With the successful completion of the House of Representatives elections in March, the political deadlock following the Gen-Z movement has largely subsided. The fresh mandate has propelled a new political force not only to a majority but nearly to a two-thirds margin. This has certainly raised hopes that the formation of a stable government will mitigate the instability that has periodically flared up across the nation, creating a widespread sense that positive changes are forthcoming.
Since Nepal’s traditional political parties, despite their success in spearheading various democratic transitions, have failed to deliver tangible improvements such as good governance, the general public continues to suffer under a prevailing national despondency. Nepal is becoming increasingly dependent on external factors, and the living standards of the average citizen have seen little comparative improvement.
This trajectory of Nepal’s political-economic development has struggled to validate the historical sacrifices made by the older parties for democracy in the eyes of the public. This recurring disconnect is further complicated by significant geopolitical and international influences, likely due to Nepal’s strategic importance and external dependencies. Consequently, the most pressing and contemporary political issues remain the guarantee of good governance, economic transformation, and social justice and welfare.
Political instability and the lack of good governance are primarily viewed as the main obstacles to Nepal’s development. Consequently, the incoming government formed by the new political party must guarantee both. Otherwise, a recurrence of instability remains highly probable. For good governance to take root, transparency, accountability, corruption control, and effective public service delivery are essential. The core tenet of democracy is that the government serves its people, which is unattainable without efficient service delivery, a critical factor for Nepal to demonstrate its competitive capability. In this regard, contemporary debates have emerged regarding multifaceted aspects of governance, such as administrative politicisation, public expenditure austerity, and the role of employee unions, while key pillars of economic transformation remain focused on production, investment, and trade.
With the marginal 3% to 4.5% economic growth that Nepal has maintained for over four decades, the country will continue to merely crawl forward, rendering true economic transformation impossible. At the very least, plans and policies should be formulated to reflect a growth target of 7%. This necessity was acknowledged by both new and old parties in their recent election manifestos, which largely promised growth exceeding 7%. However, the irony remains that such manifesto promises often erode so quickly that if this pattern repeats, the public will perceive no meaningful change.
The share of the agricultural sector in Nepal’s Gross Domestic Product has declined from 65% to 25% over the past four decades, while the service sector’s contribution has climbed to approximately 60%. Following economic liberalisation in the 1990s, the industrial sector’s contribution initially reached around 20%, but subsequently fell to 15%, where it has remained stagnant. Positive developments include the cultivation of cash crops and high-value marketable crops alongside traditional grains; a slight increase in the economic utility of non-timber forest products; and the growth of agro-processing, construction materials, and certain export-oriented industries. Additionally, tourism has developed to some extent, the country has moved toward self-reliance in physical construction, and the strategic importance of hydropower is now widely recognised.
Due to recurring political instability, millions of Nepali citizens are forced to seek employment abroad. The country must reduce this exodus by properly mobilising its internal resources and means. Currently, more than half of Nepal’s arable land lies fallow and requires effective utilisation, alongside a reliable supply of seeds and fertilisers, comprehensive irrigation systems for all cultivable land, and adequate technical support for farmers. Furthermore, while maintaining natural conservation, it is essential to maximise the use of all forest products, including timber, and to increase the extraction and utilisation of mineral resources.
For economic transformation, Nepal must develop human resources that meet modern market demands, including 21st-century agricultural modernisation, industrialisation, service sector expansion, and emerging opportunities in information technology. Beyond achieving high literacy, the focus must now shift toward comprehensive skill development. Given South Asia’s regional energy needs, Nepal should strategically identify both internal and external utilisation of its hydropower to capitalise on this sector. Furthermore, Nepal must expand its tourism industry by coordinating with neighbouring economic powers, while becoming self-reliant in infrastructure development and fostering a culture of timely project completion. In the service sector, which holds a significant share of the GDP, the contribution of market-oriented services must be increased alongside basic services.
If a country updates and diversifies its production in line with contemporary trends, the domestic economy becomes dynamic. However, Nepal has only achieved marginal growth in domestic production. While millions of Nepalis migrate abroad annually and their remittances support national income, foreign exchange reserves, and poverty alleviation, this remittance-dependent model is not sustainable for long-term development. Ultimately, Nepal must prioritise the growth of its own domestic production.
Another critical dimension of economic transformation is the effective mobilisation of capital and investment. With Nepal’s gross domestic savings at less than 10% of GDP, a significant gap exists between savings and investment. When including external income such as remittances, gross national savings reach approximately 30% of GDP, while gross fixed capital formation stands at around 25%. Furthermore, investment remains limited. Nepal’s public capital expenditure is only 3% of GDP, trailing the South Asian average of 4.5%. Similarly, foreign investment in Nepal sits at a mere 0.1% of GDP, compared to the regional average of 0.6%.
While the reliance on foreign grants and loans for development projects is diminishing, they remain necessary, particularly for enhancing technical capacity. Due to the lack of large-scale investment, industrialisation has failed to gain momentum, leaving emerging potential untapped. Foreign investment does more than meet financial needs. It facilitates the introduction of technology. For instance, technology brought in through foreign investment was pivotal to the growth of Bangladesh’s ready-made garment industry, which now maintains a dominant position in the global market.
To boost investment, a conducive environment for trade and business is essential. Investors must be assured that their capital is secure, which is unattainable without political stability and good governance. In Nepal, factors such as political instability, policy ambiguity, limited institutional capacity, and protracted legal and administrative processes increase the cost of doing business and stifle productivity, thereby reducing returns. Consequently, Nepal’s productivity remains well below the South Asian average while costs remain high, adversely affecting the nation’s overall competitiveness.
Furthermore, the private sector’s morale in Nepal has declined following the disruptions of the Gen-Z movement, leaving both national and international investors in a ‘wait-and-see’ posture regarding the government’s investment security guarantees. The government alone cannot revitalise the market without boosting private sector confidence. Consequently, the economy is likely to gain momentum only if the state actively restores this morale and ensures the safety of private capital.
Moreover, when utilising external grants and loans for development, Nepal must employ diplomatic tact to ensure these agreements yield maximum benefit and avoid long-term adverse effects. Such diplomacy is increasingly critical given the ongoing trade wars and global political polarisation. This is especially true for a country like Nepal, which is heavily dependent on external sources for both employment and essential goods, yet trails significantly in diplomatic capacity. As a result, Nepal often struggles to accurately assess external instabilities, frequently leading to domestic turmoil.
If the current conflict involving Iran persists, it could present a major challenge for Nepal’s new government. The resulting disruptions to the global oil market and supply chains would inevitably impact the country. Similarly, there is a risk of adverse effects on the employment of Nepali workers abroad, which would deal a significant blow to the economy. While rising external instability often prompts calls for immediate self-reliance, these intentions are frequently overlooked once the pressure eases. Ultimately, Nepal must take a long-term perspective to increase production and productivity, achieving high economic growth by systematically reducing its external dependence.
(Bajracharya is PhD scholar at Asian Institute of Technology)
