Nepal’s economic landscape: Recommendations for upcoming 2081/82 budget

The event “Special session with Parliamentarians on  Economic Reform and Upcoming Budget 2081/82” was held on 25^th April 2024, with the presence of Honorable Santosh Chalise, Chair of the Finance Committee, with the participation of other committee chairs and federal parliament members. The session was led by Dr. Biswash Gauchan, where he emphasized the importance of the contributions made by think tanks in policy making. He further stressed the need for coordination between evidence-based policy think tanks and the policy makers in the nation.

The agenda proposed strategic, targeted interventions across these sectors and the broader economic landscape, aiming to address the economy's complexities through a nuanced, sectoral, and thematic approach. Objectives included job creation, cost of living reduction, improving education and housing, and fostering a conducive environment for foreign direct investment (FDI), charting a course towards a resilient, equitable, and thriving economy through meticulous sectoral and thematic focus. 

The presentation was focused on the economic challenges and strategic reforms needed for Nepal's sustainable development. It highlighted the four primary risks to the economy: stagnant low economic growth, an overly leveraged economy burdened by poorly allocated credit, a concerning exodus of youth, and macroeconomic instability driven by external sector imbalances. 

Nepal's economic progression has been shaped by global and domestic factors, with a notable reliance on foreign employment, real estate investments, and imported consumption goods. Economically, the country has experienced phases of growth and stagnation. Particularly affected by the COVID-19 pandemic reducing the GDP growth to a historical low scarring the economy which the nation has not been able to achieve economic growth above its own long-term average beyond the crisis. The economic analysis reveals a shift in sectoral contribution to GDP, particularly a decline in agriculture, while noting substantial increases in per capita income, remittance flow, and sovereign debt levels over time.

Nepal's macroeconomic aspirations are against the reality of a potential low-middle-income trap, and a post-2022 economic slowdown triggered by decreased bank credit and land transactions. However, the issues Nepal is facing today are not centered around the pandemic but also due to the intricate play of the macroeconomic variables in the structure of the economy. The need for structural changes within the economy to boost economic productivity and perpetual growth is one of the key aspects highlighted throughout the presentation. 

In terms of strategy, leveraging natural resources, prioritizing agriculture transformation through import substitution, enhancing industrial value addition, promoting service exports, and embracing digital transformation were called upon. Governance reforms were emphasized as imperative for achieving these strategies. 

Political stability, global integration, and addressing the real estate asset bubble are discussed as essential areas needing attention. The presentation suggested moving beyond dependencies on India, China, tourism, and hydropower for economic diversification. It introduces a vision for Nepal that includes digital economy expansion, service sector globalization, and fostering a skilled diaspora to contribute to the national development agenda. 

The reform agenda calls for immediate action to transition towards a dynamic and productive economy, leveraging current challenges as opportunities for growth. It outlined the Structural Reform 2.0, focusing on growth, equity, sustainability, and resilience by boosting productivity, investment, and employment, underpinned by governance reform aimed at "Minimum Government, Maximum Governance". Key pillars included Agricultural Transformation, Education Transformation, Economic Reform, and Digitalization, targeting vital growth sectors such as agriculture, natural resource management, industry, and services.  

In terms of agriculture transformation, the key highlight was on the import substitution and value addition for local consumption. This was stressed as the cost of doing business in the nation is high due to high minimum wage and real estate prices. It creates a need for subsidizing businesses involved in value addition processes. 

Further, education transformation highlighted on building a more skilled manpower and transitioning into knowledge economy. Moving forward with establishing teaching hospitals in all provinces in collaboration with the provinces and establishing IT hub in the valley can be some of the measures in the avenue.  

The economic reform and digitalization focus on increasing productivity, investment and employment through emphasizing value addition, reassessment of industrial parks into IT parks, Special Economic Zones (SEZs) and revisiting minimum wage.  

Financial sector reforms included repairing the balance sheet of Banking and Financial Institutions (BFIs), the private sector and the household by implementing strict regulations on cooperatives and enhanced oversight and regulation of microcredit.  

The introduction of fiscal consolidation was suggested to reduce the underlying fiscal deficit by crowding in private investment through public investment and launching Sovereign Wealth fund (SWF) to support productive infrastructure spending.  

The event concluded with feedback from the parliamentarians emphasizing the positive attitude of the host organization during economic downturns. The presentation was found to be thought-provoking as it highlighted important data points concerning the economy which were suggested to be included in the decision-making process by policy makers.  

This event summary was prepared by Aarashi Ghimire, Intern, Center for Economic Policy at IIDS & Kshitiz Jha, Intern, Center for Economic Policy at IIDS.