Global Economic Outlook and Nepal’s Challenges
The International Monetary Fund (IMF) has recently updated its global growth projections, increasing the forecast for 2026 from 3.1 percent to 3.3 percent. This upward revision highlights a more optimistic outlook for the global economy. Specifically, China’s projected growth for 2026 has been raised by 0.3 percentage points to 4.5 percent, while India’s growth projection has also seen an increase of 0.2 percentage points, reaching 6.4 percent. In addition, the World Trade Organization (WTO) forecasts that global merchandise trade volume will grow by 2.4 percent in 2025, up from the previous estimate of 0.9 percent.
Despite these positive trends, Nepal, situated between two emerging economic powerhouses—China and India—continues to face challenges in achieving sustained economic growth. Over the past 50 years, Nepal’s average annual growth has remained at a modest 4.3 percent. Although there was a period of higher growth following the reconstruction efforts after the 2015 earthquake, this momentum was disrupted by the impact of the Covid-19 pandemic. The economy contracted by 2.37 percent in 2019-20, and although the average growth rate recovered slightly to 4.1 percent over the next five years, it remains below the potential for sustainable development.
The World Bank has warned about the risks posed by heightened uncertainty, projecting a growth rate of 2.1 percent for the current fiscal year. This underscores the need for strategic interventions to revitalize Nepal’s growth trajectory.
Factors Affecting Growth Momentum
Nepal experienced a period of robust growth between 2016-17 and 2018-19, with an average of 7.8 percent. Several factors contributed to this growth, including post-earthquake reconstruction efforts, which included the construction of around 600,000 homes. Major infrastructure projects such as the Upper Tamakoshi hydropower project, Pokhara Airport, and Bhairahawa Airport played a key role in stimulating economic activity. Additionally, the implementation of federalism allowed for better resource allocation at the local level, supporting the development of roads and administrative buildings.
However, the efficiency and sustainability of these investments remain questionable. The outbreak of the Covid-19 pandemic disrupted this momentum, leading to concerns about loanable funds, interest rates, and foreign exchange reserves. While these issues have eased somewhat, with historically low interest rates and relaxed regulations by the central bank, growth prospects remain weak due to reduced investment.
Investment Trends and Economic Implications
Overall investment in Nepal, as a share of GDP, has declined to 24 percent in the last three fiscal years, compared to 30 percent in the preceding eight years. Similarly, private sector credit growth by banks and financial institutions has slowed to 6.3 percent, lagging behind nominal GDP growth. This is significantly lower than the 19.3 percent recorded in the decade prior to the credit slowdown. Despite high levels of private sector debt, credit needs to align with GDP growth to support economic expansion.
The decline in investment signals a continued lack of momentum in the economy. If bold measures are not taken to address this issue, Nepal may miss out on opportunities presented by the growing economies of China and India. These countries have played a significant role in driving global growth, and their expanding markets could offer valuable opportunities for Nepal through increased foreign direct investment, tourism, and infrastructure financing.
Pathways to Sustainable Growth
To achieve higher growth, Nepal must focus on both production and productivity. Investing in technology and digital infrastructure can enhance productivity, as highlighted by the IMF. AI-driven productivity gains could boost total factor productivity in emerging Asia by 0.3 to 3 percentage points. For countries like Nepal, catching up with advancements in artificial intelligence and technology is essential.
Key sectors such as tourism, energy, agriculture, and Micro, Small, and Medium Enterprises (MSMEs) should be prioritized. Additionally, areas like IT, education, health, herbal processing, and forestry present promising avenues for investment. Premature deindustrialization has had a lasting impact on Nepal’s long-term growth, and the country must encourage private sector investment in manufacturing and processing.
Modern industrial policies should go beyond traditional approaches and focus on innovation and cost savings. By investing in productive capacity, Nepal can reduce its reliance on external software and programs, saving significant amounts in maintenance costs.
Demographic Dividend and Policy Challenges
Nepal’s demographic profile offers potential advantages, particularly in utilizing its abundant labor force. However, the departure of 3 million people in the last four fiscal years highlights the failure to harness this demographic dividend effectively. Low investment and inefficiencies in service delivery have further hindered growth, emphasizing the need for an efficient private sector and improved government services.
Infrastructure development, industrial capacity expansion, and human capital accumulation are critical for sustained growth. Increasing capital formation, promoting digitization, and addressing information asymmetry in finance are equally important.
Conclusion: Toward Inclusive and Balanced Growth
Developing infrastructure and enhancing productive capacity require significant effort, whereas resource distribution is relatively easier. India’s experience shows that investing in high-value services and efficiency reforms can drive productivity growth. However, policy and political instability in Nepal have constrained its growth potential, resulting in uneven socio-economic development.
As the parliamentary elections approach, political parties must move beyond divisive debates and focus on creating inclusive growth strategies. Emphasizing production-oriented policies that generate employment and promote entrepreneurship is essential for Nepal’s future. As Martin Luther King Jr. once said, “Injustice anywhere is a threat to justice everywhere.” Nepal must work towards achieving higher, inclusive, and balanced growth.
