Nepal's economy needs more than a majority to overcome its challenges

Nepal's economy is caught in a low gear, struggling to meet citizen expectations despite possessing several rare advantages for an economy at its income level. The gap between what people expect and what the state can deliver is a central challenge, one that the new government, elected on the back of youth protests, has yet to fully address.

Political instability has been a recurring theme, with frequent government changes since the mid-1990s hampering economic progress. The decade-long Maoist insurgency, for instance, caused growth to plummet to a 36-year low. While the economy recovered after the 2015 constitution and again post-COVID-19, a subsequent surge in imports depleted foreign reserves, leading to central bank restrictions on credit and imports. This clampdown, according to former banking association president Bhuwan Dahal, inadvertently pushed economic activity into illegal imports.

Nepal boasts a young median age of 25, substantial loanable bank funds, low interest rates, and tariff-free access to developed markets. However, these strengths are not translating into jobs. Each year, about 500,000 young Nepalis enter the labor market, a number neither the state nor the private sector can absorb. Consequently, around 700,000 people leave the country annually for work abroad. Bureaucratic hurdles, such as needing to visit up to seven agencies to register a business, and the unavailability of credit without collateral further stifle growth. A crisis in cooperatives and microfinance has also disrupted informal credit lines crucial for small traders.

The result is an economy where households save rather than spend, investors hesitate due to uncertain returns, and liquidity remains unused in the banking system. Compared to regional peers like Cambodia, which attracts significantly more foreign direct investment, Nepal's FDI remains under 1 percent of GDP, highlighting a persistent challenge in translating potential into tangible economic development and job creation.

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The side effect? It pushed activity into illegal imports instead of curbing demand.