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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. Coincidentally, this came at a time of historic transformation in Nepal, as a new government took up office in February 2018. 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, completed a year of office on February 15, 2019. The government was  preceded by 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.

    RECENT ECONOMIC DEVELOPMENTS

    Economic growth is expected to fall in Nepal to a range between 1.5 and 2.8 percent in FY2020 reflecting lower remittances, trade and tourism, and broader disruptions caused by the COVID-19 outbreak. A prolonged outbreak of COVID-19 is likely to affect growth significantly with a further deceleration or contraction in services and industrial production. Economic growth during FY2021 is also likely to remain subdued due to the lingering effects of the pandemic with some recovery expected in FY2022.

    Weak agricultural activity is expected to have lowered economic growth during July-January FY2020 (first half of FY2020). Delays in the monsoons and crop damage by army worms and fake seeds reduced paddy production by 1.1 percent. Growth in services, particularly, hotels and restaurants, is also likely to have moderated with lower tourist arrivals in the first half of FY20, mainly from India. On the demand side, growth was primarily supported by government consumption (higher wages) and net exports (lower imports).

    Average inflation was 6.4 percent in the first half of FY2020, driven by higher vegetable prices and increased import duties on certain agricultural and industrial goods. This widened the inflation gap with India and contributed to a 2.1 percent real effective exchange rate appreciation of the Nepalese Rupee. Credit growth exceeded deposit growth reaching 8.7 percent, leading to reduced loanable funds. But the financial sector remained well-capitalized, with the non-performing loan ratio at 1.8 percent in January 2020.

    As the trade deficit contracted because of lower imports, the current account deficit narrowed by 44.3 percent during the first half of FY2020. Imports declined by 3.5 percent, with lower demand for reconstruction-related industrial supplies (iron, steel, and coal) and gold (due to higher prices) and lower petroleum prices. Exports remained low (3.3 percent of GDP in FY2019) but grew by 22.2 percent on the back of higher external demand for refined palm and soybean oil. Meanwhile, remittance inflows grew only by 1.2 percent to $3.9 billion, reflecting reduced net outmigration. Loans and a drawdown of foreign exchange reserves financed the external deficit. As a result, foreign reserves stand at $9.7 billion or 8.4 months of imports as of January 2020.

    The budget remained in surplus because of lower execution of capital budget, at 15. 4 percent of the total in the first half of FY2020. Recurrent spending in the first half of FY2020 grew by 3.7 percent, driven by transfers to subnational governments, higher wages, and social security payments. Meanwhile, revenue growth decelerated to 13.3 percent in the first half of FY2020, because of lower import tax proceeds.

    The estimated poverty headcount ratio (at the $1.90 per person per day international poverty line) was 15 percent in 2010 in Nepal, which further declined to 8 percent in 2019. At a higher line of $3.20 a day, 39 percent of the population in Nepal is estimated to be poor in 2019, a 15 percentage-point decrease from 2010. About 31.2 percent of the population that are estimated to live between $1.9 and $3.2 a day face significant risks of falling into extreme poverty, primarily because of reduced remittances, foregone earnings of potential migrants, job losses in the informal sector, and rising prices for essential commodities as a result of COVID-19.

    Last Updated: Apr 12, 2020

    • 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. 
  • RECENT UPDATE

    As of March 21, 2019, 723,120 beneficiaries have been identified in 14 most affected districts. Out of this, around 90 percent of beneficiaries have signed the Grant Participation Agreement, almost all of whom have received the first tranche of payment. 522,934 beneficiaries have received the second tranche payment, while 396,441 have received the third tranche.

    Out of the beneficiaries, 361,153 are currently reconstructing their homes, receiving technical and monitoring support from the Nepal Reconstruction Authority (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.  

    BACKGROUND

    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 $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) $200 million from IDA’s Crisis Response Window; (ii) $100 million credit from JICA for parallel financing; (iii) $30.56 million in a World Bank-administered Multi-Donor Trust Fund (USAID – $9.6 million, Switzerland - Swiss Francs 7 million, Canada – CAN$ 10 million and United Kingdom, DfID – GBP 4.8 million). Out of $30.56 million committed under MDTF, $26.59 million has been received; (iv) about $200 million earmarked by I/NGOs for the sector; and (v) $50 million from the World Bank’s budget support. 

    Last Updated: Apr 03, 2019

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