Overview

  • AT A GLANCE

    In 2018, the World Bank came up with its Country Partnership Framework (CPF) covering the five-year period of FY2019-2023 comes at a time of historic transformation in Nepal.  The signing of the Comprehensive Peace Agreement in 2006 ended a 10-year conflict that came at a significant cost of lives and foregone economic development. Since then, Nepal has gone through lengthy and complex transitions towards a new Constitution in 2015 that set in place a federal structure.  By the end of 2017, elections were successfully held at the federal, state, and local tiers. There is a newfound optimism for greater political stability, inclusion, good governance and sustainable growth. The new federal structure presents unprecedented opportunities for Nepal to reset its development storyline, as outlined in the Systematic Country Diagnostic (SCD).  At the same time, the shift to federalism poses new challenges and source of fragility, given the heightened popular aspirations and expectations. Key challenges include the need to clarify the functions and accountabilities of the federal, state, and local governments; deliver basic services and maintain infrastructure development; create a conducive environment for the private sector; and address governance weaknesses that may worsen in the early years of the new federal system.

    COUNTRY CONTEXT

    A new government, backed by a historic majority in Parliament, took up office on February 15, 2018.  This follows elections for all three tiers (local, state and federal) of the state architecture defined by the new constitution, marking a protracted but successful conclusion of a political transition that began with the signing of the Comprehensive Peace Agreement in November 2006. State governments largely mirror the coalition at the center. At the sub-national level, funds, functions and functionaries hitherto managed by the central, district and village authorities are moving to the seven new states and 753 local governments for which new legislation, institutions and administrative procedures are being formalized as constitutionally prescribed.  Meanwhile, the central level authority is being streamlined with a focus on oversight.  These exercises at state restructuring are expected to result in improved outreach and service delivery but will likely take time before they become fully operational. 

    Significant adjustments need to be made to the government structure.  They include amending over 400 existing acts, restructuring the civil service at all levels, devolving fiscal management, and determining the division of funds, functions, and functionaries between various levels of government.

    In contrast to the frequent changes in government that characterized Nepal’s decade-long transition to federalism, the new government enjoys a historic super-majority in Parliament.  Along with new constitutional checks and a far fewer number of political parties, there is a much greater degree of optimism for stability in the coming days.  However, state restructuring on this scale is uncharted territory for Nepal and smoothening the transition from the previous unitary system to the new federal one will remain a daunting task. The new system, in principle, provides opportunities to decentralize development benefits and make service delivery more effective and accountable.  However, the risks of jurisdictional overlap between the three tiers of government, lack of clarity and coherence between policies and devolved powers, and duplication of efforts will remain high during the coming few years.  Key aspects of the new system require further definition and may continue to be contested by different population groups.

    Nepal experienced devastating earthquakes in 2015 followed by trade disruptions leading to a fuel crisis, which impacted the entire economy. The heavy monsoon rains sweeping across South Asia in 2017 affected 1.1 million Nepalis.

    RECENT ECONOMIC DEVELOPMENTS

    Nepal grew by 6.3 percent in FY2018 despite less favorable monsoons and the easing of rapid growth that ensued following the trade blockade in FY2016. On the demand side, investments are driving overall GDP growth with gross fixed capital formation contributing 4.4 percentage points. Of the 4.4 percentage point contribution, 84 percent came from the private sector. In part this has been supported by post-earthquake housing reconstruction which is in full swing. Of the 707,443 beneficiaries eligible for housing grants, over 88 percent have been enrolled in the program and received the first tranche as of August-end 2018. More than 71 percent of houses are now under construction, with a disbursement rate of 67 and 40 percent respectively for the second and third tranches.  Private domestic investment grew by close to 16 percent. Foreign Direct Investment (FDI) also grew by a healthy 32 percent (y/y) in FY2018 to reach a record US$ 168 million. The growth in FDI suggests a growing appetite to invest in Nepal by international investors such as Hongshi-Shivam Cement and Huaxin Cement Narayani, although FDI still only accounts for 0.6 percent of GDP.

    On the supply side, the main growth drivers were the service and industry sectors. Both tourist seasons – Autumn 2017 and Spring 2018 – during the fiscal year saw record levels of tourist arrivals. Furthermore, with continued strong remittance growth (see further analysis below) consumption continues to boost the service sector as well. Combined these have supported growth in the retail (9.1 percent y/y), and hotels and restaurants (9.8 percent y/y) sub-sectors of the service sector. Industry grew by 8.8 percent (y/y) in FY2018, well above its twenty-five-year average of 4 percent. The elimination of load shedding has supported the growth of industry through the expansion of capacity utilization. This has been possible through better electricity management by the Nepal Electricity Authority (NEA), with an additional 102 megawatts added to the national grid through the commissioning of new hydro powerplants and electricity trade with India.

     

    Last Updated: Oct 15, 2018

    •  In the 1950s, Nepal’s literacy rate was 2 percent. Only one in one thousand children went to school. Today almost all children go to school and live within 30 minutes of their school.
     
    • Nepal has reached gender parity in primary education.
     
    • In the early 1970s, Nepal’s road network spanned 2,700 kilometers.  Today it stretches over 80,000 kilometers.
     
    • A child born today can expect to live 25 years longer than one born in 1970.

     

    • Fewer than 1 in 1,000 Nepalis owned a telephone until 1970. Today, two in three Nepalis own a cell phone.
     
    • Until 1970, only five percent of Nepalis had piped water supply. Today, 85 percent of the rural population has access to clean water 81 percent has access to sanitation.
     
    •  By halving extreme poverty in just seven years, Nepal has achieved the first Millennium Development Goal ahead of time and well before some neighbors.
  • On April 25, 2015, a major earthquake occurred at shallow depth with a magnitude of 7.8 in central Nepal causing widespread destruction. There were several aftershocks as well as a subsequent earthquake event of magnitude 7.3 on May 12. 

    A combined 9,000 lives were lost and close to ten million people in at least 31 of 75 districts were affected, making this the worst disaster in Nepal’s history in terms of human casualties. An assessment of the impact shows that Nepal’s recovery needs amount to the equivalent of a third of its economy. 

    The Post Disaster Needs Assessment (PDNA) priced the damage at US$ 7 billion, with total reconstruction needs at US$ 6.7 billion. The largest single need identified by the PDNA was housing and human settlements, estimated at about $3.27 billion.

    Economic impact of the earthquake

    Early estimates suggested that an additional 3 percent of the population had been pushed into poverty as a direct result of the earthquakes. This translates into as many as a million more poor people. The earthquake, coupled with trade disruptions that occurred from September 2015-January 2016, pushed down the overall growth of FY 2016 to 0.6 percent (at market prices) – the lowest in 14 years.

    Reflecting both the earthquake and trade related disruptions, inflation spiked to over 12 percent (y/y) by mid-January rising 5 percentage points in just four months from mid-September 2015. This was the highest inflation level since FY 2009. As the trade disruptions ended, inflation eased to back to single digits. 

    Economic activity in Nepal, which rebounded strongly in FY2017, reaching 7.5 percent (y/y) following two challenging years, has again been impacted by severe flood affecting more than one-third of the country, as indicated in the latest Nepal Development Update (October 2017).

    Support from international donors

    After the earthquakes, the international community rallied to provide immediate rescue and relief and support for the country’s longer-term recovery. An International Conference on Nepal’s Reconstruction was held in Kathmandu on June 25, 2015. Numerous countries, international financial institutions, foundations, and NGOs stepped forward, pledging about $4.4 billion to support Nepal’s recovery and reconstruction and help the country become more resilient to future events.

    The government swung into action, launching the Post-Disaster Recovery Framework on May 12, 2016. It outlines all sector plans and financial projects through 2020. In December of 2015, it also established the Nepal Reconstruction Authority (NRA) and appointed a Chief Executive Officer to expedite the reconstruction process.

    The government also established the Nepal Earthquake Housing Reconstruction Multi-Donor Trust Fund (MDTF) to support housing reconstruction. The fund is administered by the World Bank. Current committed financing includes: (i) $200m from IDA’s Crisis Response Window; (ii) $100m credit from JICA for parallel financing; (iii) $30.56m in a WB-administered Multi-Donor Trust Fund (USAID – $9.6m, Switzerland - Swiss Francs 7m, Canada – CAN$ 10m and United Kingdom, DfID – GBP 4.8m). Out of $30.56m committed under MDTF, $26.59m has been received; (iv) about $200m earmarked by I/NGOs for the sector; and (v) $50m from the World Bank’s budget support. 

    As of October 12, 2017, 654,366 beneficiaries have been identified in 14 most affected districts. Out of this, around 90 percent of beneficiaries (572,633) have signed the Grant Participation Agreement, almost all of whom have received the first tranche of payment. 93,039 beneficiaries have received the second tranche payment, while 16,655 have received the third tranche.

    Out of the beneficiaries, 138,288 are currently reconstructing their homes, receiving technical and monitoring support from the NRA. World Bank is facilitating this process of reconstruction by sending out bulk SMSes to the beneficiaries, advising them of the various processes and requirements of reconstruction. Similarly, the NRA has set up a toll-free 24-hour hotline to cater to the queries of beneficiaries regarding reconstruction. NRA is also collaborating with a few agencies to disseminate Public Service Announcements to ensure that beneficiaries acquire correct and timely information on the reconstruction and monitoring procedure.  

    Last Updated: Oct 24, 2017

LENDING

Nepal: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

Additional Resources

Country Office Contacts

Kathmandu
Yak and Yeti
Hotel Complex
Durbar Marg
Kathmandu, Nepal
+977 1 4236000
+977 1 4226792
infonepal@worldbank.org