While the government claims the external sector of Nepal's economy is improving, industrialists and experts argue that the domestic economy remains stagnant. Despite rising remittance inflows from foreign employment, the lack of market demand has kept the economy sluggish—a point of consensus among key stakeholders.

Since the onset of the COVID-19 pandemic, Nepal’s economy has struggled to regain momentum, according to Subodh Kumar Gupta, chair of the Trade Committee at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

“The government says foreign trade has returned to pre-pandemic levels, but industrial capacity utilisation remains very low. This shows that the domestic market has not recovered,” Gupta, who is also an executive member of the FNCCI, remarked.

A survey conducted by the Confederation of Nepalese Industries (CNI) in the third quarter of the fiscal year 2023/24 revealed that the average capacity utilisation of 61 manufacturing and service sectors was only 58.47%.

Service sector capacity utilisation was 66.11%, while manufacturing industries operated at just 52.03%. The survey also showed a 3.87% decline in income, with manufacturing sector alone experiencing a 13.14% drop.

Representatives of the industries attributed the drop in production to weak market demand, with one major factor being the mass migration of the youth workforce. While many have gone to the Gulf and Malaysia for work, others continue to leave for higher education, primarily in developed nations.

“Since the pandemic, industries, businesses, jobs, and incomes have shrunk, leading to a drop in demand. When incomes decline, so does market demand, and the lack of employment is driving a mass exodus of the workforce,” said Hari Gautam, senior vice president of the Birgunj Chamber of Commerce and Industry. “This migrating workforce isn’t just a number; they are active consumers. Their departure has shrunk the domestic market.”

Ashok Kumar Temani, president of the Madhesh Province chapter of FNCCI, further argues that it is government policy, more than the pandemic that has weakened the economy. “The pandemic indeed caused a lockdown, but our government’s policies have tied down the economy even more than COVID-19 did,” said Temani.

“You don’t need to be an expert to understand the state of the economy. Simply observing everyday life will give you the answer,” he added.

Aside from remittances from foreign employment, all other sectors of the economy remain weak, according to stakeholders. Two-thirds of Nepal's foreign trade and supply chain relies on India. Yet, while India’s economy has bounced back, experts find it puzzling that Nepal’s economy remains stagnant.

Dr. Swarnim Wagle, former Vice-Chairman of the National Planning Commission and Vice-President of the Rastriya Swatantra Party, recently remarked during a discussion in Birgunj that while improvements are visible in the external sector, internal economic activities remain sluggish due to poor domestic management.

“Remittances from the young workforce abroad have reached an all-time high, with foreign exchange reserves now at $15 billion. However, aside from this, every other economic indicator has shrunk,” said Dr. Wagle at an event organised by the Rastriya Swatantra Party, Parsa. Experts, however, caution against placing too much emphasis on the high foreign exchange reserves.

During the economic shutdown caused by the pandemic, the government implemented policies such as import restrictions and cash margin requirements, along with directives on working capital loans. These measures curtailed industrial and commercial activities, according to Ganesh Prasad Lath, former president of FNCCI, Madhesh Province. He also noted that restrictions on margin lending imposed by Nepal Rastra Bank had hindered the capital market. However, some recent easing of policies has stabilised the sector.

Private sector leaders have consistently raised concerns that policy instability, corruption, and bribery have increased the cost of doing business. “Corruption and unauthorised hidden expenses have weakened the economy’s competitiveness. From customs offices to tax, police, and inspection agencies, everyone seeks unauthorised income. This burden is passed on in the form of higher prices for goods and services, weakening competitiveness,” said one business leader. Experts further note that the government’s impractical revenue policies have made domestic production and imported goods more expensive. Lath pointed out that when goods are cheaper in the Indian market than in Nepal, unauthorised imports surge. He argued that Nepal’s revenue policies should align with India’s tax system, but instead, high revenue barriers at customs have fuelled the growth of the “grey economy.”

Although the government claims to be attracting investment in industrialisation, it lacks a clear policy on what should be produced, says analyst Jagdish Agrawal. “We say we will produce everything from needles to airplanes in the name of industrialisation. This is not how you strengthen the economy,” Agrawal commented.