Subchapters:
- Basic data
- Public finances and the state budget
- Banking system
- Tax system
Basic data
Nepal’s economy grew by 2.7% in the past fiscal year 2021 and is expected to grow at only 4.1% in the current fiscal year. The services, transport and financial services sectors are estimated to have been the main drivers of growth, supported by an increase in vaccinations and fiscal stimulus packages. Tourism and tourism-related activities have also recovered with an increase in international tourists, although they remain below pre-pandemic levels. The industrial sector also contributed to growth with higher installed electricity capacity, including the recently completed Upper Tamakoshi Hydropower Project (456 MW).
According to cheeroutdoor.com, inflation was 5.8% at the end of 2021. The country is facing a growing debt burden due to uncontrolled spending in unproductive sectors. The trade balance remains negative, standing at $1billion in 2021. The foreign debt is increasing every year and, according to available data, it is 22.2% of GDP by 2021. Nepal’s foreign exchange reserves have been under pressure since the start of the current fiscal year. In the first eight months of the current fiscal year, the country’s foreign exchange reserves fell 16.3% to Rs 1,171 billion in mid-March 2022. Remittances, vital to the economy, rose 0.6% to 23.0% of GDP at the end of fiscal 2021.
| Pointer | 2019 | 2020 | 2021 | 2022 | 2023 |
| GDP growth (%) | 7.1 | 2.3 | 4 | 4.5 | 6.3 |
| GDP/population (USD/PPP) | 3,570.00 | 4,007.00 | 4,220.00 | 4,510.00 | 4,830.0 |
| Inflation (%) | 5.6 | 5.1 | 4.1 | 5.8 | 4 |
| Unemployment (%) | 3.1 | 4.7 | ON | ON | ON |
| Export of goods (billion USD) | 1 | ON | ON | ON | ON |
| Import of goods (billion USD) | 12.4 | ON | ON | ON | ON |
| Trade Balance (Billion USD) | -11 | -8.7 | -13.4 | -15.1 | -16.2 |
| Industrial production (% change) | ON | ON | ON | ON | ON |
| Population (millions) | 28.6 | 29.1 | 29.7 | 30.2 | 30.8 |
| Competitiveness | ON | ON | ON | ON | ON |
| OECD export risk | 06.VII | 06.VII | 06.VII | ON | ON |
Source: EIU, OECD, IMD
Public finance and state budget
| Public finance | 2021 |
| State budget balance (% of GDP) | -3.4 |
| Public debt (% of GDP) | ON |
| Current account balance (billion USD) | -4.9 |
| Taxes | 2022 |
| AFTER | ON |
| F.O | ON |
| VAT | ON |
In the current fiscal year, the balance of payments is in deficit at Rs 247.03 billion ($2.07 billion). Nepal’s GDP is $33.66 billion and the current budget is about $14 billion. The current account deficit for the first six months of this fiscal year is already higher than for the entire last fiscal year. The reason is primarily the widening trade deficit and the slowdown in remittances. Revenues are expected to remain strong on the back of rising import-related earnings, efforts to expand domestic tax bases, stronger economic activity including a recovery in tourism, and the removal of tax breaks related to COVID-19 starting in FY23. Now the foreign exchange reserves are sufficient to cover the import of goods and services for 6 and a half months. Foreign exchange reserves will be further affected by increased prices for the import of fuel and edible oil.
The government has cut the annual budget by 5.3%, or Rs 86.55 billion, in the 2021-22 Annual Financial Plan, which ends in mid-July 2022. The revised budget is now Rs 1.54 trillion. This is the third year in a row that the country’s budget has been cut.
Banking system
The banking sector in Nepal is still subject to strict state control, although it was formally deregulated in the 1990s. The central bank is Nepal Rastra Bank (NRB). There are a total of 28 commercial banks operating in Nepal along with 40 development banks and 32 finance companies focused on microfinance. Commercial banks have the largest share in the financial sector, followed by the Nepal National Bank NRB, followed by development banks and financial organizations. The Central Bank of Nepal is reducing the number of Banks and Financial Institutions (BFIs) and insisting that BFIs merge. Small development banks and financial institutions are thus either headed for mergers or taken over by commercial banks. The Banks and Financial Institutions Act (BAFIA) number 2074 (2017) allows the establishment of Infrastructure Banks (IDBs),
Tax system
Nepal’s tax system basically follows the British model with minor changes. The country collects consumption tax, VAT (13%), income tax (15% and 25%), corporate tax (tax on company profits, 5%), payroll tax (similar to income tax paid by an employer for its employees, health and social insurance is paid from it), tax on motor vehicles and other specific taxes.
In 2018, the government announced a massive change in the tax rate and the expansion of the tax net. It introduced additional income tax pay grades. Individuals do not have to pay tax on income up to 350,000 rupees per year. The limit for married couples is 400,000 per year. Individuals with income up to 450,000 and couples with income up to 500,000 rupees have to pay 15% income tax. Individuals and couples with higher incomes pay 25% income tax. The government increased the threshold and at the same time introduced a 10% tax for people who have not yet paid taxes. Income tax is the second largest source of revenue after VAT.
More information can be found on the website of the Nepal Revenue and Revenue Authority: www.ird.gov.np/www.ird.gov.np/
