Nepal’s digital sector, though smaller than its regional counterparts, has shown strong potential for growth and job creation. Exports of digitally delivered services grew at an impressive 12.3% annually between 2005 and 2023, placing Nepal favorably among most South Asian countries. There, however, are challenges to digital adoption. According to a new World Bank report, factors such as the high cost of digital tools, inadequate ICT regulations, limited rollout of fixed broadband in rural areas, low digital literacy and the sluggish uptake of digital IDs and electronic signatures are collectively holding back broader digital access and use across Nepal. The World Bank report titled Unlocking Nepal’s Growth Potential: Nepal Economic Memorandum says 48% of Nepali firms still lack a website, only 9.6% of payments and 23.3% of sales are conducted electronically, and ICT capital accounted for just 1.1% of total capital in 2019. High internet costs and frequent outages particularly affected smaller firms in 2023, while household internet penetration remained low at 37.8% and computer usage at 15% in 2021.

Although Nepal’s ICT services sector is still relatively small, it has made a meaningful contribution to the country’s real GDP growth. According to National Accounts data, the sector contributed 1.7% of Nepal’s nominal GDP in 2022—higher than in most South Asian countries except India. It added an average of 0.3 percentage points to annual real GDP growth between 2012 and 2024. The private sector is the main driver, generating nearly 80% of the sector’s total value addition, according to the report. The contribution of ICT services averaged around 10% of the country’s total service exports, equivalent to 0.3 percent of GDP, over the past six years, giving Nepal a competitive edge in South Asia, second only to Pakistan. Nepal has also emerged as a regional leader in the export of digitally delivered services—a broader category that includes all cross-border transactions conducted remotely through computer networks, mainly via the internet. “These exports represent a notably higher share of GDP than in most neighboring countries,” states the World Bank report. Between 2005 and 2023, Nepal’s digitally delivered service exports grew at a compound annual rate of 11.6%, significantly outpacing the 5.8% growth of non-digital services. By the end of 2023, they made up more than half of Nepal’s total service exports.

Manoj Ghimire, co-founder and CEO of RaraLabs, believes that Nepal’s IT sector is outperforming other industries when it comes to earning and retaining foreign currency. “Our policymakers need to prioritize this sector,” he said, stressing the need to assess Nepal’s digital transformation through a segmented lens. “When it comes to digital services provided by the government, we are still far behind,” he said. “The development of the Nagarik app is a step forward, but there is still a long way to go in making public digital services more accessible and user-friendly.”

Ghimire also praised the strides made in fintech and mobile banking, calling them a “phenomenal success.” He even argued that Nepal's account-to-account payment system is more advanced than that of the United States. “Large corporations in Nepal are also beginning to recognize the value of digital transformation,” he added.

Digital Skills Shortage Threatens Progress

Although Nepal’s ICT workforce has been growing steadily, it remains relatively small. According to the National Population and Housing Census, the number of economically active individuals in the ICT sector rose from 31,849 in 2011 to 52,145 in 2021—reflecting a 5.1% compound annual growth rate, which surpasses the overall labor force growth of 4.2%. This indicates increasing interest in ICT careers. However, the sector accounted for just 0.35% of the total labor force in 2021. That said, Nepal’s ICT employment rate is still higher than in most other South Asian nations. However, the gender gap in the ICT sector is significant. While the number of economically active women in ICT grew at a notable annual rate of 7.2% from 2011 to 2021, surpassing the growth rates for both men and the overall sector, their overall participation has remained low. In 2021, only 0.2% of the female labor force was employed in ICT, compared to 0.5% of the male labor force.

A major barrier to expanding ICT employment is the widespread shortage of digital and technical skills. Very few people with intermediate or higher education meet the qualifications needed for ICT and science, technology, engineering and mathematics (STEM) jobs. Only 0.16% of the population has completed intermediate-level or higher education in ICT, and just 2% in STEM fields. This shortage of qualified talent, worsened by the outmigration of skilled workers, poses a serious challenge to the sector’s growth and its broader economic impact. Wiley’s Digital Skill Gap Index, which measures preparedness across five key areas—data literacy, communication, content creation, digital safety and problem-solving—places Nepal 124th out of 134 countries. Scoring just 2 out of 10, Nepal trails far behind regional counterparts like India, which scored 5. The country fared particularly poorly in data literacy, communication and content creation, highlighting a pressing need to strengthen workforce capabilities. Additionally, less than 1% of grade 11 and 12 students in Nepal choose computer science as a major, according to the Ministry of Education, Science and Technology.

Richan Shrestha, CEO of Quickfox Technologies, called for urgent efforts to develop workforce for the tech sector. “Beyond the long-term imperatives like investing in education from the school level and updating curricula to produce a globally competitive workforce, the authorities must also foster an environment that prioritizes practical, skills-based training in colleges,” Shrestha said. “At the same time, we need to focus on upskilling existing professionals—this should be an equally important priority.”

Gaps in Broadband and Connectivity

Digital infrastructure is key to driving ICT growth, innovation and economic development. It spans both physical elements—like internet access, telecom networks and data centers—and softer components such as policies, regulations and digital tools. A strong digital base attracts investment and supports a vibrant business ecosystem.

However, Nepal faces major broadband coverage gaps. As a landlocked nation without direct access to submarine cables, Nepal relies on India and China for internet bandwidth. This dependency adds costs through taxes, tariffs and currency shifts, while subjecting Nepal to external telecom regulations. In 2023, Nepali firms spent Rs 4.7 billion for bandwidth imports. Nepal continues to face a significant fixed broadband coverage gap, with nearly half the population living more than 10 kilometers away from fiber-optic infrastructure. The country’s current fiber-optic backbone stretches just 4,932 kilometers, restricting both network speed and coverage. Despite this limitation, Nepal performs slightly better than some neighboring countries like Bangladesh (41%), Pakistan (43%) and Sri Lanka (27%).

To improve access, the government is utilizing the Rural Telecommunications Development Fund (RTDF) to expand the fiber-optic network by 6,300 kilometers, aiming to link the mid-hills highway with all 77 district headquarters. The plan also includes providing non-dedicated broadband with minimum speeds of 20 Mbps in selected areas. However, progress has been hindered by legal and administrative setbacks. Sudhir Parajuli, President of the Internet Service Provider Association of Nepal (ISPAN), underscored the need to strengthen the country’s digital infrastructure. “The backbone needs to be sturdy,” he said, noting that the private sector has already laid around 100,000 kilometers of access networks. “Internet service in mountainous districts still suffers from instability. A reliable trunk line can help us to deliver quality internet to those remote areas.”

Nepal has made significant progress in mobile connectivity. Since 2014, 3G coverage has expanded by 10 percentage points, reaching 90% of the population by 2023. The 4G rollout, launched in 2017, has been even more rapid, now covering about 88% of the population. In contrast, 5G remains in its infancy, with just 5% coverage and no commercial deployment yet. Mobile broadband quality has improved significantly, thanks to expanded 4G infrastructure, increased user adoption and broader spectrum use—leading to nearly double the average download speeds and a six-fold boost in upload speeds. However, Nepal still lags behind the South Asian average in overall mobile network performance. Despite making progress in mobile infrastructure, the country needs to bridge the fixed broadband gap and reduce reliance on imported bandwidth are essential to unlocking Nepal’s full digital potential.

Fragmented Digital Governance

Nepal’s digital public infrastructure (DPI) is still in its early stages but has significant potential to transform the digital landscape. DPI aims to build a secure, interconnected network by linking physical infrastructure like broadband with digital services such as e-commerce. Key components include digital identity systems, payment platforms and data exchange, all offering community-wide benefits. As it develops, DPI is expected to improve public service delivery, enhance well-being, and drive commerce. Nepal’s digital ecosystem is governed by multiple ministries and agencies. The Ministry of Communication and Information Technology (MoCIT) leads policy and infrastructure, with the Department of Information Technology (DoIT) handling research, development and regulation. The National Cyber Security Center oversees cybersecurity, while the Integrated Data Management Center (IDMC) manages government data to support digital transformation.

Earlier in March, the (MoCIT) announced plans to launch Digital Nepal Framework 2.0, which aims to enhance Nepal’s capacity for IT exports. The budget for fiscal year 2024/25 has set an ambitious target of generating Rs 3 trillion in IT service exports over the next decade, while also creating 500,000 direct jobs and 1 million indirect jobs. To meet these objectives and accelerate Nepal’s digital transformation, the government has updated the previous framework to strategically leverage digital technology. The draft outlines several initiatives focused on digital infrastructure, including the development and upgrade of digital public infrastructure, ensuring universal high-speed internet access, providing secure and scalable data hosting solutions, creating a transparent and accountable digital environment, and fostering a competitive, investment-friendly and consumer-centric digital market.

Key institutions also include the Ministry of Home Affairs, which oversees the national identity system, and Nepal Rastra Bank, responsible for regulating digital payments. To enhance coordination and strengthen digital governance, the E-Governance Commission, which was established in 2022 under the leadership of the Prime Minister, is currently preparing an eGovernment blueprint. Additionally, individual ministries are responsible for digitizing their respective services. ICT experts emphasize that stronger inter-agency coordination is essential to enable a unified digital transformation across government and to build a resilient digital public infrastructure that supports improved governance and service delivery. Gajendra Kumar Thakur, Spokesperson for MoCIT, acknowledged that while the government has introduced several technology-related policies, their implementation has been slow due to a lack of investment, infrastructure, public awareness and skilled personnel within government institutions. “We are significantly behind in cybersecurity infrastructure,” said Thakur. “At Nepal’s request, the Government of South Korea is currently helping a unit of Nepal Police to establish an advanced lab.” Thakur also emphasized the need for increased investment to build essential digital infrastructure. “One of the biggest challenges that we are facing is the shortage of skilled human resources willing to work in public institutions,” he added.

Slow Uptake of Digital IDs and Signatures

Digital ID adoption in Nepal has been sluggish, mainly due to limited integration into everyday services. While 15 million people have registered, restricted access to the digital ID platform has curbed its practical use. The continued focus on physical ID cards has also slowed broader digital adoption. However, the government’s recent plan to expand digital ID usage across various services starting in 2025 is expected to boost uptake. However, it is crucial to ensure that people without digital IDs are not left behind during the transition.

Although digital signatures have been legally recognized since 2006, their adoption in Nepal remains limited. The Electronic Transaction Act (2006) and its accompanying rules (2007) provide the legal basis, but actual usage is still minimal. Many institutions, including banks, still rely on physical signatures, highlighting the need for regulatory reforms to give digital signatures full legal equivalence. While some progress has been made—such as the Office of the Company Registrar implementing digital signatures in October 2023—it has taken nearly eight years since their formal rollout in 2015 to reach this level of institutional uptake.

Concerns over data and server security have also fueled public distrust in digital payment systems. This lack of confidence has contributed to a rise in paper-based transactions in Nepal between 2018 and 2022, a trend that runs counter to the broader regional shift toward digital payments, according to the Alliance for Financial Inclusion (2024). Ghimire of RaraLabs feels that the greatest challenge that Nepal’s digital sector is facing is the lack of foundational infrastructure. “It is not just about connectivity,” he said. “We have not even begun to effectively utilize the digital identity card system,” he said, adding that the government must first build core digital infrastructure, which would then provide a platform for other stakeholders in the ecosystem. “Once that is in place, and if the ICT sector is genuinely prioritized alongside hydropower and tourism, we need clear policy reforms to attract investment.”He also highlighted the government’s role in driving demand. “The state can play a key role by implementing strategies that support local service providers. If that happens, the sector is well-positioned for growth in the near future,” he added.

Telecom Law Needs Revision

Nepal’s Telecommunications Act of 1997, crafted in a pre-digital era, is outdated and no longer suited to today’s data-driven communication landscape. It falls short of addressing the regulatory needs of modern digital infrastructure. The Nepal Telecommunications Authority (NTA), which enforces this legislation, also faces structural limitations. Since its members are appointed by the MoCIT, questions have been raised about its independence and the potential for conflicts of interest, which may undermine its regulatory effectiveness. Nepal's ICT regulatory framework remains considerably weaker than that of many other low- and middle-income countries (LMICs), with minimal progress over the past 15 years. In 2022, the International Telecommunication Union (ITU) gave Nepal a score of 60 out of 100 on its ICT Regulatory Tracker—below the LMIC average of 66.1. The rating highlights persistent weaknesses in regulatory governance and market competition. Nepal is still categorized as a "Generation 2" regulatory regime, indicating an early-stage open market with only limited reforms and partial liberalization. Alarmingly, this status has not changed since 2007. Only 46% of LMICs remain in Generations 1 or 2 today, compared to 94% in 2007.

One of the main factors behind Nepal’s low competitiveness score is the dominance of a few players in the broadband market. In mobile broadband, state-owned Nepal Telecom controls 57.5% of the market, while private operator Ncell holds the remaining 42.5%. Although over 20 firms operate in the fixed broadband space, six major providers account for nearly 80% of the market. This concentration stifles competition, hampers innovation, restricts service expansion, drives up costs, and ultimately leads to lower service quality for consumers. To address these structural issues, the NTA has initiated steps to bring in a third mobile operator. An upcoming frequency auction aims to introduce new competition, granting the winning bidder a spectrum license to offer full-scale mobile broadband services. In a supportive move, the government has also removed the minimum foreign direct investment (FDI) requirement in the ICT sector. These reforms are designed to draw international investment, boost competition, improve service quality and lower consumer costs.

Nepal’s regulatory system is also hindered by limited infrastructure sharing, a key factor in fostering an efficient and competitive market. In 2021, the government introduced the Bylaws on Infrastructure Sharing and Fee Determination, permitting the sharing of both passive infrastructure—like towers and land—and active components such as base stations and routers. The ITU estimates that such sharing could cut costs by up to 30% for passive infrastructure and 50–60% for active components. However, weak enforcement and the reluctance of major providers to cooperate have significantly reduced the effectiveness of this policy.

Although Nepal’s National Frequency Policy 2023 acknowledges emerging technologies like the Internet of Things (IoT) and Machine-to-Machine (M2M) communications, it overlooks spectrum trading, a widely used practice globally. Approximately one-third of countries allow secondary spectrum trading, which enables license holders to lease or sell unused spectrum. This practice enhances spectrum efficiency, increases responsiveness to market demand and facilitates better price discovery through market-driven valuation. The lack of spectrum trading in Nepal limits flexibility for licensees and hampers the sector's ability to adapt to technological advancements and changing service requirements.

Slow Digital Adoption

Despite the global shift toward digital payments, most businesses in Nepal, especially in the manufacturing sector, have been slow to embrace this trend. By 2023, only 9.6% of firms reported making electronic payments, a figure significantly lower than the South Asian regional average and the 23.3% of firms that received digital payments from customers. Digital adoption varies widely by firm size and sector. Large firms had the highest percentage of digital payments made, though they may incur higher transaction costs for receiving them. In contrast, medium-sized firms reported a larger proportion of their sales revenue coming from digital payments. Among sectors, manufacturing firms had the lowest rates of both digital payments made and received, while the hotel sector showed the highest levels of digital adoption.

Digital investment in Nepal’s manufacturing sector remains limited. Tangible ICT capital per worker, which includes computers and related machinery, grew from Rs 7,049 in 2011/12 to Rs 9,562 in 2018/19 (adjusted to constant 2019 prices), reflecting a modest annual growth rate of 3.9%. However, intangible ICT capital, such as software, saw a decline of 5.8% per worker annually. While these growth rates slightly outperform those for non-ICT capital (with tangible and intangible assets growing at 2.5% and -16.7%, respectively), the overall situation remains underwhelming. ICT capital accounted for just 1.1% of total capital in both 2011/12 and 2018/19, well below China’s 5% and the OECD average of around 4%. The COVID-19 pandemic, however, accelerated digital investment. According to data from the Nepal Business Pulse Survey, there was a significant rise in firms adopting digital technologies during the crisis. From June 2021 to May 2022, the percentage of firms investing in new digital equipment, software or solutions increased from 15.3% to 27.4%. This trend was seen across all sectors and company sizes, reflecting a growing awareness of the role digital tools play in ensuring business resilience and fostering growth.

Affordability Challenges

Nepal’s digital transformation continues to be hindered by longstanding challenges. Key obstacles include the high cost of digital tools, a weak ICT regulatory environment, sluggish broadband rollout in rural areas, limited digital literacy, and slow uptake of digital IDs and electronic signatures. These issues have led to major gaps in both access and usage, underscoring the pressing need for broad-based reforms to realize the full potential of digitalization. Although mobile broadband has become more accessible in recent years, fixed broadband services are still relatively expensive. As of 2023, mobile broadband costs had dropped to 2.14% of Gross National Income (GNI) per capita—slightly above the UN Broadband Commission’s 2% affordability benchmark. In contrast, fixed broadband remains far less affordable, with prices reaching 7.8% of average monthly GNI per capita. However, ISPAN President Parajuli highlighted a significant pricing disparity in the country’s internet services. “Nepal has the cheapest fixed broadband but the most expensive mobile broadband in South Asia,” he added.

Although government officials claim that they are working to meet the UN Broadband Commission’s affordability benchmarks, Parajuli pointed out that the telecom sector remains one of the most heavily taxed in Nepal. “The government has not differentiated between mobile telecom and fixed broadband in its tax policy—both are treated the same. This has undermined affordability and slowed service development,” he added. The World Bank report also highlights excessive taxation as a major driver of high fixed broadband costs in Nepal. ICT services face a 30% corporate tax—the same rate applied to goods like alcohol and tobacco—along with a 13% value-added tax (VAT). In addition to these standard taxes, numerous sector-specific levies further increase the cost of delivering broadband services. ISPs in Nepal shoulder a heavy financial burden due to a range of mandatory charges. These include license and renewal fees, spectrum charges equal to 0.4% of their revenues, and a compulsory 2% contribution to the Rural Telecommunication Development Fund. On top of that, ISPs must pay a 4% royalty fee and a 13% telecommunications service charge. The financial strain is further intensified by a 100% support and maintenance fee applied to internet services. Consumers also bear the brunt of various additional charges, including the Telephone Ownership Tax—Rs 500 for each new telephone connection or 2% on every SIM and recharge card for prepaid users. Other expenses include a 10% percent tax on international bandwidth imports, a 10% fee levied by network service providers for bandwidth, and a 15% customs duty on optical fiber cables. Even digital payment services are subject to VAT which further raises costs. These cumulative taxes and fees are ultimately passed on to users, making digital access significantly less affordable—especially for low-income households and small businesses that already face financial constraints.

Issue of Affordability and Access

Internet services represent a substantial financial burden for small businesses. The average annual cost of internet access is approximately Rs 31,500. For small firms, this translates to 0.7% of total input costs, compared to just 0.1% for larger firms. Sectoral disparities are also pronounced—hotels, for instance, face internet expenses amounting to 2% of input costs, while manufacturing firms report the lowest at 0.1%. Unreliable internet service continues to disrupt business operations across Nepal. In 2022, over 30% of firms experienced significant internet outages, with average downtime lasting 3.5 hours. These disruptions led to an average annual sales loss of 2.1% per firm.

The effects of outages vary by size and sector of firms. While larger firms encounter outages more frequently, they generally suffer shorter downtimes and less severe losses. In contrast, smaller firms, though experiencing fewer outages, face longer disruptions and more pronounced revenue declines. The "other services" sector is particularly vulnerable, with longer downtimes and a greater impact on sales compared to other industries. Shrestha of Quickfox Technologies said the government’s top priority should be on fostering a business-friendly environment to support the growth of Nepal’s IT sector. “Globally, there is very little awareness that IT-related work is being done in Nepal because we lack proper branding,” he said. “We need to promote Nepal as a reliable outsourcing destination for technology services.”

He added that many clients are surprised to discover that Quickfox is a Nepali company. Industry experts, including Shrestha, also stress the need for stable and competitive policies to ensure the long-term sustainability of the IT sector. “When shaping policy, we must consider the global—if not at least regional—context,” he said. Shrestha also highlighted the critical lack of investment in Nepal’s startup ecosystem. “Access to capital remains one of the biggest hurdles for launching and scaling tech startups,” he added.

(This news report was originally published in  May 2025  issue of New Business Age Magazine.)