Economy of Nepal

Economy - overview: Nepal is among the poorest and least developed countries in the world with nearly half of its population living below the poverty line (with, as of 2001, a per capita income of just over $240 U.S.). Agriculture is the mainstay of the economy, providing a livelihood for over 80% of the population and accounting for 41% of GDP. Industrial activity mainly involves the processing of agricultural produce including jute[?], sugarcane, tobacco, and grain. Production of textiles and carpets has expanded recently and accounted for about 80% of foreign exchange earnings in the past three years. Agricultural production is growing by about 5% on average as compared with annual population growth of 2.3%. Since May 1991, the government has been moving forward with economic reforms, particularly those that encourage trade and foreign investment, e.g., by reducing business licenses and registration requirements in order to simplify investment procedures. The government has also been cutting expenditures by reducing subsidies, privatizing state industries, and laying off civil servants. More recently, however, political instability - five different governments over the past few years - has hampered Kathmandu's ability to forge consensus to implement key economic reforms. Nepal has considerable scope for accelerating economic growth by exploiting its potential in hydropower and tourism, areas of recent foreign investment interest. Prospects for foreign trade or investment in other sectors will remain poor, however, because of the small size of the economy, its technological backwardness, its remoteness, its landlocked geographic location, and its susceptibility to natural disaster. The international community's role of funding more than 60% of Nepal's development budget and more than 28% of total budgetary expenditures will likely continue as a major ingredient of growth.

Economy - in greater depth:
An isolated, agrarian society until the mid-20th century, Nepal entered the modern era in 1951 without schools, hospitals, roads, telecommunications, electric power, industry, or civil service. The country has, however, made progress toward sustainable economic growth since the 1950s and is committed to a program of economic liberalization.

Nepal will complete its ninth economic development plan in 2002; its currency has been made convertible, and 17 state enterprises have been privatized. Foreign aid accounts for more than half of the development budget. Government priorities over the years have been the development of transportation and communication facilities, agriculture, and industry. Since 1975, improved government administration and rural development efforts have been emphasized.

Agriculture remains Nepal's principal economic activity, employing 80% of the population and providing 37% of GDP. Only about 20% of the total area is cultivable; another 33% is forested; most of the rest is mountainous. Rice and wheat are the main food crops. The lowland Terai region produces an agricultural surplus, part of which supplies the food-deficient hill areas.

Economic development in social services and infrastructure has made progress. A countrywide primary education system is under development, and Tribhuvan University has several campuses. Although eradication efforts continue, malaria had been controlled in the fertile but previously uninhabitable Terai region in the south. Kathmandu is linked to India and nearby hill regions by road and an expanding highway network.

Major towns are connected to the capital by telephone and domestic air services. The export-oriented carpet and garment industries have grown rapidly in recent years and together now account for approximately 70% of merchandise exports.

Nepal's merchandise trade balance has improved somewhat in recent years with the growth of the carpet and garment industries. In FY 2000-01 exports posted a greater increase (14%) than imports (4.5%), helping bring the trade deficit down by 4% from the previous year to $749 million. Trade with India rose rapidly after conclusion of the 1996 bilateral trade treaty between the two countries, and now accounts for 43% of all exports. Indian efforts to revise the treaty, which comes up for a 5-year review in December 2001, could dampen Nepal's export growth. The annual monsoon rain, or lack of it, strongly influences economic growth. From 1996 to 1999, real GDP growth averaged less than 4%. The growth rate recovered in 1999, rising to 6% before slipping slightly in 2001 to 5.5%.

Strong export performance, including earnings from tourism, and external aid have helped improve the overall balance-of-payments situation and increase international reserves. Nepal receives substantial amounts of external assistance from India, the People's Republic of China, the United Kingdom, the United States, Japan, Germany, and the Scandinavian countries. Several multilateral organizations, such as the World Bank, the Asian Development Bank, and the UN Development Program[?] also provide assistance. In June 1998, Nepal submitted its memorandum on a foreign trade regime to the World Trade Organization and in May 2000 began direct negotiations on its accession.

Progress has been made in exploiting Nepal's major economic resources--tourism and hydroelectricity. With eight of the world's 10 highest mountain peaks--including Mount Everest at 8,800 m (29,000 ft)-- hiking, mountain climbing, and other tourism is growing. Swift rivers flowing south through the Himalayas have massive hydroelectricity potential to service domestic needs and the growing demand from India. The two countries have joint irrigation-hydroelectric projects on the Kosi[?], Trisuli[?], and Gandaki Rivers[?]. Several other hydroelectric projects, at Kulekhani[?] and Marsyangdi[?], were completed in the mid- to late 1980s. In the early 1990s, one large public sector project and a number of private projects were planned; some have been completed. The most significant private sector financed hydroelectric projects currently in operation are the Khimti Khola[?] (60 MW) and the Bhote Koshi[?] (36 MW).

The environmental impact of Nepal's hydroelectric projects has been limited by the fact that most are "run-of-river" with only one storage project undertaken to date. The largest under active consideration is the private sector West Seti[?] (750 MW) storage project which is dedicated to exports. Negotiations with India for a power purchase agreement have been underway for several years, but agreement on pricing and capital financing remains a problem. Currently demand for electricity is increasing at 8%-10% a year.

Population pressure on natural resources is increasing. Over-population is already straining the "carrying capacity" of the middle hill areas, particularly the Kathmandu Valley, resulting in the depletion of forest cover for crops, fuel, and fodder and contributing to erosion and flooding. Although steep mountain terrain makes exploitation difficult, mineral surveys have found small deposits of limestone, magnesite[?], zinc, copper, iron, mica, lead, and cobalt.

GDP: purchasing power parity - $27.4 billion (1999 est.)

GDP - real growth rate: 3.4% (1999 est.)

GDP - per capita: purchasing power parity - $1,100 (1999 est.)

GDP - composition by sector:
agriculture: 41%
industry: 22%
services: 37% (1998)

Population below poverty line: 42% (1995-96 est.)

Household income or consumption by percentage share:
lowest 10%: 3.2%
highest 10%: 29.8% (1995-96)

Inflation rate (consumer prices): 11.8% (FY98/99 est.)

Labor force: 10 million (1996 est.)
note: severe lack of skilled labor

Labor force - by occupation: agriculture 81%, services 16%, industry 3%

Unemployment rate: NA%; substantial underemployment (1999)

Budget:
revenues: $536 million
expenditures: $818 million, including capital expenditures of $NA (FY96/97 est.)

Industries: tourism, carpet, textile; small rice, jute[?], sugar, and oilseed[?] mills; cigarette; cement and brick production

Industrial production growth rate: NA%

Electricity - production: 1.17 billion kWh (1998)

Electricity - production by source:
fossil fuel: 5.13%
hydro: 94.87%
nuclear: 0%
other: 0% (1998)

Electricity - consumption: 1.212 billion kWh (1998)

Electricity - exports: 72 million kWh (1998)

Electricity - imports: 196 million kWh (1998)

Agriculture - products: rice, maize, wheat, sugarcane, root crops; milk, water buffalo meat

Exports: $485 million (f.o.b., 1998), but does not include unrecorded border trade with India

Exports - commodities: carpets[?], clothing, leather goods, jute[?] goods, grain

Exports - partners: India 33%, US 26%, Germany 25% (FY97/98)

Imports: $1.2 billion (f.o.b., 1998)

Imports - commodities: gold, machinery and equipment, petroleum products, fertilizer

Imports - partners: India 31%, China/Hong Kong 16%, Singapore 14% (FY97/98)

Debt - external: $2.4 billion (1997)

Economic aid - recipient: $411 million (FY97/98)

Currency: 1 Nepalese rupee (NR) = 100 paisa

Exchange rates: Nepalese rupees (NRs) per US$1 - 68.784 (January 2000), 68.253 (1999), 65.976 (1998), 58.010 (1997), 56.692 (1996), 51.890 (1995)

Fiscal year: 16 July - 15 July

See also : Nepal