benefits of capacity and branding can create a virtuous cycle. Networks The local IT industry can become stronger by interacting with and supporting each other. One way to do this is through the development of a peer-learning and mentorship network. In order to compete for higher value contracts, local companies may need to work together and combine complementary skill sets. A peer-learning network can facilitate such partnerships, particularly within specific industry verticals like healthcare, cybersecurity, media and entertainment, and financial services. It can also provide a space for mid-level managers to connect and discuss industry best practices related to human resource management, operational excellence, branding, and international sales. A network is also needed to mentor younger companies and software developers. Such networks can provide a beneficial way for younger companies to build their brand and learn how to work alongside or complement larger software service providers. These mentorship networks can also enable the ecosystem to handle higher capacity work, facilitating partnerships and collaborations based on transparency and healthy competition. As entrepreneurial developers and technical talent seek to build products and develop their own ideas, mentorship networks can provide them with advice, financial support, and commercial linkages Nepal’s software and services outsourcing industry is at a turning point and should be strategic in building its capacity going forward. The global technology industry provided a boost to many during the pandemic, but the winds may be volatile and weakened in the coming years. By working together, Nepali players must aim to improve the quality of their work and that of local human capital. The ecosystem should focus on collaborative efforts to secure larger contracts and build expertise in specific verticals that can be developed over time. By setting these goals, the local industry will signal its intentions and attract support from within and outside the country. The author is a senior fellow with the Nepal Economic Forum and is leading Digital Chautari, a platform to facilitate conversations on furthering the Digital Nepal Framework