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WHEN A COUNTRY’S workers go abroad in search of wages, the money they send home can transform lives. In Nepal, remittances have done exactly that: swelling from about 2% of GDP in 2000 to more than 25%, among the highest ratios anywhere. Families eat better. Children stay in school. The streets of Kathmandu are clogged with new SUVs bought with earnings from the Gulf. But the same inflow that has lifted living standards has crushed something else: the capacity of Nepal to make things.
Manufacturing’s share of real GDP has fallen from 7.3% during the insurgency years of the late 1990s and early 2000s to just 5.7% by 2023. That is a structural collapse, all the more striking because peer economies (Bangladesh, Bolivia as well as Cambodia) have held steady or grown their industrial sectors over the same period. Construction, cyclical and weather-beaten, has displaced manufacturing as the largest industrial subsector. Exports have stagnated at 7% of GDP. The country now exports its people rather than its products.
The new government, led by the Rastriya Swatantra Party (RSP) after its landslide victory, should reverse that. It has set a target of 1.2m new jobs within five to seven years. That is an ambitious number and the party knows it cannot be reached through digital-economy slogans alone. This publication argues that manufacturing—factories, agro-processing plants, export-oriented industries—must form the backbone of any credible jobs strategy. Blue-collar Nepal cannot live on apps alone.
The diagnosis is straightforward. The remittance surge has driven up domestic prices in non-tradeable sectors such as housing and services. That has caused Nepal’s real effective exchange rate to appreciate by roughly 35% since the rupee was pegged to India’s currency in 1993. The World Bank reckons the remittance inflow alone accounts for about 16 percentage points of that appreciation. A 10% rise in the bilateral real exchange rate with India—Nepal’s dominant trading partner—knocks 3% off exports. Over the decade to 2021, this effect cumulatively suppressed merchandise exports by more than 10%. For a manufacturer trying to sell into the Indian market, it is like running uphill on a greased slope.
The policy environment has made matters worse. Tariffs on imported raw materials and intermediate goods—the stuff factories need to make things—are relatively high. The World Bank’s firm-level analysis finds that a one-percentage-point increase in input tariffs reduces exports by 2%. The cumulative increase in such tariffs between 2011 and 2021 may have suppressed exports by an additional 8%. Duty drawback schemes, which refund tariffs on inputs when finished goods are exported, exist on paper but are hard to access in practice, especially for small firms. The result is a system that taxes production and subsidises nothing.
The RSP should propose five pillars for revival. The first is trade policy overhaul: a rapid audit of input tariffs; digitalisation of duty drawback; and aggressive free-trade negotiations ahead of Nepal’s scheduled graduation from least-developed-country status later this year, which will cost it preferential access to many markets. The second is special economic zones: three serviced industrial parks along the fertile Terai belt with reliable power and one-stop regulatory clearance. The third is energy policy designed for industry, not just households: preferential electricity tariffs for manufacturers; fast-track licensing for small hydropower projects; and a marketing campaign that sells hydropower as an industrial-development tool rather than a climate talking-point.
The fourth pillar is agro-processing, which is Nepal’s most job-intensive manufacturing opportunity. The country produces world-class tea, coffee, cardamom, ginger and honey, but exports most of it raw. A dedicated agro-processing policy with rural industrial clusters and geographic-indication branding could generate 150,000 formal jobs within five years. The fifth pillar is skills reform: industry-led training councils, apprenticeship subsidies and a system to recognise the technical qualifications of workers returning from the Gulf, whose experience is currently wasted.
All this is sensible. The question is whether it is possible. Nepal’s history of political instability—ten governments in the decade since the 2015 constitution—has made long-term industrial policy nearly impossible. The RSP now looks set to hold a commanding parliamentary majority, which removes the immediate coalition friction. But a single-party government with no effective opposition can also become a government with no effective feedback. The risk of arbitrary decisions, of regulatory discretion exercised in favour of connected firms, is real.
The bigger constraint is structural. The rupee peg with India, unchanged since 1993, has locked in an overvaluation that no amount of tariff reform can fully offset. Adjusting it would risk inflation and would require coordination with the central bank. Katmandu Macro Advisory, our research arm, recommends a joint review, exploring a crawling peg, but warns that the worst outcome would be a disorderly shift. That is prudent. It is also an admission that the single most important variable in Nepal’s manufacturing competitiveness lies partly outside the government’s control.
Then there is the matter of scale. The job projections, by our research arm, are plausible on paper: 150,000 in agro-processing, 130,000 in garments and textiles, 80,000 in hydropower supply chains and so on, cumulatively reaching nearly 900,000 manufacturing-led jobs within five to seven years. Combined with projected gains in digital services, tourism and finance, the 1.2m target becomes conceivable. But these numbers depend on implementation: on SEZs that are actually built; on tariffs that are actually cut; and on investors who actually come.
The RSP has an opportunity that no party in Nepal has enjoyed for a generation: a working majority and an electorate that has explicitly rejected the old ways. But the old ways were not just corrupt: they were also, in industrial terms, lazy. They relied on remittances to paper over the absence of production. The new government proposes to build something different. The architecture is there. The construction will be the test. ■
