The government has said Nepal's economy is caught in an unproductive cycle due to policy corruption, gains from licensing and contracting through informal channels and influence, and crony capitalism. As a result, state–market relations are shaped more by access and influence than entrepreneurship, competition and innovation, pushing the economy into its current state.

The report on the country’s economic situation issued on Monday by Finance Minister Swarnim Wagle states that such practices have discouraged capable entrepreneurs and new entrants, and pushed the economy towards an access-based structure instead of one based on value creation. The document outlines the government’s assessment of the economy and its priorities for future policy, planning and budgeting.

“The root of Nepal’s political and economic crisis lies in a distorted incentive structure. Expensive elections, opaque fundraising and a burdensome party structure have turned politics into a profession and an investment mechanism rather than public service,” the report states. “There has been deep ideological confusion regarding the role of the state and the market. At times, there has been the illusion of an all-powerful state over the market, and at other times, excessive trust. Between these two extremes, policy instability has been observed.”

The government concludes that, due to the belief that markets are self-regulating, necessary institutional structures such as competition policy, consumer protection, environmental regulation and social security have not been strengthened.

On the other hand, distrust of the private sector and overly distribution-oriented approaches have failed to prioritise production, investment and productivity growth, the document states.

“As a result, neither the market became dynamic nor did the state structure become accountable. In the absence of a capable, rule-based and predictable environment, the private sector could not obtain a secure and reliable foundation,” the report states. “When the state failed to ensure private property protection, contract enforcement and regulatory stability, investment could not be attracted, and the economy became trapped in an unproductive cycle.”

The government concludes that although Nepal is rich in resources, potential and goodwill, it has not been able to achieve prosperity due to a crisis of thinking, determination and governance integrity.

“Nepal has gone through several phases of political upheaval. However, the overall economic and political transformation process remains incomplete,” the document states. “Due to social discrimination, weak governance and instability, the country could not achieve the expected pace. As a result, in a period of strong demographic potential, frustration and resentment among the youth turned into an intense rebellion.”

Similarly, the government concludes that the expansion of social security and distribution-oriented programmes without proper assessment of long-term financial obligations has created challenges for intergenerational equity.

“Efforts made in the name of ensuring equity without effective implementation neither reduced inequality nor expanded productive capacity. Due to the ineffective use of the demographic dividend, foreign employment, remittance dependency and limited domestic employment creation have become the characteristics of the economy,” the report states.

The government says Nepal’s main challenge is not just a lack of resources, but conceptual ambiguity, weak institutions and poor implementation, adding that the issue is not a shortage of private entrepreneurship but policies and institutions that penalise it.

To overcome this situation, absolute liberalisation alone is not sufficient. Broad structural reforms are required, which promote competition, adopt innovation and technology, provide opportunities for new entrepreneurs, and transform the economy from rent-seeking towards sustainable, employment-oriented growth, the report states.

The government claims that the country has entered a phase of economic restructuring and upgrading. As Nepal’s political economy takes a new turn, policy reforms, improvements in public service delivery, economic transparency and good governance have been given high priority, Wagle said.

Reacting to the paper, economist Dilliram Khanal said it was a routine document rather than one many had expected.

“The economic situation paper did not present the current state of the economy and its causes as outlined in the Rastriya Swatantra Party’s manifesto and the government’s 100-point action plan. It is only a routine document,” he said. “The causes have been presented in a superficial manner rather than in a concrete and in-depth way.”

Khanal said he viewed the RSP manifesto positively, but the situation paper did not meet his expectations. According to him, the causes have not been raised in a concrete manner and are presented superficially.

The government claims that it aims to achieve an average economic growth rate of 7 percent from the next fiscal year, and to raise per capita income to at least $3,000 and the size of the economy to close to Rs100 trillion within five to seven years.

The paper states that with these commitments and targets, Nepal aims to become a respectable lower-middle-income country within five to seven years.

It sets targets, including increasing electricity generation capacity to 15,000 megawatts within five years, completing construction of major national pride projects within two years, and developing new strategically important projects expected to attract private investment and accelerate economic growth.

“The modernisation and commercialisation of agriculture, along with strong interlinkage with industry and tourism, will increase productive employment,” the report states. “Quality infrastructure development in the tourism sector and facilitation of tourism services and mobility will increase employment and income.”

According to Wagle, artificial intelligence, information technology, and the development of a digital economy will boost production, productivity, employment and exports.

The document states that economic growth has remained relatively low and unstable. Over the past decade, average annual economic growth has been 4.2 percent. During this period, Nepal’s economy has ranged from a contraction of 2.4 percent to a peak expansion of 9 percent.

“In recent years, as economic activity has remained sluggish, the economy stood at 4.61 percent in fiscal year 2024-25, and is projected to decline to 3.5 percent in fiscal year 2082-83,” the paper states. It also notes that Nepal’s economy has expanded from agriculture towards the service sector.

The contribution of industry and agriculture has been shrinking while that of the service sector has been increasing.

Against this backdrop, Minister Wagle has identified four main driving sectors of economic transformation.

The manufacturing sector remains weak, contributing an average of only 5.4 percent to the GDP over the past decade. During this period, while the overall economy expanded at an average rate of 4.2 percent, the manufacturing sector grew by only 2.9 percent.

Low investment, high dependence on imported raw materials, limited adoption of innovation and advanced technology, and high production costs have weakened competitiveness and constrained industrialisation, the document states.

The government has stated that dependence on foreign employment is increasing. Due to the lack of decent employment opportunities within the country, reliance on foreign employment has grown. Over the past decade, the number of Nepali workers obtaining labour approval for foreign employment has increased at an average annual rate of 28.6 percent, the document states.

The paper states that although large-scale labour migration has supported the external sector, poverty reduction, domestic demand and social sectors in the short term through remittances, it has increased long-term risks, including depletion of human capital due to shortages of skilled and semi-skilled labour and reduced aggregate demand.

Despite numerous challenges, the economy has multiple opportunities, summarised in 11 points in the report.

“It will be possible to strengthen private sector confidence through good governance based on a stable government and investment-friendly policy environment,” the report states. “This will attract domestic and foreign capital and technology into the economy, expanding the production sector and creating employment.”

It highlights potential for hydropower development using Nepal’s vast water resources, which could provide cheap and reliable energy for industrialisation, service sector expansion and exports. Expansion of regional electricity trade is expected to strengthen Nepal’s position in the green energy market.

Natural and cultural heritage provides a foundation for high-value tourism development. Integrated development of Himalayan, cultural and community-based tourism can expand employment and income generation in rural areas, the government states. Improvements in tourism infrastructure, service quality and destination management are expected to enhance international competitiveness.

“With the use of artificial intelligence and robotics, and the expansion of digital technology, opportunities for service exports and knowledge-based economic development are increasing,” the report states. “Expanding high-value-added economic activities such as information technology services, business process outsourcing and digital entrepreneurship can connect youth and small enterprises with global markets.”

The report also highlights the potential for agricultural modernisation to expand production, income and exports. Investment in high-value crops, livestock, horticulture and agro-processing industries could increase productivity and reduce imports. Nepal’s geographical diversity could support region-specific production and rural industrial development.

It states that export-oriented production could expand through industrial development and supply chain strengthening. Special economic zones, industrial clusters and trade facilitation measures could reduce production costs and improve competitiveness. Nepal could also emerge as a regional transit trade hub by leveraging its geography.

Organised urbanisation and infrastructure development could support investment and job creation. Expansion of transport, energy, irrigation and digital infrastructure is expected to improve productivity in both production and service sectors, while public–private partnerships could help implement large projects.

The report notes the potential to channel remittances into productive sectors. Directing foreign earnings towards entrepreneurship, skills development and investment could transform the domestic economy. Skills and experience of migrant workers and returnees could be utilised in domestic production and services.

“The financial sector can support investment expansion and economic diversification,” the report states. “Financial inclusion, digital financial services and long-term investment instruments can help mobilise savings into productive sectors. There is also an opportunity to increase income, production and employment through the use of domestic resources such as minerals, water, land and forests while maintaining ecological balance.”

The document concludes that good governance and institutional strengthening are the foundation of economic transformation. It states that improvements in public financial management, enhanced service delivery and effective implementation of federal structures can improve development outcomes.