Nepal’s growth model needs urgent overhaul to meet development goals

 World Bank's Nepal Economic Memorandum 2025

 

Kathmandu, Mar. 24

The World Bank (WB) said that Nepal’s current growth model which is heavily reliant on remittances and consumption has proven resilient but insufficient to meet the country’s ambitious development targets.

"While remittances have buoyed private consumption and reduced poverty, they have not translated into substantial job creation or productivity gains across key economic sectors," the WB concluded in its recent report on Nepal country economic memorandum 2025 titled 'Unlocking Nepal's growth potential' launched in Kathmandu on Monday.

According to the multilateral donor, this model, coupled with structural limitations such as low export competitiveness, limited industrial output, and dependency on informal labour, constrains Nepal’s potential to achieve sustained, higher growth rates.

To break this cycle and enhance growth, significant policy reforms are essential to shift the economy toward more dynamic and sustainable drivers of growth, it suggested.

The five-yearly report concluded that Nepal has achieved remarkable success in poverty reduction, nearly eradicating extreme poverty, largely driven by remittances. To strengthen future growth, Nepal should prioritize policy actions that unlock domestic opportunities, it said.

Despite progress, Nepal’s economic growth lags regional peers. Nepal's economy grew at an average annual real rate of just 4.2 per cent between 1996 and 2023, ranking sixth out of eight South Asian nations.

According to the WB, structural challenges such as low productivity, declining exports, and a stagnant industrial sector have held back the economy and led to slow job creation in non-agriculture sectors. Young workers are migrating abroad in search of better job opportunities as domestic prospects remain limited.

“Nepal's success in poverty reduction is impressive, but its economic potential remains largely untapped,” said David Sislen, World Bank Division Country Director for Maldives, Nepal, and Sri Lanka. “Nepal has significant potential to drive stronger growth and create jobs by implementing key reforms to increase the returns from migration, boost exports, use hydropower efficiently, and boost digitalisation.”

 

Conventional practices not sufficient

Speaking on the occasion, Vice-Chairman of the National Planning Commission (NPC), Prof. Dr. Shiva Raj Adhikari, said that conventional practices are not sufficient to achieve the rapid and sustained growth targets, adding the country needs to be innovative and implement sustainable development initiatives.

"The country also needs economic stability promoting equitable growth and striking balance between the lower rung in the society that benefits form the remittance and the upper class that spends it in foreign trips and education," he said.

According to Dr. Adhikari, improving labour policies and supporting migrant returnees with reintegration strategies are equally instrumental for the achievement of desired success.

 

WB recommendations

The Country Memorandum 2025 had suggested that integrating migration into national development, job creation, and poverty reduction strategies will provide a platform to work towards a systematic and institutionalised migration system. This is needed to enhance the returns from migration.

"Policies should focus on reducing the cost and increasing the benefits and safety for current low-skilled migrants, while also eyeing longer-term skill and destination diversification," it said.

According to the report, expanding and better implementing bilateral labour agreements will be critical. Initiatives promoting entrepreneurship and retraining and reskilling programmes would allow returning migrants to reintegrate into the domestic labour market.

Likewise, to improve export performance, market competition should be improved in key sectors and infrastructure deficits should be addressed.

Remedies include better managing inflationary pressures to address the erosion of exporters’ price competitiveness, and encouraging people to use remittances for investments and business growth to help ease inflation.

Similarly, to harness the potential in hydropower, there is a need to develop a clear financial strategy so that the sector could mobilise much-needed investments.  

"This strategy could include developing the domestic bond market and an effective framework for large-scale public-private partnerships," noted the report.

Strengthening the regulatory and legal frameworks, by reducing bureaucratic red tape and streamlining the current licensing process, would improve the structure of the electricity market and attract additional investment.

It has also recommended updating the Telecommunications Act and the digital strategy and adopting key digital infrastructure at the earliest in order to boost the development of the digital sector. 

Published in The Rising Nepal daily on 25 March 2025.