Small and Medium Enterprises (SMEs) are the backbone of economies worldwide, and in Nepal, they account for over 90% of the total business establishments. Despite their overwhelming presence, the contribution of SMEs to the economy is estimated at only about 25% of the country’s GDP, with much of this stemming from informal sectors. This article will delve into the state of SMEs in Nepal, comparing the situation with the broader South Asian context and global trends, while offering insights into the potential ways forward for these vital enterprises.
The Global Picture: Liberalisation and Opportunities for SMEs
Globalisation and trade liberalisation have opened up unprecedented opportunities for SMEs to access international markets and integrate into global value chains (GVCs). With advancements in digital technology, SMEs can now reach customers across the globe, fostering growth and innovation. The World Trade Organisation (WTO) and various other trade agreements have facilitated this process, giving SMEs access to new markets, reducing tariffs and providing better access to resources and technologies.
The liberalisation of trade and investment has been particularly beneficial for developing economies, where SMEs form the bulk of the business sector. However, in order to tap into these global opportunities, SMEs need to upgrade their business models, enhance competitiveness and build the capacity to scale. Integration into GVCs is no longer just a pathway to survival but a necessity for growth and job creation. This is especially important for SMEs in countries like Nepal, which are on the verge of graduating from the Least Developed Country (LDC) status.
Nepal’s SMEs: A Critical Yet Vulnerable Sector
In Nepal, SMEs are crucial for employment generation and poverty alleviation. However, many structural and systemic issues hinder their growth and long-term sustainability. A significant portion of these enterprises operates informally, with estimates suggesting that about 50% of businesses in Nepal remain unregistered. This creates a dual challenge: informal businesses are unable to access financial support, and the government loses potential tax revenue that could be reinvested into strengthening the business environment.
Post-COVID-19, SMEs in Nepal have faced numerous hurdles, ranging from business closures to labour displacement. Many would-be entrepreneurs, disillusioned by bureaucratic red tape, have left the country in search of better opportunities abroad. The journey to formally register a business in Nepal involves navigating at least five different offices, many of which are fraught with inefficiencies and harassment. Once registered, businesses face another formidable challenge: access to finance.
Project-based financing, which could foster innovation and long-term growth, remains largely unavailable. Instead, businesses rely on traditional forms of lending that often come with high-interest rates and rigid repayment schedules. Moreover, the tax system further complicates the situation. The cumbersome process of delisting from the taxation system, should a business fail, disincentivises entrepreneurs from registering in the first place.
In a fiercely competitive marketplace, Nepali SMEs struggle to keep up with cheap imports from neighbouring giants like China and India. While Nepal has issued four National Trade Integration Strategies (NTIS) aimed at identifying and promoting products with comparative and competitive advantages, the country still lags behind in import substitution and export growth.
The South Asian Context: SMEs as a Cornerstone of Development
When looking at South Asia, SMEs play a vital role in the region’s economic structure. In the BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation) member states – Bangladesh, Bhutan, India, Nepal, Sri Lanka, Myanmar and Thailand – SMEs account for around 90% of businesses and provide about 80% of industrial employment. Despite their importance, intra-BIMSTEC trade is remarkably low, accounting for only 7% of the total global trade of these nations. This figure highlights the region’s lack of economic integration and the limited opportunities for SMEs to expand within the regional market.
Several factors contribute to the low level of intra-regional trade, including inadequate cross-border infrastructure, regulatory barriers and a lack of trade facilitation measures. Promoting trade facilitation through improved cross-border linkages and robust trade infrastructure is essential to unlock the region’s full potential, particularly for SMEs.
In this regard, the BIMSTEC Free Trade Agreement (FTA) could be a game-changer. However, negotiations on the FTA have been stalled for years. Finalising the FTA could pave the way for a more integrated regional market, offering SMEs new opportunities to grow and compete. Yet, it’s crucial to implement safeguards to prevent the displacement of local SMEs, who may struggle to compete with larger foreign firms.
Global Comparisons: SMEs as Drivers of Growth
Globally, SMEs are recognised as essential drivers of economic growth, accounting for over 90% of businesses and 50%-60% of employment in most countries. In developed nations, SMEs are key players in the innovation ecosystem, often acting as incubators for new technologies and processes. These enterprises are better integrated into GVCs, thanks in part to their access to capital markets, financial services, and advanced digital tools.
The success of SMEs in countries like Germany, South Korea and Japan lies in their robust support structures. These nations have created ecosystems where SMEs can thrive through project-based financing, market access programmes and state-backed initiatives that promote entrepreneurship. In contrast, many developing countries, including Nepal, still lack these essential support systems.
Furthermore, SMEs globally have been significantly affected by international shocks, whether economic, political or environmental. As Nepal and Bangladesh prepare to graduate from the LDC category in 2026, there are concerns that SMEs in these countries may lose preferential access to key markets like the European Union. Without the necessary preparations, Nepali SMEs risk losing competitiveness in the global market.
Building Resilience in Nepal’s SMEs
Given the challenges facing SMEs in Nepal, it’s imperative to strengthen their capacity to navigate an increasingly complex global landscape. One crucial step in this direction would be the establishment of an MSME Excellence Centre in Nepal, as well as the creation of a dedicated SME bank. These institutions would serve as focal points for sharing knowledge, offering technical assistance and providing access to finance for SMEs.
Moreover, such a centre could act as a regional hub for BIMSTEC countries, helping to integrate SMEs into regional and global value chains. The need for such a platform is especially critical as SMEs often lack the expertise and resources to deal with the challenges of scaling their businesses. These challenges include access to finance, navigating regulatory frameworks and adopting new technologies.
To further support SMEs, the Nepali government, in collaboration with private sector organisations like the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), could focus on streamlining the business registration process and creating more entrepreneur-friendly policies. The emphasis should be on reducing bureaucratic hurdles, simplifying tax systems and offering better access to financial services.
Additionally, there is a need for sector-specific support. Industries such as agriculture, tourism, handicrafts and information technology have significant growth potential if given the right support. Identifying products and services with comparative and competitive advantages should remain a priority, and efforts should be made to substitute imports with locally produced goods.
The Role of Regional Trading Arrangements
BIMSTEC, as a regional organisation, holds immense potential for fostering SME growth in its member states. The creation of an MSME Development Centre within BIMSTEC could act as a knowledge-sharing hub, where best practices from across the region can be disseminated and collaborative efforts to address common challenges can be coordinated.
Such a centre could also focus on addressing the critical issue of access to finance. Across BIMSTEC nations, SMEs struggle to secure funding due to perceived risks and lack of collateral. A dedicated SME bank or fund, with contributions from BIMSTEC member states, could alleviate this problem by offering project-based financing options that are tailored to the needs of SMEs.
Moreover, finalising the long-pending BIMSTEC FTA could provide the much-needed boost to regional trade. By reducing tariffs and simplifying trade procedures, the FTA would create a larger market for SMEs, allowing them to scale their operations and compete more effectively on a global stage. However, to ensure that local SMEs are not disadvantaged by increased competition, safeguard mechanisms must be put in place to protect vulnerable industries.
Conclusion
SMEs in Nepal stand at a crossroads, with significant opportunities for growth but also numerous challenges to overcome. As Nepal prepares to graduate from LDC status, it is essential to strengthen the capacity of SMEs, enabling them to compete both regionally and globally. By addressing issues related to business registration, access to finance and market integration, Nepal can unlock the potential of its SMEs.
At the same time, greater regional cooperation through platforms like BIMSTEC can help create a more integrated and supportive ecosystem for SMEs across South Asia. With the right policies and institutional support,
SMEs can become the engine of economic growth, creating jobs, promoting innovation and contributing to inclusive development in Nepal and beyond.
The time to act is now. By nurturing SMEs and helping them navigate the challenges of a changing world, Nepal can ensure a prosperous future for its business community and its people.
Awasthi is Director General of FNCCI
