ILLUSTRATION: SHUTTERSTOCK
IF YOU want to understand why a country blessed with 83,000 megawatts of hydropower potential and the world’s deepest gorge cannot keep its own talent at home, a good place to start is the document Nepal’s finance ministry recently released. Officially titled a “White Paper”, it runs to seventy-six numbered paragraphs across eighteen sections, plus annexes. Most such documents are harmless exercises in self-praise. This one reads like a list of self-inflicted mistakes, written with a level of honesty that is almost self-destructive.
The foreword, signed by finance minister Swarnim Wagle, sets the tone. Nepal’s core problem, it states, is not a scarcity of resources: it is a “distorted incentive structure” in which politics became “a medium of investment”, elections grew expensive, funds were collected opaquely and economic returns flowed from “rent-seeking through licences, contracts and regulation”. The result, the white paper concedes, is a state that “punishes entrepreneurship”.
That phrase deserves to be underlined. A government’s own economic manifesto declares that its prevailing apparatus is hostile to the very people who might generate growth and jobs. Small wonder, then, that large numbers of capable Nepalis conclude that the only rational move is to leave before they have built anything at all.
The scale of the exodus is laid out in the data. Last fiscal year some 839,000 Nepali workers obtained labour approvals for foreign employment (506,000 of them for the first time). That figure is roughly equivalent to the entire population of Kathmandu’s metropolitan core. The remittances they send home have become the economy’s load-bearing wall. Without that torrent of cash from the Gulf states, Malaysia and elsewhere, Nepal’s current account would not have posted a surplus of Rs409bn. And foreign-exchange reserves now cover 18.5 months of imports, a cushion that is the envy of far richer Asian nations.
Remittances have underwritten macroeconomic stability of a sort, but they have also acted as an anaesthetic. By keeping the external sector cushioned, the cash from abroad has reduced the pressure on a political class that has, for decades, failed to make the home economy productive. The white paper itself notes the danger: while remittances provide “short-term relief”, they create “a shortage of skilled and semi-skilled manpower domestically” and increase “the risk of long-term human capital erosion”. It is a way of saying the country is exporting its brains and brawn to import groceries.
What greets the entrepreneur who decides, against the odds, to build something in Nepal? First, a financial system that is flush with deposits but cannot find anyone creditworthy to lend to. Banks and financial institutions hold deposits of over Rs7.7trn. Credit to the private sector had grown by just 3.5% in the eight months through mid-March. The gap between what banks collect and what they can push out has driven excess liquidity parked at the Nepal Rastra Bank to Rs904bn. Lending rates are at their lowest in years. Even so loan demand is flat. The white paper attributes this to “political instability and other factors” that have “undermined business confidence”. That is a bloodless phrase for a corrosive reality: the private sector does not trust the environment enough to borrow cheap money.
Meanwhile the non-performing loan ratio at financial institutions has crept up to decades-high. The problem is not yet systemic but the direction of travel worries regulators. When an economy’s best-known businesses are reluctant to invest and the smaller ones are struggling to repay, the banking system’s balance sheet becomes a mirror of the real economy’s health.
Second, the entrepreneur faces a state that cannot spend its own budget. Over the past decade actual federal expenditure has averaged 26.8% of GDP against appropriations averaging 33.7%. Capital spending—the bit that builds roads, irrigation and transmission lines—accounts for just 19% of total federal outlays, and even then only 64% of the capital budget gets used. In the last fiscal year, capital expenditure was a meagre 14.8% of the total. The government’s recurrent bill, dominated by salaries and a swelling social-security allowance roster that now covers 12.4% of the population, eats up 63%. The white paper deploys a dry term for the backlog of contractual commitments that have no matching funds: “outstanding payable liabilities”. The figure sits at Rs290bn, which is 14.7% of this year’s appropriated budget. Month after month, builders and suppliers go unpaid.
Third, the regulatory undergrowth is dense and tangled. Nepal has been on the Financial Action Task Force’s “grey list” for money-laundering and terrorist-financing concerns since last year. The white paper acknowledges that the international community “is yet to be convinced” of the country’s progress on sixteen required reforms. Being grey-listed makes cross-border banking slower and costlier for legitimate firms. At home around 40% of GDP is estimated to come from the informal economy. Nearly half of all economically active establishments operate without registration. Among those that do register, only 52% keep proper accounts. The state has created a two-track system: a formal sector that is squeezed by compliance costs and an informal one that largely escapes the tax net. The hundred largest taxpayers account for about 51% of total internal revenue. Everyone else either cannot be found or will not pay.
The upshot is a revenue base that depends, precariously, on imports and consumption. About 45% of tax takes come from merchandise imports. When imports slow because the economy is sluggish, revenue collapses—which is what happened in recent years. The white paper reports that revenue grew at an annual average of 8.7% in the five fiscal years since covid, compared with 14.9% in the five years before it. In the current fiscal year, up to mid-March, the growth rate was just 4.4%. Targets are repeatedly missed; over a decade collections have averaged 87.6% of the budget goal.
An entrepreneur who has navigated the banking system, waited for a government contract that might never be paid, and dealt with a tax authority hungry for what little it can extract, then confronts the physical realities. Nepal has quadrupled its installed electricity capacity in a decade to 4,105 MW, an achievement that is impressive. Yet transmission lines lag behind generation, meaning power cannot reliably reach demand centres. The country covers roughly 46% of its land area in forest, but imported wood and furniture worth Rs3.1bn in the first eight months of this fiscal year because it cannot manage its timber commercially. Iron and limestone deposits are abundant, but no mine operates at scale. The white paper calls this state of affairs “paradoxical”. It might more accurately be called diagnostic.
Tourism should be a natural earner. Around 1.16m foreign visitors arrived in 2025, staying an average of 16.3 days. But a second international airport, built at great cost in Lumbini, sits underutilised because air connectivity is weak and the state-owned carrier cannot be relied upon. Hotel capacity exceeds 64,000 beds a day yet the industry is seasonal and volatile. A temperate-zone country with the Himalayas as its backdrop should be a year-round destination. Instead it is a two-season one.
The white paper lays out eleven “opportunities for economic transformation” and four “catalytic sectors”. It sets a target of 7% average growth with per-capita income rising above $3,000 within five to seven years. To get there it proposes pushing installed electricity capacity to 15,000 MW, modernising agriculture, building tourism infrastructure and embracing artificial intelligence. The aspirations are sensible. The question is whether the institutional machinery described in the preceding seventy-five paragraphs is capable of executing any of them.
There is a troubling clue in the section on public enterprises. The government has equity and loan investments totalling Rs704bn across forty-five firms. Twenty-eight are profitable, fifteen lose money and two have shut down. The dividend yield on equity was 2.4% in the last audited year. Some enterprises have not been audited regularly, so “accumulated losses and potential liabilities cannot be ascertained”. A state that cannot get a return from its own companies is going to struggle to catalyse a private investment boom.
Foreign direct investment, in any case, remains negligible. Over the past decade Nepal attracted just $1.13bn in FDI. That is 0.2% of what South Asia as a whole received. In the first eight months of this fiscal year the figure was Rs10.84bn ($71m). Global investors have looked at Nepal’s regulatory instability, its grey-list status, its 34-out-of-100 score on Transparency International’s Corruption Perceptions Index and its BB- credit rating from Fitch, and decided to put their money almost anywhere else.
The white paper is not without hope. Its very existence—mandated on the day Mr Wagle took office—signals a government that wants to be seen as serious about diagnosis. The document names the problem without flinching: policy instability, the confusion between statist and market orthodoxies, the capture of regulation by incumbents, the punishment of entrepreneurs. In doing so, it has produced something that could serve as a checklist for reform.
But checklists do not build factories. They do not stop a 22-year-old engineering graduate from queuing at a manpower agency in Kathmandu for a visa to Doha. Nepal’s economic white paper unwittingly makes the case that the most profitable thing a capable Nepali can produce is a remittance slip. Until the incentive structure the finance minister decries is dismantled, the country will continue to be a net exporter of the one resource it cannot afford to lose. ■
