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Unlocking Nepal’s Growth Potential: Nepal Country Economic Memorandum report examines Nepal’s past economic growth performance since 1996, current challenges, and policy recommendations to unlock pathways for accelerated growth.
Nepal has continued its remarkable success in reducing poverty and has virtually eradicated extreme poverty. In 1995, an estimated 55 percent of Nepalis lived in extreme poverty, defined by the US$ 2.15 per day threshold. By 2023, this figure had plummeted to just 0.37 percent. The speed and scale of Nepal’s success in eliminating extreme poverty are unparalleled among its peers. Moreover, this progress was not confined to extreme poverty. The broad-based and deep reduction is evident in the poverty headcount ratio measured at US$ 6.85 per day, which fell from 90 percent to below 50 percent over the same time.
Despite this achievement, the sobering reality is that Nepal’s economy has struggled to keep pace regionally and globally and has not generated enough quality jobs in non-agricultural sector. Between 1996-2023, the economy grew at an average real annual rate of 4.2 percent, respectable given the challenges of domestic conflict and multiple external shocks. However, this rate lagged that of peer countries. Within South Asia, Nepal’s growth rate ranks just sixth out of eight countries. Both structural and aspiration peers outperformed Nepal as well.
The key factor behind the poverty reduction and resilience in the wake of shocks has been migration and the inflow of remittances. By 2021, over 7 percent of Nepal’s population had migrated abroad mainly in search of employment due to limited domestic job opportunities. Most of these migrants are young men, primarily seeking work in Gulf Cooperation Council (GCC) countries and Malaysia. This large-scale outmigration led to a substantial increase in remittances and the number of households receiving them. By 2023, remittances accounted for around a quarter of Nepal’s GDP, playing a crucial role in sustaining the economy and lifting many out of poverty. The direct impact of remittances on poverty has been significant and transformative.
Significant structural challenges continue to constrain domestic economic growth and job creation. Overall labor productivity remains low. Weak competition in logistics and transport, as well as subpar infrastructure have limited exports, which have not contributed to real economic growth over the past decades. Appreciating real exchange rates and domestic trade policies, including high tariffs and excise taxes, have further constrained exports. The manufacturing sector has been in steady decline from an already low base, while the tourism sector, a key growth and job opportunity, remains underdeveloped. The development of hydropower has progressed slowly, restricting its potential to shape the economy and facilitate stronger growth. Limited infrastructure, regulatory challenges, and digital literacy gaps are holding back the country’s digitalization efforts.
Current policies fall short of achieving Nepal’s ambitious growth targets and raising income to peers’ levels. The 16th Plan envisions an average annual real GDP growth rate of 7.1 percent until 2029, far above historical averages. Baseline projections, however, estimate that potential long-term real growth will hover around 4 percent. If Nepal achieves higher growth rates, GDP per capita could increase faster, enabling the country to narrow the income gap with peer countries. However, if growth continues at historical rates, Nepal’s income level would reach only 65 percent of structural peers’ levels, and less than one-third of its aspirational peers’ by 2050. Bridging this gap requires a decisive policy shift to achieve and sustain higher growth.
Unlocking opportunities for growth is the first step toward achieving Nepal’s development aspirations. Policies must unlock the potential of high-promise sectors and supporting private sector development. Facilitating firm creation, boosting export growth, and attracting domestic and foreign investment can open new pathways for growth. Targeted support for sectors such as hydropower, tourism, and digital services can generate significant economic and employment opportunities. Achieving this, however, requires addressing regulatory hurdles, improving infrastructure, and fostering a more competitive business environment. Additionally, improving migration policies to increase benefits and reduce costs for migrants can further contribute to economic development.
To fully realize these opportunities, Nepal must build the capabilities needed to translate potential into growth. Strengthening workforce skills, enhancing institutional capacity, and improving firms’ competitiveness are critical to boosting productivity and resilience. Without these efforts, potential growth could fall below 4 percent over the long-term, undermining national ambitions. Nepal also needs to enhance its capacity to manage migration patterns and remittance flows. Building these capabilities will enable the country to capitalize on emerging opportunities, withstand shocks better, and achieve faster growth.