Nepal's performance on the economic development front since turn of the century has lagged behind that of the other South Asian economies. In per capita terms, growth was even less favorable; as a result, Nepal's per capita gross domestic product (GDP) remains the lowest in the region. In 2007, the per capita GDP in 2000 prices was estimated at $243 compared with $439 for Bangladesh, $660 for Pakistan, $686 for India, $1,144 for Sri Lanka, $1,277 for Bhutan, and $3,668 for Maldives. In terms of per capita GDP, Nepal is now where Sri Lanka was in 1960, Pakistan was in 1970, and India and Bhutan were in 1980. This lackluster economic performance has occurred despite some very important reforms during the 1990s and 2000s.
On the poverty front, remittance flows and investments in rural infrastructure have helped reduce poverty incidence from 42% in 1995/96 to about 31% in 2003/04. However, poverty incidence remain high and may climb further if the global recession reduces remittance flows. An emerging concern is the sharp rise in inequality-in terms of the Gini coefficient, inequality increased from 0.34 in 1995/96 to 0.41 in 2003/04. Given that inequality is considered to be one of the most significant drivers of the recent conflict, it is important that a new growth strategy opens up economic opportunities for hitherto excluded groups, i.e., that future growth is inclusive.
Although GDP registered an impressive 5.6% growth in 2007/08 compared with 3.0% in 2006/07, the surge was largely due to timely rains leading to a good harvest of main agricultural crops and to a rise in tourist arrivals, and not due to major improvements in economic fundamentals. Although the total investment rate is reportedly high, this may be misleading as part of the rate is estimated as the residual value to balance the income and expenditure account and is prone to estimation errors and statistical discrepancies. The fixed investment rate (gross fixed capital formation), estimated using the materials/inputs approach backed by surveys, is arguably a better indicator to gauge investment levels. This approach suggests that Nepal's investment levels may be the lowest in South Asia. Moreover, growth in total investment and fixed investment rate has also been the slowest in South Asia. Time series data are not readily available, but the break up of private sector investments in 2006/07 suggests that the investments remain low particularly in infrastructure development and agriculture.
This raises the problem of how the country can improve its pace of growth and poverty reduction. The challenges Nepal faces in achieving its growth potential are compounded by the slow transition from a kingdom to a republic and the related political processes, which aim to promise political and policy stability over next few years. Moreover, the global recession threatens to drastically reduce the inflows of remittances and tourists. The country diagnostics study, Nepal: Critical Development Constraints, attempts to address these issues by examining the following questions:
- What are the critical factors constraining investments and economic growth?
- What should policymakers do to revive investments?
- How can economic growth be made more inclusive?
Key findings from examining the three questions are presented in these highlights of the main report.
