Nepal 2030: A middle-income developing country

Largely perceived to be a developing nation, Nepal endeavors to attain certain growth benchmarks in the next 15 years or so. In this light, the present circumstances however project contrasting elements of growth, exhibiting major disparities. Looking at the last 10 – 15 years, Nepal’s overall economic growth rate hovers around an average of 4%. Of late, this growth has faltered further, with estimates of rates as low as 0.77%, owing to economic shocks initially due to the earthquake and later by the supply chain disruption resulting from political agitations and blockade.  This economic downturn has compounded on the already high disparity across various facets as well as incidence of poverty.

Under such circumstances, the economy has only been able to sustain primarily due to high inflow of remittances equivalent to 32% of the GDP; which are mostly geared towards consumption purposes leading to higher imports and thus higher government revenues from customs and value added tax. On the other hand, exports have not been encouraging as Export-to-GDP stands at a mere 3%. Similarly, for a country undertaking large infrastructural projects for development, the capability to utilize funds is dismal; with poor capital budget execution, foreign direct investment at just NPR 107.13 (USD 1) per capita and gross private fixed capital formation at 19% of GDP.

Given these conditions, the mission for 2030 would be to aim for inclusive growth in order to address the issue of disparity; which if unaddressed could bring conflict and obstruct growth itself.

Keeping this in mind, the focus should be on two things i.e. size and speed at which growth occurs and balancing regional and ethnic discrepancies.

Firstly, the current 4% growth has to scale up to at least 8% in the course of 6 to 8 years. With demographic dividend favoring the country at present, it is crucial that the state fully utilize this window of opportunity in time. Otherwise, the country would be limited to just a subsistent economy, dependent on neighboring economies and unable to extract benefits of their prosperity. Simply depending on neighboring countries for imports and immigrants’ income (especially unaccounted numbers of people leave the country for Indian for seeking jobs) would limit Nepal’s growth levels no greater than current levels, while at the same time increasing instances of people leaving the country in search of foreign opportunities; since there would be no value addition to Nepal. Leveraging neighboring economy’s prosperity into some form of value addition would immensely assist in fostering growth and opportunities.

Secondly, Nepal needs to stride in capturing the competitive edge of regions, be it in tourism, hydropower or likewise, to ensure disparities across different regions are narrowed and opportunities created. Similarly, positive discrimination and targeted programs must be present to uplift certain sections of the population.

To achieve inclusive growth, a shift in policies on three key areas could be noted in the years to come.

Forging competitiveness: Firstly, policies to supplement in forging competitiveness across potential sectors should gain prominence. For instance, in agriculture, production has predominantly been cereals-centric; with 82% of total arable land devoted to it, while High-Value Crops (HVCs) only hold 18%. HVCs and medicinal and aromatic plants (MAPs) exhibit great potential for export as their demand appears to be rising at very fast. The situation, however, has begun to change as the government along with various development partners have initiated plans and programs to prioritize commercialization of HVCs. Nonetheless, to stimulate overall agricultural production, irrigation facilities should be made available all year round as well as the adoption of contract farming to tackle the problem of labor shortage.  The promotion of HVCs and MAPs deserves priority. Reducing skill mismatches, which is about 45% in the domestic market and significant among the total of overseas-bound youths, provides opportunities for skills and entrepreneurship development. A strategy could enhance the productive base of the economy considerably and help enhance opportunities for investment.

Harnessing export potential: With competitiveness, complimenting policies on exports would follow closely. Especially in hydropower, the potential for export is further boosted given the growing global emphasis on clean energy. Similarly, some areas of agriculture products, which have comparative advantages in Nepal, could be further promoted for exports. Nepal has potential to export products across the borders, especially to the Indian States bordering Nepal and integrate country’s agriculture system in the value chain network with the companies working in India and beyond.In addition, Nepal has the high potential to expand IT outsourcing activities. Wages are rapidly rising in India and Nepal can take benefit from it. Tourism could be a force for inclusive growth,offering jobs for lower-skilled people and bringing economic benefits to areas of the country without many othe rsources of income.It could also be transformational if higher value products andservices could be developed.

Leveraging regional economy: Given the growth and size of neighboring economy, Nepal should attract Indian and Chinese companies given that their market is expanding rapidly and their increased outward investment. There is also a possibility of relocation of industries from China and India. Nepal can become a strategic location for manufacturing components for multinational corporations. SMEs can benefit by linking with supply chains in India or worldwide including in Tibet.

Regional supply chains will promote intra-regional trade. This could address the current trade deficit. Similarly, regional pockets having particular set of economic advantages; be it through innovative business networking – especially exports or tourist attractions, should be able to derive gains out of these markets. Recently, the World Bank conducted a study on regional cooperation between Nepal, Bhutan, India, and Bangladesh. It found out that there is a huge potential for unrestricted electricity trade between countries; interconnection could save USD 226 billion over the years. Potential growth for Nepal is estimated to be substantial. Moreover, regional production of carbon dioxide will be reduced by 8%. Therefore, Nepal should see hydropower as a major driver of growth.

However, in a place where political considerations far outweigh economic rationale which in-turn influences the kind of policies that are devised, various domestic reforms must be initiated. At the broader level, the government should strengthen its credibility such that it projects the perception of economic progress and reduction in disparity wherever due, and seek to build capacity of civil service as well as adopt rewards and punishment system for the civil servants.

Similarly, the government must support competitive markets in that it keeps in check any elements of monopoly or oligopoly. Nonetheless, all in all the government must actually implement its priorities, evaluate outcomes and also enforce accountability. It is imperative that infrastructure bottlenecks, mainly in electricity and transportation, are eliminated; since these are integral aspects of reducing costs and attracting investments to make the economy more competitive.

Similarly, for a balanced development, discrepancies that arise in the economy, region, and ethnicities must be addressed through exploitation of regional comparative advantage and positive discrimination and education to the disadvantages groups of people. Likewise, although almost 50% of the municipalities have been clubbed within the purview of urban area, their governance still remains weak which needs to be strengthened by ensuring basic necessities such as drinking water, electricity, quality education and other public infrastructures along with supportive business environment. They could become the hub for development and drivers for the growth of hinterlands.