Nepal has achieved important progress in the past few years, with increased political stability and substantial gains made in reducing poverty and expanding access to services. However, economic growth has been modest compared to its neighbors and the economy – highly dependent on remittances – lacks dynamism. Nepal needs a new economic model to achieve faster and sustained growth as well as further improvements in human development and poverty outcomes.
The policy notes lays out a strategic vision for Nepal’s development, based on 3 “I”s for growth: Investment, Infrastructure, and Inclusion. Investment is the bedrock of a sustainable growth model but in Nepal, the state, firms and households critically under-invest. In order to unlock investment as well as to expand access to services and opportunities for all, public infrastructure is critical, but Nepal is under-connected and under-powered. Finally, growth alone will not ‘deliver’ continued fast progress on inequality and poverty reduction unless the growth model is calibrated for inclusion, which in turn can help sustain dynamic growth.
In short, the overall development challenge for Nepal is to promote faster, sustainable and inclusive growth and lay solid foundations for future prosperity.
To allow public and private investment to flourish, a more conducive environment is needed. In Nepal, the main building blocks of improving the environment for investment would include:
(i) Strengthening the financial sector: to make it more resilient to shocks, more efficient in intermediating savings for productive use, and better able to reach those firms and households currently un- or under-served.
(ii) Improving the investment climate: to remove the obstacles that firms face in setting-up and expanding operations in Nepal by alleviating the regulatory burden on firms, reducing non-wage costs of labor, effectively incentivizing production for export and offering foreign investors easier access to Nepal.
(iii) Streamlining public financial management: to leverage the significant fiscal space that Nepal enjoys and enable better public expenditure management by aligning budgets to policy priorities, boosting utilization and ensuring greater value for each rupee spent.
Infrastructure is central to meeting both investment for growth and inclusion challenges. But Nepal’s infrastructural challenges are formidable. Necessary investment would need to address both a quantity and quality deficiency, particularly in transport and energy. A minimum reform agenda would include:
(i) Unlocking Nepal’s hydro-potential: Focusing on core bottlenecks that currently hold back public and private investment will be needed. This includes putting NEA on a sound financial footing, enhancing the policy framework to provide appropriate incentives to private investors, and enhancing policies for the compensation of affected persons.
(ii) Expanding connectivity within Nepal and with its neighbors: This would require improving the efficiency of spending on transport infrastructure through more attention on maintenance and better coordination across implementing agencies, as well as greater focus on transformational interventions, such as the Fast Track (Kathmandu-Terai) project.
(iii) Improving the supply of water and sanitation services: This would involve a two pronged approach to improve the sustainability of rural water supply schemes and incentivizing urban providers to deliver better services.
Higher growth is a necessary but insufficient condition for reducing poverty and inequality at a fast pace. In order to walk the extra mile, active promotion through inclusive public policies will be needed to reach remaining pockets of deep, entrenched poverty, ensure that opportunities –not just income- are effectively available to all Nepali and to provide those vulnerable with adequate protection against shocks. The building blocks of such an expanded inclusion agenda could include:
(i) Boosting agricultural productivity and diversity: because any gains in the agricultural sector, which accounts for over one third of GDP and employs around three-quarters of Nepal’s population, would immediately and automatically reach the poor. This could be achieved by public initiative to boost cooperation and research in agricultural technologies as well as targeted programs to develop agribusiness and value chains with export potential.
(ii) Expanding the opportunity set of all Nepalis: through interventions in the health and education sectors to remove remaining social and economic barriers to access to services and to enhance service quality in order to leverage access gains.
(iii) Enhancing the poverty impact of social protection programs: by limiting further proliferation of programs, strengthening core administrative systems and developing a program explicitly designed to address poverty and other priority risks and vulnerabilities.
(iv) Preparing for decentralization: because the move to a federal state will imply a fundamental administrative restructuring, it is key to ensure that the administrative systems are in place for service delivery to proceed and that the new roles of each level of government are clear and funded.
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