Nepal's informal businesses struggle at subsistence level, World Bank reports

Most informal microenterprises in Nepal operate at subsistence levels, trapped by necessity with little hope for growth, according to a recent World Bank report. The study, "Survival or Growth? Nepal’s Microenterprise Landscape and the Case for a Differentiated Policy," highlights that these businesses are largely survival-driven, established by individuals facing limited employment opportunities and low earning potential.

Owners of informal businesses often run them to meet basic needs or as a secondary income source due to the scarcity of quality wage employment. While these enterprises form a significant part of Nepal's urban business landscape and act as a safety net, they struggle with productivity gains and structural transformation. The World Bank found that only a small fraction of informal firms can truly benefit from formalization.

The report advocates for a segmented policy approach. It suggests providing livelihood support and social protection for the majority of informal firms, while offering targeted assistance for productivity enhancement and formalization to the minority with growth potential. "The government’s ambitious economic growth targets cannot be achieved unless informal businesses are gradually brought into the formal economy," stated Nara Bahadur Thapa, former executive director of Nepal Rastra Bank. He noted that widespread informality hinders economic growth, weakens government revenue, and reduces fiscal policy effectiveness, citing complicated registration, inadequate support, and limited bank financing as key reasons for informality.

The findings are based on the Informal Sector Enterprise Survey conducted by the World Bank across eight Nepali cities: Biratnagar, Birgunj, Butwal, Dhankuta, Janakpur, Kathmandu, Nepalgunj, and Pokhara. The survey revealed that owners of these necessity-driven businesses typically have low education levels, limited business experience, and few alternatives in the labor market, with most starting their ventures due to an inability to find other income sources.

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The government’s ambitious economic growth targets cannot be achieved unless informal businesses are gradually brought into the formal economy.