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IN THE QUARTER-century to 2020, Vietnam’s economy grew by more than 6% a year on average. Bangladesh managed over 5%. Even Myanmar, amid turmoil, posted 4.5%. Nepal’s figure was 4.1%. That subdued pace might seem respectable, even resilient, for a landlocked country lashed by earthquakes and political upheaval. But it reveals a dispiriting truth. Nepal is not poor because it is battered by crises. It is poor because in the intervals between them, it does not grow nearly fast enough. Its economy has achieved stability, but at the cost of ambition. It has become a plateau.
Consider the recent numbers. After the covid-19 pandemic, many economies snapped back with a vengeful roar. Nepal’s managed a whimper. Growth recovered to 5.6% in the 2022 fiscal year, then sank. It is now hovering around 3%, less than half India’s rate. The official ambition, outlined in a plan called “Prosperous Nepal, Happy Nepali”, is to vault into the ranks of high-income countries by 2043. That would require two decades of annual growth above 10%. The present course would deliver something closer to 3%. At that speed, the destination might as well be the moon.
Also read: Nepal’s low-growth trap
Nepal’s problem is not a lack of resources. It has one roaring success story: hydroelectric power. A decade ago the country endured daily blackouts. Today, thanks to a cascade of new projects, it is a net exporter of electricity to India. The numbers are staggering. In some recent quarters, output in the electricity, gas and water sector has grown by more than 80% year on year. Yet that very triumph underlines the wider failure. All that power is either sold cheaply to a neighbour or used at home to illuminate a stalled economy. In other words, Nepal has built the engine, but it is missing the train.
The train, in development parlance, is a productive industry. Here the data are grim. Manufacturing’s share of the economy has been shrinking for years (see chart below). In the past few quarters, factory output has often grown by less than 2%, sometimes contracting. Construction, a bellwether for domestic investment, is in a slump. For a country at Nepal’s stage of development, that is an ominous pattern. Every nation that has climbed from poverty to prosperity has done so on the back of sustained manufacturing growth. Nepal is deindustrialising while still poor (see this).
Why does the industrial heart not beat? Part of the answer pulses in the wrists of migrant workers. Remittances from Nepalis toiling in the Gulf and beyond amount to nearly 30% of GDP. That money fuels consumption, props up the currency and fills the state’s foreign-exchange reserves. It also acts as a narcotic. The strong rupee makes imports cheap and local production uncompetitive. A study by the International Labour Organisation notes that remittances largely finance consumption of imported goods, rather than productive investment. The money builds houses, instead of building factories.
That points to a deeper ailment. Nepal’s growth is consumption-led instead of investment-driven. The state is particularly feeble at turning plans into concrete and steel. For years it has failed to spend its allocated capital budget, with ministries tending to absorb less than two-thirds of the money set aside for roads, bridges and ports. A payment crisis among public contractors is perennial. The private sector, meanwhile, channels its funds into speculative real estate and trade, not machinery or technology. Growth feels brisk when remittances flow and credit is cheap. It sputters when the taps tighten. This is not a development model.
Politics amplifies the trouble. Nepal has had a dozen governments in the past sixteen years. Policy does not so much reverse as waft in random eddies. Prime ministers tend to focus on staying in power when they should be overhauling the economy. Vital reforms to land acquisition, labour laws and foreign investment remain dormant. A spate of youth-led protests last year, sparked by revelations of widespread corruption, spoke to a stronger disillusionment. Why stay and build a country when the pathway to a better life is a one-way ticket to Doha or Dubai? The human capital that should be driving Nepal’s industrialisation is busy building other nations (see this).
Some see a digital escape hatch. Optimists talk of “cyber Gurkhas”, a generation of tech-savvy Nepalis exporting services over fibre-optic cables, thus bypassing the treacherous Himalayas. The IT sector does show promise, with growth in double digits, albeit from a tiny base. But even that hopeful sign shows the scale of the challenge. A thriving tech scene needs reliable power, good education and stable internet. It also needs clients. Without a broader industrial base, the market for sophisticated digital services at home is small. Tech graduates, like their construction-worker cousins, may find their skills are ultimately worth more abroad.
So what is to be done? The advice is as well-known as it is ignored. The government must fix its abysmal project execution, spending the money it budgets on the infrastructure it promises. It must use its electricity bounty as a tool for industrial policy, offering cheap, reliable power to targeted industries to stimulate local manufacturing. It needs to wean itself off remittance dependency by making it worthwhile for Nepalis to invest their skills and savings at home. That means tackling corruption, securing property rights and fostering a regulatory environment that rewards production over speculation.
None of this is easy. All of it is necessary. For now the plateau persists. Nepal’s economy absorbs shocks with admirable resilience, but it does not convert peace into progress. It has achieved a kind of equilibrium, where the misery of deep crisis is avoided, but the exhilaration of rapid development remains out of reach. The hydroelectric dams are a sign to what is possible. The silent factories are a testament to what is not. Until all of that changes, Nepal will remain a country in suspense, holding steady, going nowhere. ■
