Nepal's Road to Economic Prosperity: Challenges, Progress, and the Critical Need for Investment Reforms

Despite lofty national ambitions like achieving "Prosperous Nepal, Happy Nepali," Nepal’s journey towards economic prosperity remains sluggish and fraught with deep-rooted structural issues. A comprehensive review of the nation's economic indicators paints a concerning picture: modest economic growth, underwhelming savings and investment rates, and an urgent need for aggressive reforms to mobilize domestic and foreign investments.

Stagnant Economic Growth

Nepal's economic growth has faltered significantly over the years. During the 15th plan period, GDP growth averaged just 2.6%, far below the targeted 9.6% growth rate needed to graduate from a low-income to a middle-income economy by 2030. Recent projections for fiscal year 2080/81 estimate GDP growth at only 3.5%, showing slight recovery from last year's 2.3%, but still uninspiring compared to the 8.6% growth achieved in FY 2073/74.

Meanwhile, per capita income is forecasted to rise modestly by $51, reaching $1,456 — still a far cry from middle-income thresholds.

Weak Domestic Savings and Investments

The backbone of sustainable economic growth — domestic savings and investments — remains alarmingly weak. Domestic savings account for just 7.6% of GDP, while investments stand at 24.5%. The private sector is responsible for two-thirds of total investments, highlighting the state's heavy reliance on private capital. However, without a significant push to improve the investment climate, private sector enthusiasm may wane.

The National Planning Commission estimates that to meet the 2030 targets, Nepal must attract NRs 2,025 billion (approx. $15.5 billion) annually, with the investment mix ideally sourced 55% from the public sector, 36% from the private sector, and the rest from cooperatives, NGOs, and households.

The Foreign Investment Gap

Nepal’s performance in attracting and retaining foreign direct investment (FDI) remains disappointing. While NRs 382.37 billion of FDI was approved by mid-2080 BS, only NRs 154.95 billion actually materialized — a mere 35% realization rate.

This wide gap indicates a trust deficit among foreign investors, fueled by bureaucratic inefficiencies, political instability, infrastructure bottlenecks, and perceived corruption.

Even after institutional efforts like establishing the Investment Board Nepal (IBN) and hosting periodic investment summits (including the latest 2024 event), real outcomes have been underwhelming. Out of 154 projects showcased, only a handful reached actual investment agreements, totaling just NRs 6.5 billion.

Employment and Youth Exodus

Adding to the economic woes, Nepal faces an acute employment crisis. About 500,000 youths enter the labor market annually, but domestic job creation has failed to keep pace. Agriculture, industry, and service sectors are underperforming in providing adequate employment, pushing thousands of youths abroad each year.

Despite government initiatives like the Prime Minister Employment Program, Startup Fund Loans, Women Entrepreneurship Loans, and concessional agriculture loans, the programs only scratch the surface of the vast unemployment problem.

Financial Sector: Liquidity without Investment

Nepal’s banking sector enjoys sufficient liquidity, and interest rates have stabilized. Yet, domestic investment remains sluggish. Although commercial banks have expanded lending, with credit exposure rising from NRs 6,159 billion in 2079/80 to NRs 6,622 billion in 2080/81, productive sectors like agriculture, manufacturing, and energy still suffer from underinvestment.

This highlights the structural mismatch: available capital isn't translating into impactful economic activities.

Barriers to Investment Growth

Several critical factors hinder investment expansion:

• Complex regulatory environment: Despite multiple reforms, practical ease of doing business remains poor.

• Governance and corruption: Transparency and accountability issues persist in government institutions.

• Infrastructure and utility bottlenecks: Limited access to quality roads, energy, and digital infrastructure deters industrialization.

• Risk and Return Imbalance: Investors require strong confidence in profit security and competitive returns, which Nepal struggles to guarantee.

• Bureaucratic lethargy: Agencies like the Investment Board need a radical overhaul to deliver proactive facilitation, not just administrative approval.

The World Bank’s "Doing Business" survey ranks Nepal 94th out of 190 countries, signaling room for massive improvements especially in areas like business registration, construction permits, tax administration, and contract enforcement.

Opportunities if Addressed

Despite its struggles, Nepal is not without hope. The country possesses immense untapped potential:

• Agriculture and Agro-processing: Can sustainably feed not just domestic but export markets.

• Hydropower: Rivers like Koshi, Gandaki, and Karnali could position Nepal as a regional energy exporter.

• Tourism: Untapped scenic spots beyond Everest and Annapurna can draw millions if promoted systematically.

• Medical and Educational Services: Medical tourism and skilled labor training can generate major revenue streams.

If Nepal aggressively fixes its investment environment, the country could quickly reverse its fortunes — just like Vietnam, Singapore, or Macau have done in the past with much fewer natural advantages.

Nepal’s dream of becoming a middle-income country by 2030 is technically still achievable — but only if urgent and bold action is taken. Political stability, streamlined regulation, investor-friendly policies, massive infrastructure upgrades, and an empowered private sector must become the top national priorities.

Otherwise, "Prosperous Nepal, Happy Nepali" will remain a catchy slogan, not a living reality.