Nepal Risk Review: What’s set to change in 2022?

Nepal finds itself on the cusp of significant change: It broke into the top 100 economies, by being ranked at 94, on the doing business 2020 rankings

This ascent in rankings has been facilitated by increasing the roles of the private sector via the emergence of an open market economy in Nepal. Consequently, the country has been encouraging private investment in infrastructure development, creating opportunities for MNCs to conduct business, and has been giving a growth impetus to service sectors.  Nepal will likewise graduate from its Least Developed Countries (LDC) classification in the following five years. Furthermore, general strikes, also known as “Nepal Banda,” and violent protests, which were once common, have been on the decline. The slew of these changes are set to have a domino effect on Nepal’s business landscape.

Infrastructure development to facilitate business growth is the need of the hour for Nepal.  Being conscious of this need, infrastructure development has become a top priority for the government in its policies, initiatives, and finances. Nepal continues to struggle with these conventional natural disaster-related risks. For Nepal, disasters like earthquakes, flash floods, landslides and the GLOF events in the higher Himalayas have been further exacerbated by climate change. This has had an unequal impact on different groups of people, aggravating the prevalent socio-economic issues across the nation. Further, investments in infrastructure, hydropower and tourism also require a thorough disaster assessment.  Nepal’s development will also be greatly influenced by international allies and growth partners, but the country would need some time to overcome key challenges Presently, business operations are steadily getting back on track after the pandemic. Nepal is a country that despite adverse circumstances has depicted a great degree of resilience and zeal for growth.

What about Nepal’s foreign policy?

Nepal, a landlocked nation sandwiched between two antagonistic regional powers, finds itself caught in a triangle geopolitical rivalry as a result of its geostrategic location. Nepal’s foreign policy is typically defined by its reliance and limits on foreign policy behaviour, and it is frequently forced to choose sides. This is becoming problematic since there is a growing division over whether to go east to counteract existing Indian domination and get further economic aid, or to stick with the western neighbour and the United States.

India, China, and the United States are Nepal’s most generous development partners, with a large amount of their aid going to education, health, and infrastructure. The Millennium Challenge Corporation (MCC) of the United States and China’s Belt and Road Initiative (BRI) of China are new chapters in the US-Nepal Partnership and Nepal-China Relationship, but these projects have become a major source of contention among Nepalese political parties and other stakeholders. If authorised, the USD 500 million MCC Compact would invest in Nepal’s power and transportation sectors, while BRI has been investing in Nepal’s infrastructure development.

Foreign aid continues to play a critical role in Nepal’s growth, accounting for a large portion of the country’s budget. Over 40 donors provide Nepal with formal development aid. According to the Development Cooperation Report released by the Finance Ministry of Nepal in 2021, foreign aid to Nepal surged by 26.87 percent to USD 2 billion in the year 2019-20. The money that the country receives from its development partners accounts for 23.3 percent of the national budget.

Nepal’s Economic Outlook

Nepal can only receive a limited amount of money, thus it must rely on domestic and external loans to fund large infrastructure projects. Even if growth in debt is not a big worry because there is budgetary room for further loans until debt hits 50-60 percent of GDP, Nepal is concerned about the constructive use of loans. The government has been unable to effectively employ debt to grow the country’s economy, causing major development projects to be delayed. Most of the national projects have faced time and cost overruns, due to which economic expansion is hindered and so is the country’s ability to pay debt.

Ostensibly, the country’s private sector and government working together shall play a critical role in its long-term success. Nepal, presently, has an opportunity to leverage technology and infrastructure development to create sustainable growth.

Nepal Institute for International Cooperation (NIICE) and MitKat Advisory have jointly authored “Nepal Risk Review 2022” – an annual report on the business environment and risks outlook for Nepal. We encourage you to read it for insights into the risks and rewards of doing business in Nepal. In sum, the rewards outweigh the risks.

A special MitKat Report

Download Full Report - MitKat Nepal Risk Review 2022

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