Nepal needs critical reforms to achieve economic prosperity

Nepal has a long road ahead in terms of economic development. Continuation of current practices might just hinder the growth prospects.

Photo: UNDP

Ayushma Maharjan

  • Read Time 4 min.

“At least the economic condition of Nepal is not as bad as in our neighbors like Sri Lanka, Bangladesh and Pakistan.” This is a statement I have heard multiple times in the past month. Well, in all sincerity, Nepal is pretty far behind them–our GDP or per capita income is nowhere close to what our neighbors have already achieved. Nepal is what these countries fear to come down to after an economic crisis. Big time for us to discern the sorry state of our economy and try addressing its problems.

Truth be told, Nepal has always been grappling through crises–financial, political, natural, another political, health, political yet again. The Global Innovation Index (GII) 2022 has ranked Nepal 119 out of 132 countries in terms of political environment, which consists of political stability and government effectiveness. Our rank is marginally above countries like Yemen, Iraq, Zimbabwe, Myanmar, and other war-torn countries or those with unprecedented political upheaval. Nepal’s score for government effectiveness (29.4 out of 100) is comparable to that of Iran (28.41), Cameroon (30.7), and Myanmar (28.2).

Political instability is like issuing a red alert for investors, signaling them to bet their money elsewhere. Nepal is a case in point. The total FDI inflow of Nepal for FY 2020/21 was USD 150.61 million. Haryana, merely an Indian state whose size is three times smaller than that of Nepal, alone had FDI inflow of USD 2,587.36 million in 2021. It is significantly higher than the total FDI stock of Nepal till 2021 which stood at approximately USD 1,750 million.

Along with a comparatively better political environment, what India offers its investors is an equally better regulatory and business environment, which is weak in Nepal. To put it in perspective, would you invest your money in countries like Iraq or Niger or Uganda? I bet your answer is ‘No!’ or these countries would probably be your last choice. Well, according to GII these countries score much higher than Nepal in these aspects. While Iraq ranks 106 out of 132 countries in terms of regulatory environment, Nepal’s rank is 114. GII suggests to investors that investing in Nepal is equally risky, if not more, as investing in Iraq.

Nepal needs a stable government that is dedicated to establishing proper policy and legal frameworks to foster an environment conducive to economic prosperity.  

Nepal has a long road ahead in terms of economic development and continuation of current practices might just hinder the growth prospects. What should Nepal do in its stead? Certainly, it should follow the footsteps of developed or rapidly developing countries and commence some critical reforms to improve its regulatory and business environment.

The Human Development Index (HDI) suggests that the top ten most developed countries are Switzerland, Norway, Iceland, Hong Kong, Australia, Denmark, Sweden, Ireland, Germany, and the Netherlands. It certainly isn’t a coincidence that these countries rank the highest in almost all indexes. These are amongst the top 25 most innovative countries according to GII, top 27 least corrupt countries according to Corruption Perception Index, and top 33 most economically free countries according to Economic Freedom of the World Index. Thus, if economic growth and stability is something that Nepal aspires to achieve, policies and practices of these countries can indeed provide some crucial insight.

Comparing merely in terms of regulatory and business environment, the Economic Freedom of the World Index reveals that the cumbersome business regulations, barriers to international trade, and legal system is what makes Nepal less attractive for investment or enterprising when compared to the developed countries.

The administrative requirements and the cost of bureaucracy which requires visiting multiple government offices (at least three or more in cases of industry registration and other licensing requirements) and submitting multiple (and duplicate) documents for inspection discourages individuals from operating a business in Nepal. The time required to start a business in Nepal is 23 days and it costs 20.2 percent of GNI to launch a start-up, the same is 2 days and 0.5 percent of GNI in Hong Kong, and 4 days and 0 percent of GNI in the United Kingdom.

Additionally, the cost of tax compliance is equally cumbersome. While the marginal tax rate of Nepal is comparable to that of developed nations, the excessive compliance and bureaucracy increases the cost of paying tax in Nepal. This, along with tariff and non-tariff barriers in international trade, and strict regulations in Nepal concerning capital movement, discourages both domestic and international investors. Even if an investor is willing to navigate through the challenges and operate an enterprise, the legal system of Nepal fails to provide sufficient security for the businesses.

Nepal’s score lies far behind in terms of implementation of rule of law, protection of property rights and legal enforcement of contracts. Operating in such an environment is too high an uncertainty for the businesses.

Initiating reforms in these sectors might be particularly beneficial for Nepal. Apart from these, the GII recommends that Nepal should work towards strengthening its human capital, infrastructure, markets, and create a conducive environment to transform knowledge into innovative ventures.

But again, for the reforms to be effective, Nepal needs a stable government that is dedicated to establishing proper policy and legal frameworks to foster an environment conducive to economic prosperity. One can only hope that the newly formed government will prioritize economic growth and set the agenda right.

Ayushma Maharjan ​​is a researcher at Samriddhi Foundation, an economic policy think tank based in Kathmandu. The views expressed in this article are the author’s own and do not represent the views of the organization. [email protected]