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Nepal - Economy

Nepal is one of the world’s poorest countries and its economy depends on foreign aid, tourism and remittances from its overseas workers. Western aid comprises more than 30 percent of its annual budget. The economy of the Himalayan nation, wedged between Asian giants China and India, was slowing down by 2022, hit by rising energy and food prices, monetary tightening and fears of a global recession. The $38bn economy is expected to expand 4.7 percent in the current fiscal year starting in mid-July, according to Asian Development Bank (ADB), down from the previous year’s estimate of 5.8 percent. About one-fifth of the country’s people, who live on less than $2 a day, have been hit hard by high inflation – hovering at more than 8 percent this year.

Nepal ranks among the world's poorest countries, with a per capita income of around $490 in 2009. In 2008, it was estimated that 25% of the population was below the poverty line. An isolated, agrarian society until the mid-20th century, Nepal entered the modern era in 1951 without schools, hospitals, roads, telecommunications, electric power, industry, or a civil service. The country has made progress toward sustainable economic growth since the 1950s and is committed to a program of economic liberalization.

Nepal’s economy is ‘a tale of two cities,’ or at least two distinct economies – the economy of the Kathmandu Valley and that of the rural countryside. The Kathmandu Valley (KV) is the locus of investment, tourism, and trade, much of which was literally trucked or flown in from outside the country. The rural countryside, by contrast, remains a primarily agricultural subsistence economy, with limited economic opportunities and massive underemployment. Average income in Kathmandu is five times higher than in the mid-western rural districts that were the main base of the Maoist insurgency.

The year 2015 started with the unimaginable devastation caused by the massive earthquake of 25 April 2015 and the powerful aftershocks that followed. Over 9,000 lives were lost and over 12,000 people were injured and more than 10 million people, one third of total population, were affected. Earthquakes destroyed homes, schools, health posts and hospitals, government buildings, archaeological and cultural heritages, and basic services infrastructure. Following the earthquakes, Nepal and Nepali people received instant help and support from neighbours, other friendly countries, international organisations and people from around the world.

The earthquakes in April and May 2015 and protests and trade disruptions following the promulgation of a new constitution in September 2015 exacerbated the macroeconomic policy challenges facing the Nepalese economy. Continued political instability and a continuation of the recent disruptions to economic activity and transportation and trade routes to and from the country’s southern border and the related fuel crisis could severely affect growth and inflation.

Nearly two million Nepalese youths work in GCC countries, Malaysia, Republic of Korea and Israel as migrant workers. In 2016 a total of 364,740 Nepalese left for foreign employment, which is 25 percent more than previous year. In 2013/14, Nepal received total amount of NRs 543.3 billion in remittances which was 28 percent of GDP. In the first eight month of fiscal year 2014/15, the remittances were NRs 371 billion which was 4 percent higher than previous fiscal year.

Real GDP growth is estimated to have decelerated to 3.4 percent in 2014/15 (mid-July 2014 to mid-July 2015) from 5.5 percent in 2013/14. Inflation had been moderating from a high base but the recent acceleration to 6.9 percent in August (y/y) widened the wedge over Indian CPI, thereby undermining Nepal’s competitiveness given the exchange rate peg to the Indian rupee.

The financing data indicated that the budget was in surplus for the third year in a row, even as revenues fell short of the budget for the first time in several years. As a result, public debt remained on a declining path, falling to 26 percent of GDP in 2014/15, from 32 percent of GDP in 2012/13. The external current account surplus reached 5.0 percent of GDP in 2014/15, aided by a surge in remittances following the earthquake and lower oil import prices. Reserves rose to US$7.2 billion, or 33 percent of GDP, covering almost eight months of prospective imports.

Growth was expected to gradually rebound to around 5.5 percent by 2016/17, as economic activity recovers from the earthquake and reconstruction gains momentum. Inflation is projected to rise to about 8.5 percent over the coming 12 months as losses in agricultural production and damage to transport systems represented a large shock to the supply of agricultural products. However, over time, inflation pressures should decline as supply bottlenecks eased.

Since 2014 to mid-January 2015, the total number of tourist arrivals in Nepal was 790,118. The average length of tourist stay was 12.4 day;the average spending per tourist was USD 46.4; and the total revenue earned from this sector was NRs 46.37 billion. The share of this sector to GDP remained at 2.6 percent.

Agriculture remains Nepal's principal economic activity, employing over 73% of the population and providing about one-third% of GDP. Only about 25% of the total area is cultivable; another 33% is forested; most of the rest is mountainous. Rice and wheat are the main food crops. The lowland Tarai region produces an agricultural surplus, part of which supplies the food-deficient hill areas. Because of Nepal's dependence on agriculture, the magnitude of the annual monsoon rain strongly influences economic growth.

Nepal's exports decreased from $907 million in 2008 to $849 in 2009. Exports, constrained by political turmoil and a poor investment climate, were also impacted by the worldwide financial crisis. Imports increased from an estimated $4.31 billion to $5.26 billion in 2009, resulting in a growing trade deficit.

Nepal posted a balance of payments surplus of $40.4 million in 2010-2011, recovering from a 2009-2010 deficit of $48.5 million. The country receives substantial amounts of external assistance from India, the United Kingdom, the United States, Japan, and the European Union (EU). Several multilateral organizations--including the World Bank, the Asian Development Bank, and the UN Development Program--also provide significant assistance. On April 23, 2004, Nepal became the 147th member of the World Trade Organization (WTO).

Nepal has eight of the world's ten highest mountain peaks, including Mt. Everest at 8,848 m (29,000 ft.). The country is a tourist destination for hikers and mountain climbers, as well as devout Buddhists who visit Lumbini, the birthplace of Siddhartha Gautama, the Supreme Buddha. Since 2007, tourism has grown, helped by greater peace and stability following the official end of the 10-year insurgency and rising incomes of Indian and Chinese travelers. Figures from the Department of Immigration showed a 24.6% increase in air arrivals between January and August 2011 over the same period in 2010, with arrivals of Indian travelers growing by 46.3% and Chinese travelers by 60%. In 2011, Nepal celebrated its "Year of Tourism."

Swift rivers flowing south through the Himalayas have massive hydroelectric potential to service domestic power needs and growing demand from India. Only about 1%-2% of Nepal's hydroelectric potential is currently tapped. Several hydroelectric projects, at Kulekhani and Marsyangdi, were completed in the early to late 1980s. In the early 1990s, one large public-sector project, the Kali Gandaki A (144 megawatts--MW), and a number of private projects were planned; some have been completed. Kali Gandaki A started commercial operation in August 2002. The most significant privately financed hydroelectric projects in operation are the Khimti Khola (60 MW) and Bhote Koshi (36 MW) projects.

Population pressure on natural resources is increasing. Overpopulation is already straining the "carrying capacity" of the middle hill areas, particularly the Kathmandu Valley, resulting in the depletion of forest cover for crops, fuel and fodder, and contributing to erosion and flooding. Additionally, water supplies within the Kathmandu Valley are not considered safe for consumption, and disease outbreaks are not uncommon. Although steep mountain terrain makes exploitation difficult, mineral surveys have found small deposits of limestone, magnesite, zinc, copper, iron, mica, lead, and cobalt.

Progress has been achieved in education, health, and infrastructure. A countrywide primary education system is under development, and Tribhuvan University has several campuses. Although eradication efforts continue, malaria has been controlled in the fertile but previously uninhabitable Tarai region in the south. Kathmandu is linked to India and nearby hill regions by an expanding highway network.

By law, labor unions in Nepal are independent of the government and employer. In practice, however, all labor unions are affiliated with political parties, and have significant influence with the government. The constitution provides for the freedom to establish and join unions and associations. It permits restrictions on unions only in cases of subversion, sedition, or similar conditions. Labor laws permit strikes, except by employees in essential services such as water supply, electricity, and telecommunications. Sixty percent of a union’s membership must vote in favor of a strike for it to be legal, though this law is often ignored. Laws also empower the government to halt a strike or suspend a union’s activities if the union disturbs the peace or adversely affect the nation’s economic interests; in practice, this is rarely done.

Total union participation is estimated at about one million, or about 10 percent of the total workforce, much of which is employed in informal sectors. The three largest trade unions are affiliated with political parties. The Maoist-affiliated All Nepal Trade Union Federation (ANTUF) is the most active, and its organizing tactics have led in the past to violent clashes with other trade unions in the past. The ANTUF and its splinter group, the ANTUF-R, are aggressive in their defense of members and frequently engage in disputes with management. A US company in Nepal was shut down twice in 2013 and 2014 by workers associated with the CPN-M-affiliated ANTUF-R.

Labor union agitation is often conducted in violation of valid contracts and existing laws, and unions are rarely held accountable for their actions. Unions, particularly the ANTUF-R, have targeted joint ventures involving foreign investment and hotels. Collective bargaining is only applied in fixing workers’ salaries, a process in which trade unions, employers, and government representatives actively engage. The Department of Labor has a dispute resolution mechanism that addresses disputes in businesses and state-owned enterprises.

Strikes are a common feature in Nepal. Although most strikes last a day or two, political parties in the Terai – the region bordering India that is home to most of Nepal’s industry – called for a general strike in August 2015 that lasted six months.