Powering the national economy

Nepal saw both supply and demand side effects during the Covid-19 pandemic. Following that event, the Russian-Ukrainian war, which caused several political upheavals worldwide, in addition to domestic political instability in Nepal, prevented the economy from recovering. Nevertheless, tourism, IT and hydropower sectors have exhibited some positive trends that are likely to stimulate economic recovery. 

An economic model where revenue generation is based on customs duties and remittances has been found to be unsustainable yet contributing to the Nepali economy substantially. Therefore, new economic measures have become imperative. There is a growing debate of a new economic model in Nepal known as Structural Reforms 2.0. The previous reforms—Structural Reforms 1.0—liberalized the national economy, opening space for private sector development. Sectors like banking, aviation, and services performed relatively well and generated jobs. However, with a rising labor force (around 500,000 entrants per year), the private sector developed during 1.0 is no longer sufficient to meet a growing job demand, highlighting the urgent need for Structural Reforms 2.0.

Macroeconomics

Realizing the projections made, most of the growth in real GDP growth is anticipated to come from the services sector, which is expected to grow from two percent in 2023 to 3.9 percent in 2024. Within this sector, tourists’ arrivals have risen by an astonishing 30.7 percent aiding sectors such as accommodation, culinary services and transport, signifying the return of normal economic activities. Paddy production also increased by 4.3 percent, while hydropower production advanced significantly with an addition of more than 450 MW. 

The highest-ever foreign exchange reserves of $13.64bn were a result of record breaking remittance inflows of $5.52bn in FY 2023-2024. Private consumption, which makes up over 80 percent of GDP, surged by 1.1 percent from 0.7 percent the year before due to this spike in remittances. Supported by concessional external borrowing and stable domestic debt levels, public debt slightly declined to 42.7 percent of GDP. 

Consumer price inflation, on a year-on-year basis, dropped to 3.57 percent by mid-July 2024, down from 7.44 percent the previous year. The World Bank projects inflation will decrease to 6 percent in 2025, down from 6.8 percent in 2024, while the Asian Development Bank (ADB) forecasts a rise in inflation to six percent in 2025, up from 5.5 percent in 2024. The inflationary trend is driven by rising vegetable prices, India’s export bans on essential commodities like wheat and rice, global energy price hikes impacting transportation costs, and increasing housing and utility expenses.

Way forward

As we have already identified, three key sectors in Nepal (in line with Structural Reforms 2.0) are currently contributing significantly to the economy: hydropower, tourism and IT. We need solid strategies to drive these sectors forward. To enhance the private sector’s contribution to electricity generation and the export of energy to India and Bangladesh, we must first address land acquisition issues promptly. One of the recurring challenges is securing land for hydropower development. The anticipated amount of land often turns out to be much higher when we engage with local communities, largely influenced by local political leaders and other influential figures. Delays in acquiring land damage Nepal’s reputation in the global investment community, making potential investors reluctant to engage. 

Additionally, when exporting electricity to India—especially in real-time trading—we must be fully prepared to manage potential obstacles. For example, recent Sept 2024 flash floods damaged several hydropower sites, which hindered our ability to export electricity. Consequently, Indian buyers demanded compensation under existing agreements. This situation highlighted the need for regular safety audits of hydropower sites to mitigate climate-induced risks. 

In tourism, one of the most frequent complaints is our limited connectivity to the world. The national flag carrier; Nepal Airlines, is underperforming, and we remain blacklisted by the European Union due to weak safety audits, outdated pilot training and regulatory shortcomings. The European Civil Aviation Authority has even recommended that the Civil Aviation Authority of Nepal (CAAN) be split into two separate entities—one for regulatory functions and another for operations. Having both responsibilities under a single entity creates conflicts of interest, compromising the growth and safety of our aviation industry. Therefore, we must prioritize enhancing direct connectivity to European cities and separating the CAAN’s functions for improved oversight and development. 

In the IT sector, the government needs to adopt a more flexible approach to attracting American and European IT companies. Instead of acting as a stringent regulator, the government should serve as a facilitator. A recent case where the government sued Cotiviti for allegedly evading capital gains tax has created a negative impression on potential investors. As an alternative, the government could allow companies to reinvest the amount owed in capital gains tax into job creation, which would benefit the economy through VAT and income taxes. Rather than demanding large sums upfront, this circular model of reinvestment could help generate wealth while maintaining government revenue through other channels. 

At the same time, Nepal Rastra Bank should consider opening avenues for Bitcoin mining, a growing business model in the global market. Bitcoin mining requires significant energy, and placing Bitcoin mining stations near hydropower plants could create economic opportunities for the hydropower sector, utilizing energy right at their doorstep. Allowing PayPal to function in Nepal would also be a positive step toward advancing the IT sector in the country. 

We are harnessing energy through hydropower, a renewable resource that contributes to a net-zero world. In the light of this, applying for grants from the Green Climate Fund to implement tech-related projects focused on net-zero, green, or gig economies should be considered. Additionally, the development of equipment for carbon trading measurement by our IT professionals could economically benefit the country while positioning us as a forward thinking nation in the fight against climate change. 

Additionally, the government-led initiative for startup funding should be implemented effectively. The distribution of funds should be based on meritocracy, with concrete business plans that demonstrate good returns, sustainability and long-term viability. Funds should not be allocated based on political alignment or favoritism toward certain individuals or party cadres. In Nepal, there is a growing complaint about the politicization of business, where those who favor political parties receive benefits. This practice must be stopped. 

The plans mentioned above are just starting points and suggestions. The primary focus of Nepal’s economic policy should be job creation, and these three sectors—hydropower, tourism, and IT—are performing relatively well. Therefore, flexibility should be extended to individuals and companies investing in Nepal, rather than portraying them as ‘foreign agents’ who have come to Nepal with an intention to undermine the country’s territorial integrity. 

Furthermore, the legacy of a socialism-oriented economy, even reflected in our constitution’s preamble, needs to be reconsidered. Socialism can only be sustainable when there is a broad private sector base capable of supporting those in need. Hostility toward the private sector or specific business communities is not the solution. It’s time to think critically.