Introduction:

Nepals geo-physical setting and time-zone location assume strategic significance in South
Asia. The rich biodiversity comprised of three ecological regions - mountain, hills and terai -
experiencing tropical, meso-thermal, micro-thermal, tiga and tundra climates provide 60-80
percent of the rainfall. The country possesses 2.3 percent of the worlds hydro- resources
attributable to four principal river systems, the life-line of Nepalese economy viz., Koshi
(east), Gandaki (central), Karnali (far-west) and Mahakali (far-west). Nepal has enormous
advantages and competitive edges to create for a most popular tourist hub and global
destination for tourists from all over the world. Preliminary geological surveys reveal that
subterranean resources are available in the country. However, the extent and commercial
potential of these mineral deposits are not exactly known.
Nepal is bestowed with 6,000 rivers and rivulets, 5,000 species of vascular plants, 175
species of mammals, and 850 species of birds and some specific herbal and medicinal plants
are used for the treatment of cancer. Of total approximately 30 million population, the size
of economically active population aged 15-59 years is estimated to be 54.2 percent (NLSS
III, 2010). Nepals territory is double the size of Sri Lanka, 3.5 times greater than
Switzerland, 6.7 times bigger than Israel, 23 times smaller than India, and 68 times less
than the size of China. The striking features of Nepalese economy constitute that
productivity and rainfall steadily increases from west to east; poverty is more acute and
pervasive in the north as compared to south; and migration tends to shift from north to
south.
2. The Current Economic Situation:

Nepalese economy is passing through a crucial phase circumscribed by poverty and
stagnation. The macroeconomic indicator reflects that Nepal suffers from a sluggish
economic growth rate compressed to 4.6 percent in FY 2011/12 against the target of 5.5
percent as envisaged in the 3-Year Interim Development Plan, 2010-12 (NPC, 2010). The
average inflation rate is hovering around 11.9 percent in August 2012, highest in the last
twenty-five months (NRB, 2012). The diminutive GNI estimated to be US$ 19 billion and
inordinately low GNI per capita (approx. US$ 745) exhibit that Nepal's economy is
conspicuously trailing behind other member countries in the South Asia region (WDR,
2012).
The economy is characterized by high cost economy, subsistence agriculture and alarmingly increasing
dependence attributing to built-in structural constraints and dwindling comparative advantages and
competitive edges to maximize benefits from globalization and liberalization. More than 74.0 percent of the
total population still derives their livelihood directly from agriculture, which is encapsulated by staggering
magnitude of disguised unemployment, mounting rural indebtedness, and a high incidence of poverty. A
vast majority of the people (25.16 percent) still live in abject poverty with wretched economic condition and
perpetual struggle for sustenance.
The rising consumption, poor savings and encouraging investment/GDP ratio led to a large fiscal and budget
deficits. The fiscal and budget deficits are estimated to be 8.6 percent of and 4.3 percent of GDP, and total
outstanding debt leveled at 32.7 percent of GDP in FY 2011/12 (Economic Survey, 2012). Merchandise
exports grew at a slow pace and imports rapidly increased resulting in a huge trade deficit (Rs. 387.41
billion) in excess of the size of annual budget (Rs. 327.8 billion) during the same period. Unfortunately, the
total magnitude of exports (Rs. 74.3 billion) is unable to match the import bill of petroleum products
equivalent to Rs. 94 billion in FY 2011/12 (NRB, 2012). However, balance of payments situation (Rs. 127.70
billion) remained unexpectedly favorable and foreign exchange reserves moderately increased to sustain
imports of goods and services for 10.3 months during the same period.
Growth of remittances has been robust as high as 23.0 percent of GDP, which has been
instrumental in reducing extent of poverty over the years. Share of foreign exchange
earnings from tourism sector stagnated and FDI declined to Rs. 7.14 billion in FY 2011/12.
Revenues are buoyant that surpassed the annual target with tax effort ratio (TER)
estimated to be 15.7 percent of GDP during the period. However, internal revenue
mobilization is inadequate to supplement counterpart funding for development activities.
Unfortunately, capital expenditure (Rs. 40.83 billion) suffers from under-spending
syndrome, which is compressed to 2.6 percent of GDP attributing primarily to inefficiency,
corruption and poor governance.
Investment in agriculture, the biggest and priority sector has been minimal confined to 3.2
percent of total resource allocations, and the share of manufacturing sector remained below
6 percent of GDP. Financial sector witnessed a tumultuous environment and commercial
banks suffered liquidity crunch during FY 2011/12 with reversal of credit crunch in recent
times, and there is indication that liquidity crisis is likely to persist again. NEPSE index
declined from 814 in 2008 to 389.74 in FY 2011/12 and the prospect for share market is
bleak with negative interest rates on saving deposits. At present, the demand for credit is
extremely low especially in priority sectors due to increasing risks and uncertainties with
protracted transition.
3. Critical Constraints to Growth :
The major critical constraints to growth in Nepal include: (1) high-cost economy, (2)
subsistence agriculture, (3) alarmingly increasing dependency, (4) extremely poor
infrastructures, (5) low investment in priority sectors, (6) acute and pervasive poverty, (7)
limited items for exports (8) lack of employment opportunities at home, (9) fragile industrial
relations (10) lack of pragmatic industrial and foreign investment policy, (11) persistent
stagflation, (12) huge subsidies to public enterprises, (13) frequent disruption in the supply
of petroleum products, (14) poor capacity to spending capital expenditures, (15) revenues
are inadequate to supplement the counterpart funding, (16) relatively high tax burden, (17)
tumultuous financial sector, (18) poor implementation of reform programs, (19) growing
inefficiency, rampant corruption and poor governance, and (20) prolonged transition.
4. The Major Crucial Issues:
The major crucial issues facing the economy include: (1) how to transfer excessively
dependent extra population from agriculture to more productive non-agriculture sector by
creating employment opportunities and thereby reducing extent of poverty? And, (2) how to
integrate domestic economy with neighborhood, regional and global economies to maximize
benefits from globalization, liberalization and market economy to achieve a sustainable,
high and inclusive economic growth?
5. Foundation of Nepalese Economy
The prime foundations of Nepalese economy are comprised of: (1) Hydropower: Of total
theoretical hydropower potential (83,000 MW) only 0.9 percent has been exploited so far
and domestic demand is estimated to be 1,200 MW for FY 2012/13. Hydropower
development could enrich prosperity in South Asia Region. (2) Tourism: Nepal has
enormous potentials to make a regional hub with global destination to attract tourists from
all over the world. (3) Biodiversity: The rich eco-system and a variety of species have
tremendous economic potential. (4) Export Potential: In 2010 Nepal Trade Integration
Strategy (NTIS) indentified nineteen key commodities and services that have export
potential. (5) Human Resources:Increasing remittances through foreign employment have
been instrumental in poverty reduction. (6)Agriculture especially high value
crops: There exists enormous potential for agriculture development especially high value
crops through promoting agribusiness and commercialization.
6. Mission, Vision and Strategic Objectives:
The vision or mission of Nepalese economy is to build a strong economic nation-state
through achieving a high, sustainable and inclusive growth with active participation of the
people ensuring a high quality of life to each individual and household within given
timeframe.
The specific strategic objective should be to: (a) increase diminutive magnitude of GNI from
US$ 19 billion to US$ 100 billion and transform economy from a low income with US$ 745
GNI per capita to the level of middle income economies with average GNI per capita
estimated to be US$ 3,764 by 2025; and (b) ultimately, make Nepal the Switzerland of
Asia by 2050.
7. Conclusion:
It is necessary to devise a model for export-led and private- sector led open and
competitive economy with due consideration to social security and welfare of the people.
The model must ensure a high growth trajectory with substantial poverty reduction
especially through mobilizing FDI on a greater quantum for infrastructure development. It is
important to explicitly distinguish the sector functions to be undertaken separately by the
government and private sector.
There is need to expedite both vertical and horizontal merger of financial institutions by
offering attractive package of incentives. The defaulters should be given a maximum three-
month time to settle the loan above Rs. 10 million borrowed from financial institutions. In
case of delinquency the government and NRB should strongly act against the defaulters to
expedite repayments through the sale of collateral including from the personal guarantee.
The primary function of the cooperatives should be tied-up with the production activities for
creating employment opportunities especially at local levels, and this should be made
mandatory.
There is need to set reordering of priorities and correspondingly determine the level of
investment based on viable economic areas comprising hydropower, tourism, bio-diversity,
human resources (foreign employment and remittances), limited exports (carpet, garments,
handicrafts and pashmina), and agriculture with special reference to high value crops. The
government should effectively induct and implement the policy of economic diplomacy to
expedite bilateral trade and investment on the basis of comparative advantages and
competitive edges with friendly countries in cooperation with Nepalese diplomatic missions
abroad. The economic diplomacy should also be instrumental to mobilize foreign assistance
in priority areas especially in the context of economic growth and poverty alleviation.
All state owned enterprises (SOEs) except specified by the government should be privatized
within a maximum three-year period. The government should totally abandon the policy to
undertake business, establish industries and provide subsidies to SOEs, for this comes
under the jurisdiction of private sector - a vehicle for economic development. The
government should effectively work in tandem with private sector to attract FDI for initiating
mega-projects in priority areas by creating investment-friendly environment conditioned to
enduring peace and stability in the country. In compatibility with the spirit of liberalization
the government should open up access to investment across the country and maximize the
benefits from globalization especially through promoting joint ventures in banking sector.
A scientific land reforms system should be introduced with a view to increase productivity of
agriculture and individuals must have the right to create wealth but with payment of taxes
to government as per the existing rules and regulations. The government must be able to
abolish dual ownership on land by offering reasonable package of incentives to absentee
landlords if they are willing to relinquish ownership and transfer entitlement to the actual
tillers. The new constitution must have the provision for ensuring food security as a
fundamental right.
Industrial relations need to be substantially improved through initiating tripartite agreement
among private sector, trade unions and the government. The development plan, annual
budget, national policies and programs should be formulated on the presumption of
interdependence to galvanize the cooperation from neighborhood economies, donor
communities and multilateral funding agencies. The National Planning Commission (NPC)
should maintain its separate entity and play the crucial role of a Think-Tank at macro-level
backed by legal status to effectively implement its decision and formulate the periodic plans
ensuring appropriate delivery of the results.
The NRB and Department of Cooperatives under Ministry of Agriculture and Cooperatives
must strengthen their capacity to effectively supervise a large number of financial
institutions in the country. The quality of middle-level manpower aspiring for foreign
employment should be improved. Since tax burden is relatively higher in Nepal compared
with South Asia region employing GNI per capita criterion, the tax system must be made
simple, transparent and competitive to attract FDI and promote indigenous investments. In
this context, special economic zone (SEZ), industrial corridors and industrial estates must
operate more effectively to promote exports.