Unimpressive economyNepal’s economic policy reform is unsustainable and unsuitable for private investment.
Nepal initiated a liberalisation policy in the middle of the 1980s, although it gained momentum only in the 1990s. This policy can help promote and stimulate private sector investment and, in turn, create a competitive environment in the economy. It can bring a positive attitude to private sector investment, which heralds economic prosperity. For effective implementation of this policy, a number of public enterprises involved in producing basic goods like shoes, sugar, agricultural tools, clothes and paper were dismantled and transferred to the private sector during the 1990s. In the past, these industries made significant contributions to all economic activities such as production, distribution, consumption, income and employment. However, several among those industries have been closed since, creating a shortage of goods produced by such industries.
The disappearance of the old industries and the non-commissioning of new ones has made Nepal a dependent country at least in two ways. First, basic goods production in Nepal has diminished. This has led to a trade deficit as the demand for the goods produced by those industries earlier is being met by imports. It increases imports, which enlarges the trade deficit and deepens unfavourable balance of payment. Second, a large number of people employed in these industries lost employment. In the absence of alternatives, some of them migrated to foreign countries in search of livelihood. Others remained unemployed and joined the street vending businesses.
Economic liberalisation can play an important role in economic development. It can attract, promote and encourage private sector investment, both foreign and domestic, particularly in the manufacturing and hydropower sectors. But Nepal’s economic policy reform is clearly unsustainable, creating a gloomy environment for private investment. Private sector investment has been diverted to less risky ventures such as the social service sector, particularly in health and education. Schools, colleges and nursing homes, including private hospitals, are mushrooming through the private sector's investment in various urban centres of Nepal. These institutions provide services to rich people. Poor people have no access to such facilities as they are constrained by low income. They cannot admit their children to private schools (assumed to provide quality education at a high cost), so they send them to public schools. This divides people in two distinct sets, superior and inferior.
Clearly, Nepal has been producing two categories of future manpower: A superior workforce which graduates from private schools, and an inferior one which graduates from public schools. Skilled, semi-skilled and unskilled youths are migrating to foreign lands in search of livelihood. The majority of students who graduate from private schools are migrating to developed countries. This is a tragedy for Nepal. Similarly, private sector investment has been diverted to the unproductive sector. During the 1990s, many cosy dance restaurants opened in different urban centres of Nepal, particularly in Kathmandu Metropolitan City, through private sector investment. They were unproductive activities and so could not last long.
Nepal’s economic growth is sluggish and very low. It amounted to 4.4 percent on average during 1990-2021. It had stood at 4.9 percent during 1990-99, reaching a high of 8.6 percent in 1994 and a low of 3.6 percent in 1993. In the first decade of economic liberalisation, the growth rate trend was optimistic. However, this trend has been declining over the years. During 2000-2009, the average annual growth rate of GDP was 4.1 percent, reaching a high of 6.1 percent in 2001 and a low of 0.1 percent in 2002. Similarly, during 2010-2021, the annual average growth rate was 4.3 percent, a slight or marginal increase by 0.2 percentage points over the previous period, reaching a high of 9 percent in 2017 and a low of -2.4 percent in 2020. This is barely enough to feed the population, which is growing at the rate of nearly 2 per cent per year. If such economic woes continue, hunger, malnutrition rife, employment insecurity, social insecurity, health crisis and loss of livelihood will become a routine occurrence.
What went wrong
The failure of economic policy, particularly after 1990, is reflected in the overall progress of the Nepali economy. In the initial decade of liberalisation and privatisation, the economic growth rate, to some extent, was optimistic. But it came down over time and turned towards pessimism. The economic growth rate is not only disappointing but also depriving. Irrespective of its size, few people have excess over the fruits of its growth. This means the distribution of the fruit of the growth has been skewed. Unemployment is endangering the livelihood of people, corruption is rampant, and anti-corruption mechanisms are ineffective. The living standard of the richest 10 percent has been increasing over the years while that of the rest is deteriorating. The monetary sector is growing, setting up a large number of financial institutions while the real sector is deteriorating.
The poor economic performance reveals a weak association between the growth of monetary and real sectors. To achieve healthy and prosperous economic growth, there should be a strong relationship between them. Moreover, private sector investment has been pouring into the construction of a large number of big residential buildings and the opening of departmental stores for the transaction of imported goods. Banks find these sectors to advance their loans. This shows that the current trend of economic activities in which the investments are pouring is not sustainable. These activities would sustain for a longer period only when the country is able to achieve a high economic growth rate.