Nepal Country Economic Memorandum

NEPAL COUNTRY ECONOMIC MEMORANDUM2025 © 2025 International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet:www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed inthis work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume respon-sibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information,methods, processes, or conclusions set forth. The boundaries, colors, denominations, links/footnotes and other information shown in this workdo not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance ofsuch boundaries. The citation of works authored by others does not mean the World Bank endorses the views expressed by those authors orthe content of their works. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The WorldBank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be repro-duced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 HStreet NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail:pubrights@worldbank.org. Graphic design: Karlien Truyens Contents Acknowledgements Executive Summary CHAPTER 1.Facts of Growth 1 1.1. Nepal’s journey to lower-middle income status21.2. Growth accounting and drivers51.2.1. Expenditure approach61.2.2. Production approach121.2.3. Long-term growth14 1.3. Labor market developments161.4. Looking ahead: Drivers of future growth19 CHAPTER 2.International Migration for Employment and Welfare 22 2.1. International migration remains important, with increasing economic returns232.1.1. Remittances contributed significantly to reducing poverty232.2. Pre-departure: The factors shaping the migration and destination choice262.2.1. Migrants face high costs before departure262.2.2. Socioeconomic factors affect the destination choice272.3. During migration: The benefits for migrant-sending communities and households302.3.1. Remittances strengthen household resilience and affect migrants’ home-communities302.3.2. But migration comes with considerable risks352.4. Post-migration: Remigration and reassimilation in the labor market362.4.1. Migrants struggle to effectively reassimilate362.5. Looking ahead: Reducing costs, increasing benefits, boosting long-term growth37 CHAPTER 3.Real Exchange Rates, Trade Policy, and Exports in Nepal 44 3.1. Introduction453.2. The effect of bilateral RERs and trade policy on firm-level exports473.2.1. Overview of firm-level data in Nepal473.2.2. Bilateral exchange rates and exports493.2.3. Domestic trade policy and exports493.2.4. Partner country trade policy and exports503.3. The effect of remittances on REER dynamics523.4. Looking ahead: Policy recommendations to boost exports54 CHAPTER 4.Unlocking Nepal’s Hydropower Potential to Enable Stronger Growth59 4.1. The current state of Nepal’s hydropower sector604.2. The key impediments to hydropower development624.3. Avenues for economic growth through hydropower674.4. Looking ahead: How to boost hydroelectricity for economic growth70 CHAPTER 5.The Digital Sector: A Driver of Growth and Job Creation73 5.1. The current state of Nepal’s digital sector745.1.1. Overview of the digital economy755.1.2. Progress in digital infrastructure775.1.3. Progress in digital adoption by firms805.1.4. Progress in digital adoption by households835.2. The key impediments to digital adoption845.3. How digital technologies can boost growth and jobs895.4. Looking ahead: Policy recommendation to close the coverage and usage gaps90 References Annexes99 Endnotes113 List of Figures Figure 1.1. Nepal’s economy grew slower than peers’ before 2014 and in line thereafter…3Figure 1.2. … the real output gap nevertheless widened compared to peers.3Figure 1.3. GNI per capita lost ground against peers…3Figure 1.4. … and current growth rates are not sufficient to catch up in the long-term3Figure 1.5. Remittance inflows increased significantly over time…4Figure 1.6. …and contributed to the poverty reduction.4Figure 1.7. Private consumption has been the biggest contributor to growth in Nepal…6Figure 1.8. ... and its share in GDP remained high over time.6Figure 1.9. Remittances financed