Economic Development of Nepal: Challenges

Introduction to Economic Development

Before, we define the term ‘Economic Development’, we must know the meaning of Economic Growth. We often misunderstand the term ‘Economic Development’ with ‘Economic Growth’. Economic growth is nothing but the increase in the quantity and quality of the economic goods and services that a country produces. Growth only considers the improvement in the market value of the goods and services produced.

Economic Development is a wider and more democratic concept. Economic development considers the overall development of a nation including the economic growth factors. It includes positive change in the social, political, environmental, natural, cultural, technological and economic factors. Economic development leads both the quantitative and qualitative changes in the socio-economic elements. It reflects the positive change in the quality of life in a country.

Modern theory of development suggests that economic dimension alone is not sufficient, for economic development, there requires institutional and social change in social practices, beliefs, values and customs and one must remove the backward internal structure that is causing underdevelopment. Therefore, Economic Development is the creation of wealth from which community benefits is realized.

Determinants of Economic Development

There are various factors that determines the economic development. As economic development is a wider concept to economic growth, there are various economic and non-economic factors that impact the level of economic development. Some of such economic and non-economic factors of economic development are as follows:

Economic FactorsNon-Economic Factors
Natural ResourcesHuman Resource
Capital FormationPolitical Freedom
Size of the marketSocial Organization
Structural ChangeDesire for Development
Financial SystemMoral, Ethics and Social Values
Marketable SurplusTechnological Knowledge
Foreign TradeSocietal Formation
Economic System

Economic Development of Nepal

Nepal has a long history of its existence. It is one of the oldest countries in the world. Nepal, as a country, has seen different phases of socio-economic development, along with the changes in the world economy.

Nepal is one of the least developed countries in the world. It is located between China and India, the two fastest growing economies in the world. Nepal marched towards the modern development with the beginning of democracy in 1951. This democracy led to a new era of socio-economic awakening and realization of the need of major reform. In Nepal, the economic reforms started in the mid-1980s and intensified in the early 1990s after the restoration of democracy in 1990. It is one of the most liberalized country in the South Asian Region. There has been some significant progress in Nepalese economy but political instability is dragging and undermining such reforms.

Some Important Indicators to Economic Development

IndicatorWorld’s BestNepal
Human Development Index (HDI)0.9570.602
Life Expectancy at Birth82.4 years70.8 years
Adult Literacy67.9 %
Multidimensional Poverty Index0.074
GDP Per Capita $ 125,923$ 1,166
Gross Domestic Product (GDP)$19.49 Trillion$30.90Billion
Prosperity IndexNorway114
Unemployment Rate0.1%3.60 %
Gross National Income (GNI) per capita$78,290$1,190
Remittance Receiving Rank23rd
Inflation Rate4.35%3.6%

Challenges in Economic Development in Nepal

Nepal is ranked 142nd in Human Development Index out of 189 countries. In Corruption Perception Index, Nepal is at 117th rank out of 180 countries. Nepal is ranked 85th in Happiness Index. All these ranks for different determinants to Economic development suggest not so uplifting scenario. There are many factors that globally affects to the economic development and there are some country specific challenges that obstruct to Economic development. Some of the challenges to Economic Development in Nepal are:


The inflation rate in Nepal is 3.6%, as per the record for 2021. According to Inflation Expectation Survey, the average prices of goods and services are likely to rise by 11.3%. For a third world country like Nepal, small changes in factors like inflation, interest rate impact a lot.

Nepal is already operating with less investment in productive sectors. Higher or unstable Inflation impose as a resistance for investment or capital formation. Inflation directly affects the expenditure pattern at individual and institution level. Also, inflation adjust the interest rate and interest rate affects the investment propensity.

Nepal has high dependency with India. About 60% of total economic activities is directly or indirectly with India. Therefore, any affect in Indian economy directly affect the pricing of goods in Nepal.

Induced inflation, uncontrollable price level for good and services are making economy weaker at individual level. Inflation erodes the purchasing power or encourages spending causing a catastrophic loop of inflation. With the economic structure that is dependent and less capital investment, inflation has become a big obstacle to economic development.

How Inflation Eats away all your savings
Picture : Jago Investor


Corruption is the most disrupting factor to economic development of Nepal. It won’t be wrong to say that corruption at different levels is the prime cause of all the underdevelopment in Nepal. All the dissatisfaction among the citizen is due to corruption.

Nepal is ranked third as the most corrupted country. There has been unofficial and public claims regarding the misuse of authority, favoritism, lobbying, bribing, influencing, embezzlement in various public and private domain in Nepal. Corruption acts as an inefficient tax on economic activities which raises the cost and decreases the productivity.

As mentioned above, there is corruption of different forms at one or another level at private or public domain. Such interruptions affects the equitable distribution of the available resources as wells ass increase the inequalities affecting the economic efficiency. The poor lifestyle, poverty, less investment in capital projects, negligible operations etc. are the result of corruption.

Apart from unfavorable and weak business policy, corruption is the major conspirator for unfavorable environment for economic activities. Hence, all these adds up to economic imbalance affecting economic development.

Trade Deficit

Trade deficit is a state of a country where the value of country’s import is more than the value of its exports. In simpler terms, trade deficit happens when a country buys more and sells less from other countries. In 2020 alone, the trade deficit of Nepal was amounted to $ 9.86 billion.

Trade deficit reflects two major factors. First is the dependency of a country on other countries for goods and services. Second the inability, incapability and competence of a country to fulfill the need of the country (lack of infrastructures that support the growing demand). Dependence clearly, do not assist to economic development. It means, economic activity of a country is dependent on the policies of other countries. In case of Nepal, we have a huge dependency over India i.e. 60% of our economic activities are with India.

Trade deficit also reflects the nominal condition where we do not have capacity to fulfill needs. In Nepal’s condition, trade deficit is more towards consumable goods than capital goods, which is alarming. Trade deficit is considered good when the import is more for products that contribute to expand the domestic capacity, which is not a case for Nepal.

Foreign trade can be a big booster for economic development as it promotes competitive business environment and shares the technical know-how and human resources but foreign trade dependence is a big slugger for any economy.

Mass Poverty

Mass Poverty is clearly related to the position of workforce in a country. Multidimensional Poverty Index (MPI) of Nepal for 2019 is 17.4 which is lower when compared to the MPI of 2014. Despite this, Nepal is fighting with the economic disparity. A report by Oxfam in 2019 suggests that the richest 10% of the Nepal’s population have more than 26 times the wealth of the poorest 40% of the population.

This disparity in Nepalese economy is pushing country towards inequality, instability and conflict in the country. This growing burden of poverty is affecting the national reserves impacting the economic development factors. Economic growth and poverty level are inversely related. It means increase in poverty level means less individuals who contributes and more individuals who is dependent.

This changing dynamic is creating an imbalance in the economic development of the country.


It is another challenge for economic development. Unemployment similar to poverty increases the burden and reduces the working hands in an economy. In 2020, the unemployment rate in Nepal was around 4.44 percent which low but is gradually increasing over the time. Unemployment and underemployment are reflect the quality of workforce in a country.

The dark story behind lower unemployment rate in Nepal is higher labor migration. Nepalese economy has been unable to provide a good compensation for the work and effort. Hence, people are migrating. The percentage of unemployment are the individuals who are either self-unemployed or are in transitional phase of labor migration.

Young population, skilled or unskilled, do not get either the equitable compensation for the job or the job in Nepal. The employment opportunities is limited to urban settlement and rural settlements and resources are underutilized. Such loop of underemployment, unemployment and labor immigration is affecting the workforce of Nepal, which actually contribute to productive functioning.

It is difficult to imagine the economic development when the working class age is either unemployed or underemployed or migrated for employment. Nepal is in same situation.

Viscous Circle of Poverty

The viscous circle of poverty disbalances the whole process of economic development. It is the central thought of challenges of economic development. Viscous Circle of Poverty and economic development can relate from the following figure:

Explain the vicious circle of poverty.

Dependency in Agriculture and Remittance

68 % of Nepalese population is dependent on agriculture and Agriculture sector accounts for 23 percent of total GDP. Similarly, remittance accounts for 24 percent of Nepalese GDP. Nepalese economy is heavily dependent on these two sector. It clearly reflects the vulnerability of Nepalese economy. Agriculture sector is also not independent, it is heavily dependent on Indian market and scalability and success of agriculture is totally upon Indian market forces.

Such high dependency on agriculture and remittance bar the progress of Nepalese economy. A small break down and the whole economy shatters. The major contributors to GDP are very much dependent on other countries and their policies.

Hence, this dependency has become a challenge to Nepal’s economic development.

Lack of Investment in Capital Projects

Around 47% of total GDP is agricultural and remittance. Fulfillment of basic needs of the citizens, current expenditure and corruption empties the national reserves. There is nothing left from the national reserves that actually invest in capital projects. For the FY 2078/79, Rs. 347 billion has been allocated for capital expenditure which is 21 percent of the total budget. Capital investment promotes the productivity in the country and make a country march towards self-reliant status.

Of the allocated fund, only few percentage of the fund actually go into investment. Factor life liquidity, corruption, interest rate, project related factors directly affect the actual investment in Capital Projects.

Hydro Investment is the most charming sector for capital investment in Nepal. This sector is passive and reaps return in longer run. Hence, direct and quick contribution is negligible.

All other capital investment sector are developing and are risky for investment which encourages individuals and government not to invest further more in risky projects. Lack of capital investment will lead to low production and low production will lead to low economic growth. Nepal is stuck in the loop and productive capital investment will break this loop and lead to economic development.

Lack of Industries and Enterprises

This is the outcome of lack of capital projects. Nepalese investments are either fulfilling the basic needs or are investment in regular non-risky projects. Only around 11% of Nepal’s GDP comes from industry sector which is very low for a economy.

Industries and enterprises signify the independent nature of any economy. Manufacturing and production reflect the competency of a country. Promotion of Industries promotes employment, productivity, less trade deficit and encourages prosperity in the country.


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