While Nepal was already facing numerous hurdles to realize the desired level of growth, the recent Covid-19 pandemic and the subsequent lockdown has wreaked havoc on the economy. The past few months have seen a surge in writings and discussions pertinent to conducive policies for reviving the economy of Nepal. Many experts view the crisis as an opportunity for Nepal to bring considerable reforms that would not have been in priority in normal circumstances.
However, prior to implementing any kind of reform, it is important to understand its impact and viability on the Nepalese economy. While at that, there is no hard and fast rule to determine one best policy prescription that will facilitate higher economic growth. Thus, a brief analysis of the economic history of Nepal can help identify and understand the policies conducive to revive and grow the economy.
Nepal, in 1956, embraced a state-led development strategy where the efforts of the government were highly concentrated in becoming self-sufficient and generating full employment in the economy whilst reducing inequality.
The growth strategies of Nepal mainly focused on: Establishing public enterprises that covered all sectors of the economy; controlling trade and industry by fostering license and quota system; protecting domestic industries through import substitution and protectionist trade policies; controlling both price and distribution of goods and services; and strict foreign exchange control.
However, the adopted plans and policies were not able to generate the desired results. In the following three decades the average GDP growth of Nepal was a mere 2%, while the population grew by 2.6%, resulting in a decline in per capita income of the general people. Additionally, Nepal frequently experienced negative real GDP growth in the period. In 1979, the contribution of the industrial sector to GDP of Nepal was a mere 13% – the least in whole of South Asia. Additionally, the labor participation of the sector declined from 1% in 1971 to 0.5% in 1979.
Such disappointing achievements were attributed to unfavorable policies that did not incorporate wider economic considerations. The policies were highly rigid and only served to facilitate economic opportunities like opening of business or industries to high-class elites. Additionally, the industries were protected and thus Nepal could not realize the development brought forth through competition and innovation. Both design and implementation of development strategies were faulty, and with such constraints, even a sharp increase in the availability of resources would not have solved the economic problems of Nepal.
The devastating effects of highly constrained economic environment were visible during the early 1980s. By 1985, the country underwent a severe macroeconomic and foreign exchange crisis.
In light of the deepening economic crisis, Nepal in late 1980s and early 1990s embarked on development policies that supported market-led economic development, promoted policies that facilitated private sector development and lowered the role of government.
The government undertook major reform to transform the controlled economy into an open, liberal and competitive market oriented economy. In order to expand the participation of private sector in economic activities legislations in monetary, fiscal, industrial, commercial and foreign investment sectors were introduced and the practice of licensing was abolished. Likewise, Nepal permitted free export of goods and removed quantitative restrictions on imports.
Owing to these reforms, Nepal’s GDP growth rate reached as high as 8.2 percent in the year 1994 and the inflow of Foreign Direct Investment (FDI) increased from around US$5.9 million in 1990 to a peak of US$23 million in 1997. Similarly, Nepal for the first time realized some form of economic freedom where all citizens could open business and earn their own livelihood. However, Nepal could not fully realize the benefits of the policies adopted as the deteriorating political environment and the Maoist insurgency hindered the reforms from continuity. In the years that followed, Nepal’s economic growth agendas always took the back seat in the affairs of the state whereas politics overtook everything else.
Given the scenario, even a layman can easily conclude that state-led development strategy with highly restrictive policy is not conducive to growth in the case of Nepal. While at that, liberal economic environment where private sector can foster and grow is highly suitable.
Fast forward to 2020, the Nepalese economy still suffers from problems like stringent compliance process to start a business, operate and exit from one, complex tax payment procedure, lack of security of life and property, anti-competitive practices like protectionism, syndicates and cartels, lack of adequate infrastructure, inconsistent and uncertain policy environment, among many.
Initiating reforms that address these underlying issues by adopting policies that align with economic freedom of the people and promote market-oriented policies would help the Nepalese economy to revive, grow and sustain.