Infra gap can push Nepal’s economy downhill

For several years, physical infrastructure development has moved to Nepal’s policy agenda due to its higher economic and social multiplier effect in addressing development challenges. Globally, the development of transport, electricity, and telecommunications infrastructure is found to have a significant positive impact on Gross Domestic Product (GDP). Intriguingly, growth impacts are higher in developing countries compared to developed countries. However, infrastructure development in Nepal has primarily remained a political rhetoric, and poor infrastructure governance sharply contrasts with the country’s target to achieve middle-income status by 2030. This juxtaposition between aspiration and infrastructure deficit calls for a paradigm shift—where infrastructure development is intrinsically intertwined with evidence-based growth policies for economic takeoff.

Development backlog

Nepal remains one of the world’s least urbanized yet rapidly urbanizing countries, which means an ever-increasing demand for road, energy, and ICT infrastructure. According to the World Bank, Nepal must invest 10-15 percent of its annual GDP until 2030 to maintain present GDP growth. But statistics present a glaring disparity in road density, ICT, energy reliability, and consumption infrastructure.

From 2011 till 2018, Nepal’s strategic road network increased from 11,636 kilometers to 13,447 km, a mere increase of 2000 km in six years. Notably, the 15th periodic plan has set an ambitious target to expand national highways above two lanes to 3,000 km by 2043/44. Presently, road connectivity is poor, and it has significantly discouraged international trade and FDI, inflated transportation costs, and limited economic and public services access. Studies also indicate a bi-directional causality between road infrastructure and economic growth, complementing each other.

Also, we are confronted with a paradox when we assess Nepal’s ICT infrastructure. On the one hand, mobile phone penetration has surged to an impressive 130 percent, painting a picture of connectivity on the rise. On the other, Nepal’s position in the Network Readiness Index is 112 out of 131 economies, signaling a shortfall in digital connectivity, technology access, and overall readiness of the economy and society to benefit from digital advancement. 

Despite initiatives like the Digital Nepal Framework, the development and use of ICT infrastructure in easing and economizing business and public service delivery remains far from satisfactory. A vast digital divide persists in terms of availability, accessibility, and reliability, given the current state of digital infrastructure.

Unlike road and ICT, the energy landscape has improved with electricity access to 89.9 percent of the population after development of new hydropower projects. But poor distribution networks remain a bottleneck resulting in intermittent power outages and energy shortages. Furthermore, World Bank statistics reveal Nepal’s energy consumption is meager 144 kWh per capita, which is significantly lower even by the South Asian benchmark of 694 kWh per capita. As a result, only 35 percent of the total population has access to clean fuels and technology for cooking. A juggernaut task, therefore, is twin-sided, i.e., not just enhancing distribution infrastructure but also ensuring higher consumption driven by increased access to clean technologies for household use.  

Developmental challenges

Nepal’s policy discussions have often centered around the availability of financial resources for infrastructure projects. While it’s a fact that Nepal faces a financial shortage when it comes to executing massive projects, the crux of the infrastructure deficit lies in the nation's poor infrastructure governance. Over time, Nepal’s projects have been subject to political influence, often bypassing rigorous and systematic approaches during the ideation and preparation phases. The lack of due diligence and institutional capacity raises concerns about a project’s credibility, leaving investors skeptical about its bankability and potential return on investment. Numerous projects have eventually transformed into ‘white elephants’ or encountered time and cost overruns, including prominent projects like the airports in Pokhara and Bhairahawa, along with the Kathmandu-Tarai Fast Track.

Additionally, Nepal’s rugged terrain is compounding these challenges, which demands substantial financial and technical resources for developing large-scale infrastructure projects—resources that Nepal currently lacks. Collaborations with neighboring countries for project development also face additional challenges on geopolitical fronts, further complicated by political dynamics. In the face of such hurdles, a resource-constrained economy like Nepal’s finds the realization of projects increasingly daunting, and poor infrastructure development remains a constant reminder of these barriers.

An engine for growth

The impact of infrastructure remains different given a country’s level of development and economic structure. Due to the multiplier effect, developing physical infrastructure in African countries was associated with 1.3 percent higher economic growth than in Southeast Asian countries. Although Nepal lacks adequate research on the economic impact of infrastructure, its impact has been witnessed in terms of improved living standards after access to such infrastructure. For instance, despite poor digital infrastructure, the ICT sector generated more than 66, 000 jobs, contributed 1.4 percent to GDP, and 5.5 percent in foreign earnings. Given Nepal’s poor development indicators, such a high multiplier effect is certain through road and energy infrastructure. 

Furthermore, Nepal must refer to striking economic differences between Latin America and Southeast Asia, where the unavailability/inadequacy of physical infrastructure slowed growth by 1-3 percent in the long run. Furthermore, it led to a noticeable one-third disparity in output per worker compared to their Southeast Asian counterparts. Such insights remain vital for Nepal to enhance business competitiveness and bolster economic growth. The tangible impacts are more evident as infrastructure leads to positive spillover on local market creation, increased employment opportunities, and improved peoples’ livelihoods.

Aspiration to transformation

With increasing growth aspirations, Nepal's demand for infrastructure shall mount, creating an uneasy situation for policy stakeholders. But the central question is how the government will ensure sound infrastructure governance and strategically interlink with economic growth and development. Findings from the McKinsey report estimate 15-35 percent of the project cost can be reduced with improvement in infrastructure governance. In Nepal’s context, it is essential that the government distance itself from investing in ambiguous projects failing to demonstrate long-term socio-economic benefits. Secondly, sufficient investment should be made in project identification, preparation, and structuring to streamline service delivery. 

Lastly, policy should equally focus on extracting maximum benefit from existing infrastructure through upgradation to break Nepal’s poor infrastructure-economic backwardness trap. In a nutshell, neglecting the development of power, transport and telecommunications infrastructure at this critical juncture risks putting Nepal on an irreversible path of regression by taking a toll on GDP.  

The author is currently a public policy candidate at Willy Brandt School in Germany. He has served as a research officer at the Investment Board Nepal