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The government led by the Rastriya Swatantra Party, which commands nearly a two-thirds majority, has acknowledged that Nepal’s economy is trapped in an unproductive cycle, raising concerns about its long-term sustainability.

The assessment comes in the State of the Economy Report unveiled on Monday by Finance Minister Swarnim Wagle, who outlined a range of structural and policy-driven challenges weighing on the economy.

Wagle pointed to Nepal’s inclusion on the grey list for failing to meet international standards on anti-money laundering and countering the financing of terrorism, warning that the move has dented global financial credibility and complicated efforts to attract foreign investment. He also noted that while Nepal is on track to graduate from the least developed country category, sustaining that progress remains uncertain.

The report paints a picture of an economy still rooted in traditional agriculture, with a lopsided shift toward the service sector in the absence of sufficient industrialization. Weak productive industries have constrained job creation, while recent gains in hydropower generation have yet to translate into broader economic transformation.

Despite the country’s rich forest and mineral resources, their utilization remains far below potential. Meanwhile, the expansion of the service sector has not generated enough decent jobs, pushing more workers abroad and deepening Nepal’s dependence on remittances.

Fiscal challenges remain equally pressing. Revenue collection has failed to keep pace with targets, the tax base remains narrow, and the informal economy continues to dominate. A large share of the budget is consumed by recurrent spending, while weak capital expenditure has undermined the effectiveness of development projects. Rising deficits have further increased reliance on public debt, with liabilities, arrears, and pending payments mounting steadily.

Although banks and financial institutions have expanded lending to the private sector, its impact on productive industries remains limited. Investment growth has also lagged despite relatively low interest rates. The report highlights declining foreign aid and weaker-than-expected foreign investment as additional pressures on resource management, alongside persistent structural imbalances in trade and heavy reliance on imports.

Aiming for the political economy, Wagle said costly elections, opaque fundraising, and bloated party structures have turned politics into “a means of profession and investment rather than public service.” This, he argued, has fueled policy corruption, transactional practices, and crony capitalism.

“Instead of fostering growth through entrepreneurship, competition, and innovation, rent-seeking through licenses, contracts, and regulations has come to define state-market relations,” he said.

The report warns that such practices have discouraged capable entrepreneurs and new entrants, shifting the economy away from value creation toward access-based advantages. Distrust of the private sector and a tilt toward distribution-focused populism have further sidelined productivity, investment, and growth.

It also points to a deeper institutional problem: neither has the market become dynamic nor has the state grown sufficiently accountable. In the absence of a predictable, rules-based environment, the private sector has struggled to find a secure footing. Weak protection of property rights, poor contract enforcement, and regulatory instability have all contributed to stalled investment and economic stagnation.

Wagle cautioned that the expansion of social security and welfare programs without realistic assessment of long-term fiscal liabilities could create intergenerational burdens. For now, foreign employment, remittance dependence, and limited domestic job creation continue to define Nepal’s economic structure.

Despite the challenges, the minister said Nepal has entered a phase of restructuring and transition. He stressed the need for policy reforms, improved public service delivery, transparency, and good governance as the country’s political economy evolves.

Looking ahead, the government has set an ambitious target of achieving average annual economic growth of 6 to 7 percent starting next fiscal year. It also aims to push per capita income beyond 3,000 US dollars and expand the economy to nearly 100 billion US dollars within five years - laying the groundwork for Nepal to graduate into a middle-income country.

The report also identifies pathways for transformation. Priority sectors include energy, agriculture, tourism, and information technology. In the energy sector, the government plans to raise installed electricity capacity to 15,000 megawatts within five years, while fast-tracking national pride projects and launching new strategic initiatives to attract private investment.

Agriculture modernization and commercialization - linked with industry and tourism - are expected to boost productive employment, strengthen the rural economy, and reduce import dependence. In tourism, improved infrastructure, expanded services, and better connectivity are expected to increase arrivals, income, and jobs.

The report underscores the growing role of digital technologies, including artificial intelligence, in building a modern economy. Expanding IT services, business process outsourcing, and digital entrepreneurship could generate high value with relatively low capital investment while supporting exports and employment.

Hydropower, in particular, is viewed as a long-term pillar of the economy. The government believes that reliable and affordable energy can drive industrialization and boost energy exports, creating a stable source of foreign income.

At the same time, modernizing agriculture, investing in high-value crops and agro-processing, and strengthening industrial supply chains are expected to enhance export competitiveness. Measures such as special economic zones, industrial clusters, and trade facilitation could further reduce production costs.

The report also highlights the importance of planned urbanization and infrastructure development - including transport, energy, irrigation, and digital systems - in improving productivity and attracting investment. Public-private partnerships are seen as key to implementing large-scale projects.

Finally, the government sees potential in channeling remittances into productive sectors and leveraging the skills of returning migrant workers to drive domestic growth.

Challenges identified by the Finance Minister

- Nepal’s placement on the grey list

- Slow progress in achieving Sustainable Development Goals

- Weak control of corruption and poor governance

- Low and unstable economic growth

- Agriculture-based economy with weak industrialization

- Weak productive industries

- Inadequate job creation and high dependence on foreign employment

- Large savings–investment gap and weak capital formation

- Weak revenue collection and narrow tax base

- Large informal economy

- Unrealistic budget and weak capital expenditure

- High recurrent expenditure with low effectiveness of development spending

- Rising budget deficit and rapidly increasing public debt

- Growing government arrears and liabilities

- Pressure on consolidated funds, including a negative balance

- Declining foreign aid

- Weak returns from public enterprises

- Limited impact of bank lending on productive sectors despite expansion

- Structural imbalance in foreign trade

- Lower-than-expected foreign investment

- Poor quality of infrastructure despite expansion

- Opportunities identified by the Finance Minister

- Rapid expansion of the energy sector and increased hydropower production

- Modernization and commercialization of agriculture

- Creation of productive employment and import substitution

- Tourism development to boost rural income, employment, and foreign exchange earnings

- Expansion of service exports through information technology and the digital economy

- Increasing export-oriented production and improving competitiveness

- Infrastructure development, investment attraction, and expansion of economic activities

- Accelerating economic growth through public–private partnerships

- Productive use of remittances (foreign earnings) in the domestic economy

- Mobilization of savings into productive investment

- Income, production, and employment growth through efficient resource utilization

- Creating an investment-friendly environment to attract both domestic and foreign capital

By Dilip Paudel