Nepal’s economy has recently faced repeated shocks of increasing intensity and frequency. Both natural and human-induced disasters have crippled the economy, leading to persistent socio-economic challenges. Since the 1990s, the nation has endured dozens of shocks, including two major events within a single month: the September 8-9 Gen Z protest and the devastating flood and landslide of October 4. Other significant setbacks during this period include a decade-long insurgency, a major earthquake, economic sanctions, widespread floods and landslides, the international financial crisis, the Covid-19 pandemic, and various political impasses and protests.
While these shocks are often unforeseen, former Asian Development Bank Vice President Bindu Nath Lohani suggests the country must focus on minimising losses and damages through cautious interventions, particularly concerning natural disasters. A study conducted by his team for the Confederation of Nepalese Industries (CNI) highlights that losses and damages from climate-induced disasters could escalate to as much as 10% of the country’s Gross Domestic Product (GDP). Against this backdrop, experts stress that protecting human life, minimising property loss and damage, and building resilience for the rapid return to normalcy are critical priorities.
This year’s consecutive shocks severely battered the Nepali economy just as it was gradually reviving from the prolonged slowdown caused by the Covid-19 pandemic. The Gen Z protest on September 8-9 resulted in considerable loss of life and property. Subsequently, the colossal loss of life, physical infrastructure and private property caused by the torrential rain-triggered flood and landslides on October 4 has pushed Nepal into a greater economic crisis.
Steady state economy
Nepal’s economy was already characterised as a steady-state economy even before it was hit by the recent shocks. Within the framework of the Solow Growth Model, this means that new investment is just sufficient to cover depreciation and population growth; essentially, all new investment (savings) is precisely utilised to replace worn-out capital and to equip new workers, leaving no surplus for additional accumulation. Furthermore, government expenditure will be spent merely to cover losses and damages rather than dedicated to opening new avenues for economic growth.
Recently, following the colossal loss of infrastructure and physical assets, the Ministry of Physical Infrastructure and Transport (MoPIT) estimated a resource requirement of Rs. 10.68 billion to rebuild the roads swept away by the floods and landslides. This figure includes the cost of rapid response efforts to establish alternative temporary roads for the evacuation of vehicles stranded by the disaster. Amidst existing resource constraints, this unforeseen liability forces the government to realign its priorities toward reconstruction and rehabilitation.
MoPIT’s preliminary estimation details the costs as follows: Rs. 1.50 billion is needed for the rehabilitation and rebuilding of the Mechi Highway, which was the most severely affected by the recent floods and landslides. In addition to this, the Koshi, Mid-Hill, Postal, Araniko, Kanti Highways, and the Narayangadh-Muglin section of the Prithvi Highway are estimated to cost Rs. 3.77 billion. Similarly, the repair of 17 bridges damaged and destroyed in the recent disaster is estimated at Rs. 4.52 billion, with Rs. 800 million allocated for installing Bailey bridges and Rs. 1.59 billion for rapid response and the construction of alternative temporary roads.
On the one hand, economic activities have been squeezed, and the private sector has lost its confidence and morale following the vandalism and arson targeting business establishments and private properties. Declining consumption, a lack of job opportunities, and a deteriorating investment climate threaten to push the economy into a further slowdown.
Major business establishments, including Bhatbhateni, Ncell, CG Electronics, and Hilton Hotel, were torched, along with hundreds of other businesses across the country. Key administrative and heritage buildings such as the country’s main administrative centre, Singhadurbar, the iconic Parliament building, and the Supreme Court were also set on fire. More than 2,000 vehicles were burned during the protest. Insurance claims surged to Rs. 23.22 billion, of which non-life insurers have so far disbursed Rs. 15.85 billion as of October 12.
The government’s preliminary assessment indicates that the torching of 440 public properties during the Gen Z protest caused an estimated loss of approximately Rs. 150 billion. These unforeseen liabilities have constrained the government’s ability to develop new infrastructure, invest in innovation and technology, and focus on human capital development to propel growth. Although a reconstruction drive could provide a necessary stimulus to the economy, the government may take years to complete the works, given the current resource constraints and the growing risk of future unforeseen shocks.
Resource constraints
The government has been struggling with resource constraints and an economic slowdown due to the multifaceted impacts of the Covid-19 pandemic. Nepal’s import-based revenue was severely affected as consumption plummeted because people lost purchasing power in the wake of the pandemic. The private sector downsized operations, many SMEs pulled down their shutters, and the government was unable to intervene with stimulus packages or accelerate development work; consequently, people lost jobs and faced increasing hardships. Policymakers were navigating these challenges to bring the economy back on track, and positive signals of a revival were beginning to appear. However, the nationwide Gen Z protest against corruption and ill-governance erupted at this critical time, ultimately resulting in a colossal loss of lives and properties.
Resource constraint could become more pressing in the coming days as the Gen Z protests and subsequent natural disaster have caused losses equivalent to one-third of the country’s GDP, according to experts.
Economist Keshav Acharya stated that the private sector and the general public have never before felt such insecurity. He stressed that the losses and damages caused by this protest are vast compared to previous movements that led to regime change. He added, “The government must restore the rule of law by taking action against these criminal offences to boost the private sector’s confidence.” Despite this, he applauded Finance Minister Rameshore Prasad Khanal’s efforts to revive the economy by boosting the private sector’s morale and actively collaborating with stakeholders.
Especially, foreign direct investments (FDI) and foreign assistance (including both aid and grants) saw a sharp decline as the economies of the developed world began grappling with the crises following the Covid-19 pandemic. Against this backdrop, the resources available to the government for public spending became limited.
According to the Financial Comptroller General Office (FCGO), the government collected merely 16% of its revenue target of Rs. 1,480 billion in the first three months of the ongoing fiscal year. As revenue mobilisation plunged, the government has been compelled to rely on internal debt and foreign assistance (mainly debt). The country, however, lacks the luxury of accepting more debt, considering the rising debt-to-GDP ratio, which stood at nearly 47% by March 2025, according to the Public Debt Management Office (PDMO).
On the other hand, the utilisation of debt to enhance the productive capacity of the economy is a key concern, as debt must be repaid within a defined period. Dilli Raj Khanal, convenor of the Public Expenditure Review Commission, 2018, noted, “The uneconomical projects financed under debt are a concern for intergenerational equity because future generations, who have no share in the decisions of accepting the debt, will be the ones who have to pay it back.”
Trimming uneconomic expenses and piecemeal projects
To cope with the emerging challenges and the requirement for priority expenses, the government has decided to trim down uneconomical expenses and piecemeal projects. Soon after taking office, Finance Minister Khanal publicly announced that the government had excluded these piecemeal projects from its priority list. By dropping these projects, most of which were political pet projects, the government aims to save Rs. 100 billion in the state coffer. Previously, political parties often misused the development/capital budget by allocating funds to uneconomical projects in their constituencies primarily to secure votes in elections.
Moreover, the Ministry of Finance (MoF) has issued a circular to trim such uneconomical expenses and realign the budget to priority areas that offer greater socio-economic impacts, thereby supporting a measure of austerity.
The MoF circular on resource realignment, expense trimming, and austerity measures was approved by the Cabinet on September 21. This policy clearly defines project prioritisation and capital/development expense management. Furthermore, it takes crucial steps toward minimising rampant recurrent expenses: it bars the President, Speakers, Ministers, and others from appointing personal secretaries and advisors; only purposeful foreign trips based on rational participation are allowed; additional allowances for civil servants in their regular work, along with the provision to employ contract staff, have been scrapped; external consultancy procurement is curbed if the work can be performed by internal human resources; government offices are barred from keeping offices in high-cost rental properties; offices are urged to implement projects above Rs. one million in strict compliance with public procurement rules; and the Land Problem Settlement Commission has been scrapped.
Moreover, the MoF circular has mandated the insurance of the government’s physical properties and the comprehensive insurance of its vehicles. This decision follows the Gen Z protest, which resulted in the destruction of 440 public offices, including the main administrative building and one of the country’s most precious heritage sites, Singha Durbar. Insuring public properties is expected to enhance the nation’s shock-bearing capacity in the future.
For foreign trips sponsored by the Government of Nepal, the delegation will be strictly confined to a maximum of three persons, with the limit rising to 10 persons only for visits by the Head of the State or Head of the Government. To further minimise recurrent expenses, the government has decided that trainings, workshops and seminars must be conducted in public offices and has encouraged holding them virtually. The purchase of new vehicles has also been halted until a subsequent decision is made, and political and administrative office bearers utilising government vehicles in an unauthorised manner have been urged to return them. The government also urged the concerned agencies to expedite the recovery of outstanding dues and arrears based on the final audit.
Most importantly, the government underscored that adequate resources will be provided to priority development projects to ensure their timely completion. Economists have hailed the government’s decision, citing that the move is crucial for mobilising precious resources in an efficient and rational manner.
Finance Minister Khanal has also initiated efforts to control revenue leakages and sanitise ill practices within the revenue administration. “The Gen Z movement sought an end to corrupt and immoral practices not only in government institutions, but this is equally important for the private, public and cooperative sectors,” Khanal remarked while inaugurating the first-ever electronic customs clearance system based on self-declaration valuation at the Biratnagar customs point on September 24.
He added, “The introduction of this system will certainly minimise the cost of trade, control the corrupt practice of bribing, and promote ethical norms. Based on the experience and results, we’ll expand this system to other checkpoints in the near future.”
According to customs officials, this system is embedded with an ‘electronic risk engine’ to avoid the potential for revenue leakages. They stated, “Any suspected entity coming onto the radar can be investigated at the destination, and this system will end the unethical practices of seizing trucks ferrying goods to industries and godowns.” As part of administrative reforms, Finance Minister Khanal established an MoF grievances mailbox to receive complaints and grievances. This mechanism was flooded with emails shortly after its introduction. According to authorities, “This will eliminate the need for people and institutions to personally visit Singha Durbar to seek solutions to the problems they have faced.”
Most importantly, the government has set up a ‘Physical Infrastructure Reconstruction Fund’ and is collecting resources from contributors for the reconstruction of public properties destroyed during the Gen Z protest. To incorporate the private sector in infrastructure development, Finance Minister Khanal has signalled an intention to table the Alternative Development Finance Mobilisation Bill, 2024, to the National Assembly.
Supporting the private sector to heal
Finance Minister Khanal, who is credited for his sharp and practical understanding gained while serving as finance secretary, has deeply realised the crucial role of the private sector in economic revival. From the very beginning of his tenure, Khanal has been consultative with the private sector. The private sector has, in turn, hailed his initiative to introduce an ‘integrated business restoration package’.
The umbrella organisations of the private sector – Federation of Nepalese Chambers of Commerce and Industry (FNCCI), Confederation of Nepalese Industries (CNI) and Nepal Chamber of Commerce (NCC) – have particularly applauded initiatives such as revenue exemption for reconstruction work, bank loans at subsidised rates for adversely affected businesses, facilitation in obtaining insurance, and the electronic customs clearance system with its self-declaration-based valuation.
On the flip side, the private sector is more concerned about the Ministry of Home Affairs (MoHA)’s reluctance to take action against those involved in criminal offences during the Gen Z protest. Stating that such impunity will worsen insecurity and further deteriorate the investment climate, the private sector has urged the government to distinctly treat genuine protestors from those involved in criminal acts like looting, vandalising and burning properties.
The MoHA, however, instructed the Nepal Police to refrain from taking action against those involved in criminal acts, even based on evidence, citing that the issue is now under the purview of the Judicial Inquiry Commission led by former judge Gauri Bahadur Karki. This decision by the MoHA was widely criticised across the public spectrum, which argued that the Nepal Police is free to investigate, collect evidence, and prosecute those involved in criminal acts during the protest. According to Upendra Mahato, founding president of the Non-Resident Nepali Association (NRNA), if the government protects criminals, such impunity will further damage the investment climate, stating, “Nobody will invest in Nepal if the criminals are not penalised.”
In addition, the private sector has expressed dissatisfaction with the government’s perceived arrogance towards industrialists regarding the recovery of electricity tariffs for power supplied through dedicated/trunk lines. The Nepal Electricity Authority (NEA) had previously established a Complaint Mechanism to review clients’ grievances (provided they were lodged with evidence regarding the dedicated line tariffs imposed by the NEA). After a long dispute, the NEA Board had found a way to resolve the tariff disagreement based on the Lal Commission’s Report.
Industrialists claim that after becoming Energy Minister, Kulman Ghising, who was previously removed as NEA Managing Director by the KP Sharma Oli-led government, has terrorised them by overlooking this established process. According to the industrialists, “Users are permitted to file a complaint for review by depositing five percent of the invoice as a guarantee.” They added, “The committee created at the NEA is required to make a decision within 35 days after a complaint is filed.”
The private sector has underscored the need for government handholding at this stage of unprecedented challenges. It further urged the government to formally recognise its substantial contribution to the economy, noting that the private sector accounts for 86% of jobs and 81% of the Gross Domestic Product (GDP).
