The economy of Nepal is developing category and largely dependent on agriculture and remittances. Until the mid-20th century Nepal was an isolated pre-industrial society, which entered the modern era in 1951 without schools, hospitals, roads, telecommunications, electric power, industry, or civil service. The country has, however, made progress toward sustainable economic growth since the 1950s. The country was opened to economic liberalization, leading to economic growth and improvement in living standards when compared to the past. The biggest challenges faced by the country in achieving higher economic development are the frequent changes in political leadership, as well as corruption. Agriculture remains Nepal's principal economic activity, employing about 65% of the population and providing 31.7% of GDP. Only about 20% of the total area is cultivable; another 40.7% is forested (i.e., covered by shrubs, pastureland and forest); most of the rest is mountainous. Fruits and vegetables (apples, pears, tomatoes, various salad greens, peach, nectarine, potatoes), as well as rice and wheat are the main food crops. The lowland Terai region produces an agricultural surplus, part of which supplies the food-deficient hill areas. Huge numbers of Small Foreign Investments come to Nepal via the Non Resident Nepali, who are investing in many sectors. Nepal has a huge potential for hydroelectricity. Accordingly, a large number of foreign companies are willing to invest in Nepal, but political instability has stopped the process. Nepal has entered into agreements for avoidance of double taxation with 10 countries (PSRD) since 2000. Similarly, it has Investment protection agreements with 5 countries (PSRD) since 1983. In 2014, Nepal restricted the Foreign aid by setting a minimum limit for foreign grants, soft and commercial loans from its development partners.
Top Sectors in Nepal
Agriculture in Nepal
In Nepal, the economy is dominated by agriculture. In the late 1980s, it was the livelihood for more than 90% of the population. Although only approximately 20% of the total land area was cultivable, it accounted for, on average, about 60% of the GDP and approximately 75% of exports. Since the formulation of the Fifth Five-Year Plan (1975-80), agriculture has been the highest priority because of the dependence of economic growth on both increasing the productivity of existing crops and diversifying the agricultural base for use as industrial inputs. According to the World Bank, agriculture is the main source of food, income, and employment for the majority of the population in Nepal. It provides about 33% of the gross domestic product (GDP). In trying to increase agricultural production and diversify the agricultural base, the government focused on irrigation, the use of fertilizers and insecticides, the introduction of new implements and new seeds of high-yield varieties, and the provision of credit. The lack of distribution of these inputs, as well as problems in obtaining supplies, however, inhibited progress. Although land reclamation and settlement were occurring in the Terai Region, environmental degradation and ecological imbalance resulting from deforestation also prevented progress. Although new agricultural technologies helped increase food production, there still was room for further growth. Past experience indicated bottlenecks, however, in using modern technology to achieve a healthy growth. The conflicting goals of producing cash crops both for food and for industrial inputs also were problematic.
Tourism in Nepal
Nepal's tourism industry, though hit hard by the COVID-19 pandemic, remains a significant contributor to the country's economy. Prior to 2020, tourist arrivals were steadily increasing, reaching 1.19 million in 2019. This influx generated revenue of $471 million and provided jobs for millions of Nepalese [3]. The breathtaking Himalayas, including Mount Everest, naturally draw adventure tourists for mountaineering, trekking, and other activities. However, Nepal also boasts rich cultural heritage sites and diverse ecosystems, attracting visitors interested in religious pilgrimages, wildlife safaris, and experiencing the unique traditions of various ethnic groups. With travel restrictions loosening, Nepal's tourism sector is poised for a rebound, capitalizing on its natural beauty and cultural richness.
Energy in Nepal
Nepal's energy sector is undergoing a period of exciting development, with hydropower leading the charge. The country, nicknamed the "water tower of South Asia" due to its abundant rivers, boasts a massive hydropower potential of 83,000 MW, with 45,000 MW considered economically viable [1]. This translates into significant progress between 2018 and 2022, Nepal doubled its installed hydropower capacity to 2,100 MW, with exports of surplus electricity even reaching neighboring India. However, challenges remain. Despite impressive growth in electrification rates, reaching 86% nationally, some remote areas still rely on off-grid solutions, and seasonal variations in rainfall can impact hydropower generation. Looking ahead, Nepal is aiming to further develop its hydropower potential while exploring alternative renewable sources to create a more secure and sustainable energy future.
Banking and Finance in Nepal
Nepal's banking and finance sector plays a vital role in the country's economic growth, but faces a balancing act. Deposit levels are encouraging, with a substantial 11.4% increase in mid-May 2023, reflecting a strong saving culture, especially evident in the 60% share held by fixed deposits. This indicates healthy financial resources available for investment. However, a potential roadblock lies in rising interest rates. The average base rate for commercial banks stood at 10.27% in late 2022, while lending rates are significantly higher at 12.65%. This wide gap could restrict access to credit, particularly for critical sectors like small and medium-sized enterprises (SMEs) that fuel economic activity and job creation. Managing interest rates to bridge this gap and fostering financial inclusion, especially for SMEs, will be crucial for Nepal's banking and finance sector to fully unlock its potential and propel the country's economic development.
17 Dec 2024
01 Jan 2025
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