Nepal is a low-income, developing nation with an estimated GDP of $33.7 billion and per capita annual income of $1,155.10 in fiscal year (FY) 2019/20 (Nepal’s fiscal year runs from July 16 to July 15). Nepal’s estimated population is 29.14 million (male 13.35 million and female 15.79 million). The median age in Nepal is 24.6 and more than half of the population is under the age of 25, indicating a young nation whose ratio of working to non-working population will remain high in the years to come.
Nepal was beset with political turmoil from 1996 – 2017, due to an armed Maoist insurgency until 2006, followed by a decade-long peace process culminating in the promulgation of a new Constitution in 2015. Elections under the new Constitution were held in 2017 and a new majority government took over in 2018. Nepal’s economic growth lagged behind most of its neighboring countries due to years of political instability, averaging 4% from 2007-17, compared to India (7.4%), Bangladesh (6.2%), and Sri Lanka (5.9%).
Economic growth rebounded with the onset of political ‘normalcy’ in 2018, averaging 7.3% over the three years 2017-19 prior to the COVID pandemic. However, the pandemic and associated lockdowns led to a contraction of the economy by -1.9% in fiscal year (FY) 2019/20. The Nepali economy appeared to be recovering from this downturn by the spring of 2021, with the World Bank making a projection in April of 2.7% growth in FY 2020/21. With a second COVID wave beginning late April 2021, such a recovery now appears optimistic.
Following a year of infighting within the then-ruling Nepal Communist Party (NCP), Prime Minister Sher Bahadur Deuba of the Nepali Congress Party won a confidence vote on July 18, which means that his government can stay in office until regularly scheduled parliamentary elections in November 2022. However, political infighting and instability are likely to negatively impact the economy and business environment, in addition to the pandemic, so long as they continue.
Structurally, Nepal’s economy is still highly dependent on agriculture, but the services sector is the largest contributor to national GDP. Agriculture accounts for 27.5 percent of GDP and 65.7 percent of employment. The industrial sector—whose largest sub-sectors consist of manufacturing and construction—contributes 15.1 percent of GDP. The services sector—whose largest sub-sectors include real estate, trade, transport, communications, and education—contributes 57.4 percent of GDP.
The structure of the Nepali economy is slowly shifting away from agriculture with significant migration from rural to urban areas and overseas. An estimated four to six million Nepalis work abroad, primarily in the Gulf countries, Malaysia, and India. Nepal received $7.52 billion in remittances in FY 2019/20, equivalent to 22.3 percent of GDP. As such, a significant chunk of Nepal’s wealth is generated abroad through the export of labor (as opposed to the export of goods and services produced in Nepal). Although remittances were expected to decline significantly in 2019/20 owing to the pandemic, they only declined by a nominal 3.3%, once more proving to be a lifeline to the Nepali economy, even at a time of crisis.
Political instability, widespread corruption, a landlocked location, challenging topography, poor infrastructure, a poorly trained and educated workforce, and a weak policy and regulatory environment have been some of the key impediments to economic growth. Relative political stability obtained in 2018, a major turnaround in itself, was bringing improvements to some of the other constraints above, but the pandemic and political infighting have, as of July 2021, impacted any potential economic turnaround story. Government messaging has prioritized infrastructure development, creation of job opportunities at home, and finalization of business enabling legislation, but the impact on the ground has been modest. The government professes to focus on attracting foreign investors to Nepal and organized an international Investment Summit in March 2019 towards this purpose, yet it has not completed the necessary reforms to attract large scale investment nor effectively addressed the process challenges faced regularly by already-present international firms. The government’s ability to effectively manage the COVID pandemic and a healthy economic recovery remains an open question.
India accounted for 62 percent ($6.9 billion) of Nepal’s total trade in FY 2019/20, China for 14 percent ($1.57 billion), and the rest of the world for the remaining 24 percent ($2.63 billion). Compared to 7 years ago (FY 2012/13) when disaggregated records began, China’s share of total trade with Nepal has grown from 10 to 14 percent. However, given the pandemic, 2019/20 was an unusual year for trade, during which Nepal’s total trade declined by 15%. Nepal imports far more than it exports. The imports-to-exports ratio in FY 2019/20 was 12.2 (down from 14.6 the previous year), i.e., Nepal imported $12.2 for every dollar exported. However, given the unusual trade pattern in the past year (owing to the pandemic) Nepali imports declined by -15.6%, whereas exports increased marginally by 0.6%, per latest Nepal Rastra (Central) Bank (NRB) data. This resulted in a trade deficit of $9.1 billion (down from $11.4 billion the previous year), which equates to 27% of GDP (much improved from a staggering 37% the previous year). In 2019, Nepal exported $931.5 million worth of goods, mainly palm and soyabean oil, woolen carpets, polyester yarn, juices, tea and spices (cardamom), textiles, jute goods, readymade garments, and other apparel items. Nepal’s annual imports were about $11.9 billion, mainly from India, China, and Indonesia in 2019. The main imports were petroleum products (diesel, petrol, LPG), industrial use items (mainly steel billets), gold, construction equipment and cement clinkers, rice, and telecommunications equipment.
U.S.-Nepal bilateral trade was approximately $213.3 million in 2019, roughly 1.5 percent of Nepal’s total trade with the world, according to data from the Office of the United States International Trade Commission. This was a sharp increase from the previous year when total bilateral trade was $154 million. This surge was mainly attributable to increased U.S. exports of agricultural products (soybeans and animal feed). Major U.S. exports to Nepal have traditionally been medical and surgical instruments, aircraft machinery and parts, ICT products, electrical machinery and equipment, and miscellaneous grains, seeds, or nuts (mainly soybeans). In 2020, U.S.-Nepal bilateral trade declined to $180 million, but this decline is consistent with the overall decline in total trade due to the pandemic.
As in previous years, the United States was the second largest export market for Nepal in 2020, accounting for 10.2% of its total exports (India was the largest, accounting for over 70%). Until 2018, the United States was one of the very few countries with which Nepal had a trade surplus. Key Nepali exports to the United States are carpets, handicrafts and antiques, animal feed (dog and cat food), textiles, glassware, and apparel (shawls, scarves, other knit material, and felt products). In December 2016, the United States established a new stand-alone trade preference program for Nepal, as mandated by the Trade Facilitation and Trade Enforcement Act of 2015. Designed to help support Nepal’s economic recovery following the 2015 earthquakes, this program gives duty-free access to the United States for some products made in Nepal, including certain kinds of carpets, headgear, shawls, scarves, handbags, and suitcases. More information on this program can be found at (https://np.usembassy.gov/nepal-trade-preference-program/?_ga=2.11886836.1322969068.1631642383-1488676793.1627348993)
Until recently, Nepal’s long-standing trade deficit was balanced by sufficient inflows of workers’ remittances (mainly from the Gulf, India, and Malaysia) to maintain a surplus or balanced current account. The increase in the trade deficit has outpaced remittance inflows since FY 2016/17, when the current account was in deficit by only $95.4 million. By FY 2018/19, the current account deficit had ballooned to $2.3 billion. The Government of Nepal argues that the import of intermediate goods, to feed growing industries dormant during the political transition, is partly responsible for the rising trade deficit; and that as these investments produce a payoff in the coming years, the deficit will slowly rebalance. The government also expresses confidence that the number of hydropower plants coming online in the next couple of years will reduce electricity and fuel imports from India, further reducing the trade deficit. During 2019/20 the NRB tried to maintain foreign exchange reserves by curbing imports of perceived luxury goods by raising duties and imposing outright import bans in some cases.
The sharp decline in trade, particularly imports, over the past year due to the pandemic, and fairly buoyant remittances have improved Nepal’s trade balance, and its current account deficit declined to $289 million. As a result, Nepal’s foreign exchange reserves rose to $10.6 billion in FY 2019/20 (enough to sustain 12.3 months of imports) versus $8.6 billion (7.6 months of imports) in 2018/19. While Nepal’s external payments and foreign reserves situation currently appears stable, businesses interested in Nepal are advised to monitor these indicators as a potential macroeconomic vulnerability.
The Nepali rupee is pegged to the Indian currency (INR 1 = NPR 1.6); thus the Nepali currency fluctuates against the USD in line with the INR.
Historically, Nepal has attracted little Foreign Direct Investment (FDI) relative to comparable countries. As per World Bank data, FDI as a percentage of GDP from 2014 - 18 stood at 0.4% for Nepal compared to 1.6% for South Asia and 3.5% for Low Income Countries (LICs) worldwide. Annual FDI inflows into Nepal, which rose from $125 million in FY 2016/17 to $168 million in FY 2017/18, dropped to $116 million in 2018/19, and rose again to $167.7 million in 2019/20, according to the NRB. While there has been growing interest from foreign, especially Chinese, investors in Nepal ,the pandemic may slow FDI into Nepal in the near term. An NRB report shows that the total stock of FDI in Nepal as of July 2019 was $1.62 billion, of which the U.S. share was 2.4 percent ($39.7 million).
Nepal’s ranking in the World Bank’s Ease of Doing Business rankings improved from 110 in 2018 to 94 in 2020, raising it from fourth to third ranked in South Asia. The World Bank notes improvements in the process for receiving permission to do business in Nepal including improvements in credit mobilization, international trade, and contract formation. According to this World Bank indicator, Nepal is an easier place to do business compared to neighbors Pakistan and Bangladesh, but more difficult than in India and Bhutan.