While Nepal made substantial progress in poverty reduction and several other development outcomes, such as those related to health and education, as part of the Millennium Development Goals and has been making further progress since the launch of the Sustainable Development Goals (SDGs) in 2016, it faces a challenging road ahead to meet its development aspirations, notably to become an upper middle-income country by 2030. Nepal’s per capita gross national income (GNI) was US$1,340 in 2022 (current dollars, Atlas method, World Bank). The country is graduating from the least development country (LDC) category in 2026 without meeting the income criterion. It has the lowest per capita income among the dozen LDCs on track towards graduation. This reflects a key structural challenge faced by the Nepali economy masked by other, more positive, development outcomes, especially in the social sector. The challenge pertains to de-industrialization, low productive capacity and a poor rate of creation of decent jobs.
The structure of its economy has transformed significantly in the last three decades, with agriculture’s share in GDP falling and services’ share increasing. The value added of agriculture, forestry and fisheries as a share of total value added in the economy has declined, from 40.8% in 2000 to 24.6% in 2022; so has the share of value added of industry (including mining; electricity, gas and water; manufacturing; construction), from 21.1% to 14.1%; while the share of value added of services has increased, from 37% to 61.2%. Manufacturing value added as a share of GDP has been in decline since the late 1990s; the peak share was 9%. Thus, manufacturing-led industrialization has bypassed the economy, while the booming services sector, largely of the non-tradable variety, has not generated enough decent jobs to an expanding labour force. Exports of goods and services as a share of GDP has seen a steady decline. As a share of GDP, exports of goods and services fell from 26.3% in 1997 to 6.8% in 2022, lower than the average for the LDCs, low-income countries and lower middle-income countries. On the other hand, imports have surged, leading to a huge combined goods and services trade deficit amounting to 35.8% of GDP in 2022. Nepal’s graduation from the LDC status in 2026 will pose additional challenges to its merchandise export sector.
The growth-enhancing effect of this structural change has been limited. During 2008-2018, the growth in per capita gross value added, just 2% , was driven by labour moving from low-productivity sectors to high-productivity sectors (static reallocation) and demographic change (an increase in the share of working-age people in the population), whereas the contribution of within-productivity growth was negative and that of dynamic reallocation of labour was also negative, the latter implying that sectors absorbing labour exhibited negative productivity growth in the aggregate.
Dearth of decent jobs has led to massive temporary work-related outmigration, with remittances emerging as the mainstay of the economy (amounting to 22% of the GDP in 2022) and contributing to the progress towards social development goals. As estimated 2.8 million Nepalis, out of a population of some 30 million, are working abroad.
Worryingly, during 2016-2019, the latest period for which an authoritative review of progress on SDGs is available, there was “slow” progress in SDG 8 (decent work and economic growth) and “no progress” in SDG 9 (industry, innovation and infrastructure). These are goals that were not part of MDGs, are critically associated with industrial growth, productivity, output and employment, and hence are significant determinants of structural transformation prospects.
Finding the resources to meet development goals was always a challenge. A huge resource gap was already staring at policymakers as the government embraced the SDGs. The lingering effects of the pandemic, the global economic slowdown and uncertainty, the economic shocks in the wake of the Russia-Ukraine war, and LDC graduation present additional challenges, have reversed or threatened to reverse progress on SDGs, and trigger additional resource demands while making resource mobilization more difficult, for both public and private sectors. The average real GNI per capita growth during fiscal years 2018/19 through 2022/23 has been about 2.3%, a far cry from the about 7.8% required during 2019-2030 to meet the SDG income target for 2030 in real terms. While economic growth has been modest, public debt has surged since 2017 such that the public debt-to-GDP ratio is now higher than the target for 2030. Sweeping import restrictions in 2022 led to a decline in tax collections in fiscal year 2022/23, bringing into sharp relief the government’s dependence on import-based taxes, which constitute about half of total tax revenue.
Soon after the launch of the SDGs, the total investment needs for attaining them were estimated at 47.8% of GDP in 2015 prices. The total financing cap was estimated at 12.8% of GDP. Investment requirements and resource gap are especially high for SDGs 8 and 9. An assumption underlying the resource mobilization target is an average GDP growth of 8.67% during the SDG implementation period. If GDP growth is 5%, the public sector financing gap as proportion of public sector investment needs will be 30% instead of 19.6%. Coming to reality: the actual average growth rate during 2015/16-2022/23 was 4% at basic prices and 4.2% at purchasers’ prices.
It’s high time Nepal wrote down and implemented an industrial development strategy (currently it has none) that is focused and results-oriented and can deliver sustained high economic growth and decent jobs. Otherwise, the sustained growth-effecting and decent jobs-creating structural transformation that eluded the MDG implementation period may elude the SDG period as well. The government is, apparently, looking elsewhere. In Nepal’s revised national-level indicators for SDGs, released in mid-2023, gross national disposable income (GNDI) per capita has replaced GNI per capita, while the target value remains the same. As GNDI, which includes remittances, exceeds GNI by 24%, the new target is easier to achieve, but this would imply that the government is, again, banking on remittances to save the day.
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