Nepal's gross domestic product (GDP) for 2012 was estimated at over $17.921 billion (adjusted to nominal GDP). In 2010, agriculture accounted for 36.1%; services comprised 48.5%, and industry 15.4% of Nepal's GDP. While agriculture and industry are contracting, the contribution by the service sector is increasing. Agriculture employs 76% of the workforce, services 18% and manufacturing and craft-based industry 6%. Agricultural produce – mostly grown in the Terai region bordering India – includes tea, rice, corn, wheat, sugarcane, root crops, milk, and water buffalo meat. Industry mainly involves the processing of agricultural produce, including jute, sugarcane, tobacco, and grain. Its workforce of about 10 million suffers from a severe shortage of skilled labor.

Nepal's economic growth continues to be adversely affected by the political uncertainty. Nevertheless, real GDP growth was estimated to increase to almost 5 percent for 2011–2012. This is an improvement from the 3.5 percent GDP growth in 2010–2011 and would be the second-highest growth rate in the post-conflict era. Sources of growth include agriculture, construction, financial and other services. The contribution of growth by consumption fueled by remittances has declined since 2010/2011. While remittance growth slowed to 11 percent   (in Nepali Rupee terms) in 2010/2011, it has since increased to 37 percent. Remittances are estimated to be equivalent to 25–30 percent of GDP. Inflation has been reduced to a three-year low of 7%.

The proportion of poor people has declined substantially since 2003. The percentage of people living below the international poverty line (people earning less than US$1.25 per day) has halved in seven years. At this measure of poverty the percentage of poor people declined from 53.1% in 2003/2004 to 24.8% in 2010/2011. With a higher poverty line of US$2 per-capita per day, poverty declined by one quarter to 57.3%. However, the income distribution remains grossly uneven. In a recent survey, Nepal has performed extremely well in reducing poverty along with Rwanda and Bangladesh as the percentage of poor dropped to 44.2 percent of the population in 2011 from 64.7 percent in 2006, 4.1 percentage points per year, which means that Nepal has made improvement in sectors like nutrition, child mortality, electricity, improved flooring and assets. If the progress of reducing poverty continues at this rate, then it is predicted that Nepal will halve the current poverty rate and eradicate it within the next 20 years.

The spectacular landscape and diverse, exotic cultures of Nepal represent considerable potential for tourism, but growth in the industry has been stifled by political instability and poor infrastructure. Despite these problems, in 2012 the number of international tourists visiting Nepal was 598,204, a 10% increase on the previous year. The tourism sector contributed nearly 3% of national GDP in 2012 and is the second-biggest foreign income earner after remittances.

The rate of unemployment and underemployment approaches half of the working-age population. Thus many Nepali citizens move to other countries in search of work. Destinations include India, Qatar, the United States, Thailand, the United Kingdom, Saudi Arabia, Japan, Brunei Darussalam, Australia, and Canada. Nepal receives $50 million a year through the Gurkha soldiers who serve in the Indian and British armies and are highly esteemed for their skill and bravery. As of 2010, the total remittance value is around $3.5 billion. In 2009 alone, the remittance contributed to 22.9% of the nation's GDP.

A long-standing economic agreement underpins a close relationship with India. The country receives foreign aid from the UK, India, Japan, the US, EU, China, Switzerland, and Scandinavian countries. Poverty is acute; per-capita income is around $1,000. The distribution of wealth among the Nepalese is consistent with that in many developed and developing countries: the highest 10% of households control 39.1% of the national wealth and the lowest 10% control only 2.6%.

The government's budget is about $1.153 billion, with expenditure of $1.789 billion (FY 20005/06). The Nepalese rupee has been tied to the Indian rupee at an exchange rate of 1.6 for many years. Since the loosening of exchange rate controls in the early 1990s, the black market for foreign exchange has all but disappeared. The inflation rate has dropped to 2.9% after a period of higher inflation during the 1990s.

Nepal's exports of mainly carpets, clothing, hemp, leather goods, jute goods and grain total $822 million. Import commodities of mainly gold, machinery and equipment, petroleum products and fertilizer total US$2 billion. European Union (EU) (46.13%), the US (17.4%), and Germany (7.1%) are its main export partners. Recently, the European Union has become the largest buyer of Nepali ready-made garments (RMG). Exports to the EU accounted for "46.13 percent of the country's total garment exports". Nepal's import partners include India (47.5%), the United Arab Emirates (11.2%), China (10.7%), Saudi Arabia (4.9%), and Singapore (4%).

Besides having landlocked, rugged geography, few tangible natural resources and poor infrastructure, the ineffective post-1950 government and the long-running civil war are also factors in stunting the nation's economic growth and development.

Nepal has achieved remarkable progress over the last years.  The country managed to halve the percentage of people living on less than $1.25 a day in only seven years, from 53 percent in 2003-04 to 25 percent in 2010-11 and is continuing to make progress. Several social indicators in education, health and gender have also improved.


From post-conflict to democracy

Since the end of the civil war in 2006, Nepal has successfully transitioned from its post-conflict status.  And while the country’s political transition – notably the drafting of a new constitution – is taking longer than expected, the November 2013 elections resulted in a peaceful transfer in power and marked an important step toward the formation of an inclusive and democratic state. 

Despite Nepal’s short experience of democratic government, there have been significant political achievements in the last decade.  Nepal’s highly-diverse population has peacefully come to terms with difficult issues such as federalism and form of government, and forged a strong consensus about the country’s identity as a secular, inclusive, and democratic republic. On September 16th, 2015 the Constituent Assembly (CA) has passed the constitution bill with two thirds majority.


Focus on economic growth

Moving forward, Nepal needs to deliver on its economic potential. The country’s economy grew steadily during the height of the conflict and yielded budget surpluses in 2013-14.  However, current growth levels are too low to reduce poverty and too dependent on remittances.


Current Challenges

  • Nepal has a unique chance to end extreme poverty and spur more inclusive and sustained economic growth by removing major bottlenecks to public and private investment
  • Poor infrastructure:  unreliable electrical power and low-quality transportation networks are the country’s most important economic bottlenecks and hinder job creation and the delivery of services.
  • A difficult regulatory environment constrains the private sector as businesses are required to comply with 130 processes from over 41 ministries and government agencies.  A high degree of informality, characterized by reluctance toward taxation, regulation and inspection, also prevails and diminishes the quality of goods and services.
  • Stability in the financial sector: Some financial institutions remain at risk of insolvency, due to inadequate risk management practices, poor corporate governance and high credit exposure compounded by under-resourced supervision and weak enforcement of prudential norms.  The regulatory framework remains weak; operational capacity to manage the fiscal costs of a financial crisis is limited; and so the capacity to prevent and manage potential crises remains a concern. 
  • At one-third of GDP, Agriculture represents an important source of growth and remains, at least over the medium-term, the largest employment sector for over three-quarters of the population.
  • Human development: Nepal has made good progress on many social indicators, but the rates of childhood malnutrition and chronic energy deficiency among women remain high. Poor infant and child feeding practices are prevalent.  Access to health services remains unequal and of low quality. 
  • Despite good progress in enhancingequal access to basic education (grades 1-8), children, especially the poorest, do not continue to post-basic education and the quality of education at all levels remains a problem. 
  • Poverty reduction: despite recent encouraging trends, Nepali households remain vulnerable to the vagaries of life as the existing social protection system does not provide reliable safety nets. Social assistance schemes – including cash transfers and scholarships – have had a limited impact on poverty, due to limited benefits and weak targeting. 
  • Nepal is also heavily vulnerable to climate change and natural disasters. Recent records show an increasing number of droughts, floods, hailstorms, landslides and crop diseases, mostly affecting the livelihoods of the poor.  Nepal is located on the edge of a tectonic plate and is subject to high earthquake risks, particularly in the Kathmandu valley. 
  • Nepal will benefit from strengthening its governance and the management of its public expenditures. The country still ranks low on international governance indicators such as Transparency International’s Corruption Perception Index 2014 (126 out of 175 countries) and the World Governance Indicators (declining trend over the last decade).