Nepal’s Growth Paradox: Remittance Success Amid Structural Economic Challenges

Nepal has achieved remarkable poverty reduction driven by remittances, but its economic growth remains constrained by weak exports, low productivity, and underdeveloped sectors. The World Bank urges bold reforms in trade, hydropower, digitalization, and migration to unlock sustainable, inclusive growth.

The Nepal Country Economic Memorandum 2025, jointly produced by the World Bank’s Economic Policy Global Department with contributions from Colgate University and support from the Nepal Statistics Office, offers a comprehensive and in-depth assessment of Nepal’s economic performance, structural challenges, and growth potential. At the heart of this report lies a striking paradox: while Nepal has made unprecedented progress in reducing extreme poverty from 55 percent in 1995 to just 0.37 percent in 2023 its overall economic growth remains sluggish, averaging only 4.2 percent annually over the past three decades. This remarkable poverty reduction has largely been fueled by massive outmigration and remittance inflows, not by structural transformation or domestic productivity growth. By 2023, remittances contributed to nearly a quarter of Nepal’s GDP, cushioning the economy against shocks but also masking deeper vulnerabilities.

Migration: A Lifeline with Hidden Costs

International migration has become Nepal’s most reliable employment strategy, especially for young men facing limited job prospects at home. Over 7 percent of the population now lives abroad, primarily in Gulf Cooperation Council countries and Malaysia. These migrants send home substantial remittances, which directly contributed to more than 30 percent of the poverty reduction achieved between 2011 and 2023. Remittances have not only elevated living standards but have also increased household investments in education and health.

However, this model is not without significant social and economic costs. Migration remains expensive, with high upfront costs often financed through informal loans. Access to higher-return destinations remains skewed in favor of wealthier households, while poorer families are largely limited to low-wage jobs in India. Moreover, the reintegration of returnees into Nepal’s weak labor market is difficult. Many returnees end up unemployed or in low-paying informal jobs, unable to leverage the skills they acquired abroad. Migrant deaths and exploitative working conditions abroad are common, yet policy mechanisms to protect workers and reduce migration risks remain inadequate. The report urges the government to build a more structured and inclusive migration system, reduce costs, ensure better worker protection, and develop effective reintegration programs.

The Export Collapse and the Real Exchange Rate Trap

One of Nepal’s most pressing economic challenges is its dismal export performance. The country’s export-to-GDP ratio has plummeted from over 25 percent in the 1990s to less than 7 percent in recent years. Manufacturing, once a promising growth sector, has steadily declined and now contributes less than 6 percent of GDP. Meanwhile, services dominate the economy, driven largely by remittance-fueled consumption rather than by high-value exports or productivity gains.

A major factor behind the export slump is the appreciation of Nepal’s real effective exchange rate (REER), driven in part by remittance inflows and a long-standing fixed currency peg to the Indian rupee. Since 1993, this peg has not been adjusted, even as inflation in Nepal outpaced that of its trading partners, leading to declining price competitiveness. The report finds that this REER appreciation has contributed to a 10 percent drop in exports over the past decade. Compounding the problem are high tariffs on intermediate goods, burdensome customs procedures, and limited trade agreements beyond India. As a result, Nepal remains one of the most closed economies in South Asia, deterring both exports and foreign investment.

Hydropower: The Sleeping Giant of Economic Transformation

Nepal possesses one of the highest hydropower potentials in the world, estimated at 83,000 megawatts, with 42,000 MW economically viable. Yet, only about 4 percent has been harnessed so far. Hydropower could be a transformative force for the Nepali economy providing clean, low-cost electricity for domestic industries, reducing fossil fuel imports, and positioning Nepal as a green energy exporter to India and Bangladesh. Electricity exports have already increased to over 900 MW in 2024, making Nepal a net electricity exporter for the first time.

Despite this promise, the sector faces numerous obstacles. Outdated legislation, weak market structures, and slow approval processes have delayed investment. The Nepal Electricity Authority remains the sole buyer of electricity, and power purchase agreements often exclude take-or-pay clauses, discouraging private investment. Infrastructure bottlenecks, such as weak transmission lines and unreliable supply, continue to plague the sector. The report calls for a new electricity law, liberalized market access for private players, and public-private financing models to unlock this latent growth engine.

The Digital Economy: Promise Amid Gaps

Digitalization represents another promising frontier for Nepal’s economic future. The ICT sector currently contributes 1.7 percent of GDP and accounts for a growing share of services exports, particularly in digitally delivered services such as outsourcing and software. Nepal’s young, English-speaking population, combined with its low-wage structure, offers a comparative advantage in the global digital economy. Firms like Daraz and Foodmandu have already demonstrated the job-creating potential of digital platforms.

However, challenges abound. Fixed broadband remains expensive and limited in reach, while digital literacy and skills are low, especially among women and rural populations. Regulatory frameworks are outdated, and the telecom market is highly concentrated, stifling competition. Digital payments, though growing, still lag behind peer countries. The report recommends updating the 1997 Telecommunications Act, investing in digital public infrastructure, reforming the rural telecom fund, and expanding digital skills training to fully leverage the sector’s potential.

A Call for Bold, Coordinated Reforms

Despite its impressive poverty reduction and resilience in the face of natural disasters and political instability, Nepal’s growth model is running out of steam. Reliance on remittances and consumption has delivered social gains, but not structural transformation. To move forward, Nepal must adopt a new economic strategy, one that emphasizes productivity, competitiveness, and job creation.

The Nepal Country Economic Memorandum 2025 lays out a comprehensive reform agenda. It urges policy shifts to revive exports, modernize trade policy, improve hydropower governance, accelerate digitalization, and better manage migration. Crucially, it emphasizes the importance of building institutional capacity, improving public investment management, and fostering private sector development. Only through such coordinated, bold reforms can Nepal escape its current low-growth trap and realize its long-held aspirations of becoming a dynamic, inclusive, and middle-income economy.