Nepal Development Update International Migration and Well-being in Nepal October 2024 © [2024] International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this 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 responsibility 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. 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Cover Photo Bhupal Pariyar, 20 years old, from Sindhuli, works at a construction site in Kathmandu, Nepal Cover Concept and Design by Print Communications To receive the NDU and related publications by email, please email amaharjan1@worldbank.org. For questions and comments, please email njoshi3@worldbank.org NEPAL DEVELOPMENT UPDATE October 2024 NEPAL DEVELOPMENT UPDATE ACKNOWLEDGEMENTS The Nepal Development Update is produced twice a year to report on key economic developments that occurred during the year, placing them in a longer-term and global perspective. The Update is intended for a wide audience including policymakers, business leaders, the community of analysts and professionals engaged in the economic debate, and the general public. This report was produced by the World Bank Macroeconomics, Trade and Investment (MTI) team for Nepal, led by Nayan Krishna Joshi (Country Economist), and consisting of Abdoul Ganiou Mijiyawa (Senior Country Economist), Sebastian Michael Essl (Senior Economist), and Prabin Dongol (Consultant). The Special Focus of the report was prepared by Lokendra Phadera (Economist), Sarita Sapkota (Economist), and Alvin Etang Ndip (Senior Economist) of the Poverty and Equity Global Practice. Inputs were received from Prashant Raj Pandey (Economist, ESAF1), Yoshihiro Saito (Public Sector Specialist, ESAC1), and Yixin Zhang (Operation Analyst, SAROS). The report benefitted from data and consultations with Dr. Gunakar Bhatta (Executive Director, Nepal Rastra Bank), Mr. Mahesh Acharya (Joint Secretary, Ministry of Finance), Mr. Hikmat B. Bhandari (Undersecretary, Ministry of Finance), and Mr. Suresh Neupane (Deputy Manager, CDS and Clearing Limited). The team thanks Mathew Verghis (Director, Equitable Growth, Finance and Institutions (EFI), South Asia Region), David N. Sislen (Country Director for Maldives, Nepal and Sri Lanka), Shabih Ali Mohib (Practice Manager, MPSTI), Ximena Del Carpio (Practice manager, ESAPV), Preeti Arora (Manager, Operations), and Gregory Smith (Lead Country Economist and Program Leader, EFI) for their guidance and comments on the report. Akash Shrestha and Avinashi Paudel managed media relations and dissemination. Anima Maharjan managed the publication process. The cutoff date is September 15, 2024, and includes data released up until that date. The Nepalese fiscal year generally begins on July 16 and ends on July 15 of the following year. 2 CONTENTS ACKNOWLEDGEMENTS 2 EXECUTIVE SUMMARY 6 A RECENT ECONOMIC DEVELOPMENTS A.1 Real Sector 12 12 A.2 External Sector 15 A.3 Monetary and Financial Sector 17 A.4 Fiscal Sector 21 B OUTLOOK, RISKS, AND CHALLENGES B.1 Real Sector 26 26 B.2 External Sector 27 B.3 Monetary and Financial Sector 28 B.4 Fiscal Sector 28 B.5 Risks and Challenges 28 C SPECIAL FOCUS: INTERNATIONAL MIGRATION AND WELL-BEING IN NEPAL: MAXIMIZING BENEFITS AND LEVERAGING LONG-TERM GROWTH 32 C.1 The State of Migration 32 C.2 Migration Trends 36 C.3 Making the Most of Migration 39 REFERENCES 41 THE WORLD BANK | 3 NEPAL DEVELOPMENT UPDATE 4 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 EXECUTIVE SUMMARY THE WORLD BANK | 5 EXECUTIVE SUMMARY RECENT ECONOMIC lower fiscal transfers to subnational governments and austerity measures targeting recurrent expenditures. The spending DEVELOPMENTS reductions were focused on allowances, fuel, office supplies, and other administrative expenses. Government revenue (including grants) remained stable at around 19 percent of Nepal’s real GDP growth accelerated to 3.9 percent in GDP in FY24, the lowest level of revenues in eight years.  FY24, up from 2 percent in FY23. The services sector was the key driver, fueled by a 30.7 percent surge in tourist arrivals, The decline in spending also reflects deteriorating which boosted activities in transportation, accommodation, budget execution, a persistent issue since FY18, with and food services. Increased hydropower production, by budget execution rates falling below 80 percent both over 450 MW, plus a 4.3 percent rise in paddy production also FY23 and FY24. Poor revenue collection and chronically contributed to the growth.  low capital expenditure execution have affected budget execution since FY18. In addition, the common practice of On the demand side, private consumption was bolstered bunching expenditures towards the last quarter or month of by strong remittance inflows. Private consumption, the fiscal year continues to be problematic, resulting in lower- accounting for more then 80 percent of GDP, grew by 1.1 quality investments and inflationary pressures from surges in percent in FY24, up from record low growth of 0.7 percent aggregate demand. in FY23. Private investment, on the other hand, slowed, as evidenced by declining high-frequency indicators such as The lower fiscal deficit led to a slight reduction in public lower private investment commitments, reduced imports debt to 42.7 percent of GDP in FY24 from 42.9 percent of intermediate and capital goods, and decreased credit to at end FY23. Public debt remains sustainable, supported non-financial businesses. Public investment remained weak by a high share of concessional external debt, with domestic due to persistently low capital expenditure implementation, debt comprising 49 percent of the total and external debt with public consumption following a similar downward trend, accounting for 51 percent as of end FY24. Banks and financial partly influenced by austerity measures. institutions hold the bulk of the domestic debt. Reduced imports and robust remittance inflows Average headline inflation moderated to 5.4 percent in bolstered the current account balance, resulting in a FY24, down from 7.7 percent in FY23, below the Nepal surplus of 3.9 percent of GDP—the first in eight years. Rastra Bank (NRB)’s target of 6.5 percent. This decline was Remittance inflows increased to a nine-year high on the back driven by a significant drop in non-food and services inflation, of record high migration in FY23. Trade-related measured led which fell from 8.6 percent in FY23 to 4.6 percent in FY24. Lower to lower merchandise imports, particularly of intermediate housing and utility prices, as well as reduced transportation goods, including reduced imports of crude edible oil following costs due to lower fuel prices, contributed to this easing. Food India’s tariff cuts, a drop in imports of broken rice and rice in and beverage inflation saw a slight decline of 0.2 percentage husk (paddy or rough) driven by India’s export restriction (on points to 6.7 percent, largely due to lower ghee and oil prices. broken rice) and the imposition of a 20 percent export duty (on rice in husk), and a decrease in unwrought gold imports due Monetary policy remained cautiously accommodative. to higher customs duties. Electricity exports reached a record At the start of FY24, the NRB reduced the policy rate by 50 high, and service exports grew on the back of increased tourist basis points to 6.5 percent, followed by a further 100-basis arrivals. As a result, official foreign exchange reserves grew, point reduction to 5.5 percent in December 2023. The NRB covering 13 months of imports by the end of FY24. aggressively absorbed over NPR 3.5 trillion liquidity in the second half of FY24, through the newly introduced standing Nepal’s fiscal deficit narrowed despite stagnating deposit facility, which kept the interbank rate close to the revenues, due to a sharp contraction in spending in FY24. lower bound of the policy corridor. During the first half of FY24, The fiscal deficit (including grants) dropped to a seven-year low the actual interbank rate remained below the corridor’s lower of 2.6 percent of GDP in FY24, largely due to a 2.2 percentage bound. point reduction in recurrent spending, which resulted from 6 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 Short- and medium-term nominal market interest rates debt-to-income ratios, and reduced risk weights for first-time declined, reflecting the lagged impact of lower policy homebuyers. rates and increased liquidity in FY24. Although real interest rates rose as inflation moderated, which, alongside Consumer price inflation is expected to remain moderate, higher remittance inflows, increased banking and financial supported by softer global commodity prices and institutions’ deposits as a share of GDP by 6.3 percentage increased agricultural production. Lower inflation in India points to 113.3 percent in FY24. However, private sector credit would help mitigate imported inflation, given Nepal’s currency as a share of GDP remained stagnant. In response, the NRB peg. Although rising minimum paddy support prices, the introduced several measures aimed at stimulating credit removal of VAT exemptions on select goods, the imposition growth, particularly in the real estate and manufacturing of VAT on services such as offline air transport and digital sectors. payments, and the introduction of excise duties on items like laptops may exert upward pressure on inflation, these effects The banking sector faced mounting pressures on asset are likely to be offset by the factors mentioned above. quality, profitability, and capital adequacy. The non- performing loans (NPLs) ratio reached a record high of 3.8 The current account surplus is expected to narrow as percent by mid-July 2024, leading to a 29.5 percent increase the trade deficit widens. This widening will stem from a in loan-loss provisions. This, in turn, reduced net profits by 8.8 rise in both merchandise and service imports. Merchandise percent in FY24. While the banking sector’s capital adequacy imports are projected to increase due to expected recovery of ratio (CAR) remained well above the regulatory minimum of domestic demand, although their values may stay below the 11.5 percent (including a countercyclical buffer of 0.5 percent), record high FY22 levels because of lower commodity prices emerging pressures are starting to challenge the sector’s and reduced electricity imports. On the export side, electricity resilience. exports are expected to rise significantly. Service imports are likely to increase as more Nepalese citizens emigrate for work and study, and as foreign exchange restrictions for outbound OUTLOOK, RISKS, AND travel are relaxed. Conversely, service exports are expected to grow, driven by a strengthening tourism industry. Remittances CHALLENGES are expected to stabilize at around 25 percent of GDP over the projection period, assuming peak migration in FY23. Under the Nepal’s real GDP growth is projected to accelerate to 5.1 baseline scenario, foreign exchange reserves are projected to percent in FY25 and 5.5 percent in FY26. Wholesale, retail, remain sufficient to cover nine months of imports by the end construction, and manufacturing sectors- that collectively of FY26. A low foreign direct investment (FDI) remains a key account for over one-fifth of GDP-are poised to benefit weakness. from the NRB’s loosening of monetary policy and easing of A gradual reduction in the fiscal deficit is expected regulatory requirements, including the relaxation of working over the medium term, driven by decreased recurrent capital requirements, easing of loan classification and loan- expenditure. New tax measures introduced in the FY25 loss provisioning for businesses that continue servicing loans budget, such as a green tax, the implementation of the despite closures due to unforeseen circumstances. These recently approved Domestic Revenue Mobilization Strategy, measures are expected to stimulate private investment, while the removal of VAT exemptions on select goods, and remittance-driven private consumption and increased exports planned increases in duties on certain items, are expected of hydropower and tourism are anticipated to further bolster to increase revenue collection. However, these effects may economic growth. be partially offset by the reversal of certain tax amendments, for example, the cancellation of VAT on few food items. While The services sector is forecasted to remain a key growth capital expenditure is projected to rise, its execution is likely driver, with tourism, real estate, and trade leading the to remain constrained by the slow implementation of the way. Accommodation and food services are expected to national project bank. Public debt is projected to decline to benefit from an increase in domestic and international tourism, 41.3 percent of GDP by the end of FY26, driven by smaller fiscal fueled by government initiatives aimed at attracting 1.6 deficits and higher economic growth. million international visitors in FY25 through various tourism promotion programs. This growth will also be supported by While the medium-term outlook for Nepal remains the presence of international five-star hotel chains currently positive, it is subject to several downside risks. Increased operating in Nepal. Additionally, a recovery in merchandise vulnerabilities in the financial system, marked by a rise in imports is anticipated to boost the wholesale and retail non-performing loans, could curtail private sector credit sectors. Real estate services are poised for expansion, driven growth. Policy discontinuity resulting from frequent changes by NRB’s policies that include increased loan limits, higher in political administrations, along with the short tenures THE WORLD BANK | 7 EXECUTIVE SUMMARYUPDATE NEPAL DEVELOPMENT of officials, might deter investors. Delays in implementing of women aged 15 to 24 were unemployed, significantly capital expenditure could hinder infrastructure development, higher than the national unemployment rate of 12.5 negatively impacting growth. Externally, regional instability percent. Consequently, international migration from Nepal is and trade disruptions could reduce tourism and domestic predominantly driven by young adults. Out of the 2.2 million demand. Natural disasters also pose additional risks to individuals living abroad in 2021, 44.5 percent were between sustaining welfare gains. ages 15 and 24, and another 31.3 percent were between 25 and 34 when they left the country, while 80 percent were male. There is also a risk that economic growth could slow For many, migrating for work represents their first job entry if there is a shock in migrant-receiving countries. into the labor market. International remittances play a significant role in Nepal’s economy, affecting household consumption, poverty Financial inflows from Nepalis abroad play a pivotal reduction, and human capital development. However, role in uplifting the living standards and resilience, with migration also poses challenges, such as high costs, unequal remittances directly contributing to over 30 percent opportunities, and poor working conditions for migrants. The of Nepal’s poverty reduction between 2011 and 2023. special topic section of this Nepal Development Update on Remittances benefit households across the wealth distribution. international migration and household well-being highlights The number of households receiving these incomes, and these key challenges and the necessary reforms. To maximize the average per capita receipts have increased over time, migration benefits and ensure long-term economic growth, becoming a significant portion of households’ budgets. the reforms should focus on implementing an effective and This is especially notable when compared to households in inclusive migration management system. This includes other South Asian countries. Migration and remittances are reducing migration costs, investing in education and training, associated with increasing household consumption, higher promoting entrepreneurship among returnees, and improving investment in education and health, better family living the domestic economic environment. standards, and improved food security. However, migration from Nepal is costly, opportunities SPECIAL FOCUS: remain unequal, and the economic benefits are not without costs. Liquidity constraints limit household INTERNATIONAL migration and influence destination choices. While poorer households are likely to send members to low-cost and MIGRATION AND low-return destinations, the most lucrative destinations are predominantly accessible to the wealthiest, who can afford WELL-BEING IN NEPAL: the high migration costs. Furthermore, migrant workers to MAXIMIZING BENEFITS the GCC countries and Malaysia often rely on informal loans with exorbitant interest rates to finance their costly moves. AND LEVERAGING LONG- After daily consumption, repaying loans is households’ most cited use of remittances. While the families left behind face TERM GROWTH disruption in their social and domestic lives, many migrant workers endure challenging working and living conditions without access to healthcare or social protection, even International migration remains integral to Nepal’s resulting in death. They also face contract fraud during the economy and livelihood. In 2021, one-fourth of Nepali recruitment phase and, once abroad, employer exploitation, households had at least one member living abroad, and including withholding of travel and legal documents and likely absentees represented 7.5 percent of the country’s population. without social support. Remittance inflows to Nepal accounted for more than one- fourth of its GDP in FY24, far surpassing the low inflows of FDI The lack of domestic economic opportunities that propel and official development assistance, placing Nepal among the people to go abroad inhibits the reintegration of return top remittances-receiving countries globally. migrants. Most returnees either remigrate or remain out of the labor force or unemployed. Based on the 2017/18 Nepal Overseas low-skilled employment, mainly in the Gulf Labor Force Survey, one of the few available data on returnees, Cooperation Council (GCC) countries and Malaysia, has more than half (55.8 percent) of returnees were either out of become crucial in coping with inadequate domestic job the labor force or unemployed, and even among those with creation. This is particularly the case for younger workers, who jobs, over 75 percent were employed in the informal sector, face disproportionately high unemployment in the domestic mainly in basic self-employment in agriculture or as an own labor market. In 2023, 20.9 percent of men and 25.3 percent account and contributing workers. The more advanced skills 8 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 the returnees bring from abroad do not match the demand of Incorporating migration explicitly within Nepal’s poverty the domestic labor market. Only a fraction of returnees utilizes reduction and development strategy will provide a basis the skills learned abroad. As a result, remigration remains to work towards such a system. This will entail improving high, reflecting the lack of a conducive economic environment migrant preparedness through education and training, raising to utilize the skills and capital from abroad. awareness, enhancing financial and regulatory literacy, establishing a transparent and systematic recruitment process, The management of migration through an inclusive and planning for longer-term upskilling. It will be crucial to institutionalized system is critical for sustainability and engage in bilateral agreements and actively participate in maximizing the rewards from migration. Nepal’s current their implementation and timely update. At the same time, predominantly low-skilled economic migration matches the retraining and reskilling programs and initiatives promoting strong demand at the destination countries. Policies, thus, returnees’ entrepreneurship could improve returnees’ should focus on reducing migration costs and increasing job matches in the domestic labor market. Improving the benefits for all stages of contemporaneous migrations with an economic environment to utilize returnees’ capital and eye for longer-run skill and destination diversification. skills from abroad is equally key. Ultimately, addressing the structural issues in the domestic economy will be important for Nepal in creating a vibrant place where local opportunities can retain people and/or harness new skills. THE WORLD BANK | 9 NEPAL DEVELOPMENT UPDATE 10 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 A RECENT ECONOMIC DEVELOPMENTS THE WORLD BANK | 11 A RECENT ECONOMIC DEVELOPMENTS REAL SECTOR A.1 Nepal’s economic growth increased, fueled by high tourist GROSS DOMESTIC PRODUCT arrivals, increased agricultural production, and a boost in energy production. BY PROVINCE  Real GDP growth accelerated to 3.9 percent in FY24, up All provinces recorded growth rates exceeding 3 from 2 percent in FY23. The services sector was a key driver, percent, with Bagmati, Nepal’s economic powerhouse, fueled by a surge in tourist arrivals that boosted activities in contributing 1.5 percentage points to the nation’s 3.9 ZĞĂů transportation, accommodation, and food services (Figure percent overall national growth. Bagmati, accounting for ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ 1). Increased hydropower production and higher paddy 38.8 percent of Nepal’s GDP, ŐƌŝĐƵůƚƵƌĞ sector contribute saw its services^ĞƌǀŝĐĞƐ /ŶĚƵƐƚƌLJ EĞƚƚĂdžĞƐ 'WĂƚŵĂƌŬĞƚƉƌŝĐĞƐ production also supported growth. On the demand side, a significant ϭϬ 1 percentage point to the national growth rate private consumption was bolstered by high remittance ϴ (Figure 2). In contrast, Karnali, with the smallest GDP share of ϲ inflows, while public investment remained subdued due to 4.6 percent, ϰ contributed just 0.14 percentage points. persistent low execution of capital spending budget. Ϯ Ϭ ͲϮ Ͳϰ Figure 1. Real GDP growth increased in FY24 driven by the &ŝŐϭ 2. &zϭϯ Figure&zϭϮ Bagmati contributed &zϭϰ &zϭϱ to more &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϮ one-third than &zϮϬ &zϮϭ &zϮϯ &zϮϰ of services sector. overall national growth in FY24. ZĞĂů ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŶĂƚŝŽŶĂůƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ EĞƚƚĂdžĞƐ 'WĂƚŵĂƌŬĞƚƉƌŝĐĞƐ ^ĞƌǀŝĐĞƐ EĞƚƚĂdžĞƐ ϭϬ ZĞĂů'WĂƚŵĂƌŬĞƚƉƌŝĐĞƐ Ϯ͘Ϭ ϴ ϭ͘ϱ ϲ ϭ͘Ϭ ϰ Ϯ Ϭ͘ϱ Ϭ Ϭ͘Ϭ ͲϮ Ͳϰ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ &ŝŐϮ &ŝŐϭ Source. National Statistics Office (NSO) and World Bank staff calculations. Source. NSO and World Bank staff calculations. ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŶĂƚŝŽŶĂůƌĞĂů'WŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ŐƌŝĐƵůƚƵƌĞ /ŶĚƵƐƚƌLJ ^ĞƌǀŝĐĞƐ EĞƚƚĂdžĞƐ ZĞĂů'WĂƚŵĂƌŬĞƚƉƌŝĐĞƐ Ϯ͘Ϭ ϭ͘ϱ ϭ͘Ϭ Ϭ͘ϱ Ϭ͘Ϭ &ŝŐϮ 12 ;ƉƌŽĚƵĐƚŝŽŶŽĨĐƌŽƉƐ͕ƚŚŽƵƐĂŶĚDdͿ WĂĚĚLJ tŚĞĂƚ DŝůůĞƚ ϳ͕ϬϬϬ ϲ͕ϬϬϬ NEPAL ϱ͕ϬϬϬ DEVELOPMENT UPDATE | OCTOBER 2024 ϰ͕ϬϬϬ ϯ͕ϬϬϬ Ϯ͕ϬϬϬ ϭ͕ϬϬϬ Ϭ &ŝŐϯ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ GROSS DOMESTIC PRODUCT BY Figure 4. Higher hydroelectric production from the private sector supported the industrial sector in FY24. INDUSTRIAL CLASSIFICATION ĚĚŝƚŝŽŶĂůŝŶƐƚĂůůĞĚĐĂƉĂĐŝƚLJ;/WWͿ͕ŵĞŐĂǁĂƚƚ ĚĚŝƚŝŽŶĂůŝŶƐƚĂůůĞĚĐĂƉĂĐŝƚLJ;EͿ͕ŵĞŐĂǁĂƚƚ Agricultural sector ĚĚŝƚŝŽŶĂůŝŶƐƚĂůůĞĚĐĂƉĂĐŝƚLJ;ƚŽƚĂůͿ͕ŵĞŐĂǁĂƚƚ /ŶĚƵƐƚƌŝĂůƐĞĐƚŽƌΖƐŐƌŽǁƚŚƌĂƚĞ͕LJͬLJ͕ƉĞƌĐĞŶƚ;Z,^Ϳ ϴϬϬ ϭϱ The agricultural sector grew by 3 percent in FY24. Paddy ϲϬϬ ϭϬ production, one of the three major cereal crops in terms ϰϬϬ ϱ of area coverage, increased by 4.3 percent (Figure 3). This ϮϬϬ Ϭ growth reflects a combination of favorable summer monsoon Ϭ Ͳϱ conditions, improved fertilizer availability, and the ongoing &ŝŐϰ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ advancement of agricultural mechanization. The sector also witnessed growth in the production of vegetables, cash Source. Nepal Electricity Authority and World Bank staff calculations. crops, legumes, fruits, and other cereals, including wheat and millet, further contributing to the sector’s steady expansion in FY24. Figure 5. Manufacturing1 and construction subsectors Figure 3. Agriculture expanded due to the increased faced headwinds, as indicated by decline in the production production of paddy. of cement and other key construction materials. ;ƉƌŽĚƵĐƚŝŽŶŽĨĐƌŽƉƐ͕ƚŚŽƵƐĂŶĚDdͿ ;ĐŽŵƉŽŶĞŶƚƐŽĨŵĂŶƵĨĂĐƚƵƌŝŶŐƉƌŽĚƵĐƚŝŽŶŝŶĚĞdžͿ WĂĚĚLJ tŚĞĂƚ DŝůůĞƚ ZŝĐĞ ůůŽƚŚĞƌƐ sĞŐĞƚĂďůĞŽŝů ĂƌƐĂŶĚƌŽĚƐ͕ŚŽƚͲƌŽůůĞĚ͕ŽĨŝƌŽŶŽƌƐƚĞĞů ϳ͕ϬϬϬ ĞŵĞŶƚ ƌŝĐŬƐ ϲ͕ϬϬϬ KǀĞƌĂůůŵĂŶƵĨĂĐƚƵƌŝŶŐƉƌŽĚƵĐƚŝŽŶŝŶĚĞdž ϮϬ ϱ͕ϬϬϬ ϰ͕ϬϬϬ ϭϱ ϯ͕ϬϬϬ ϭϬ Ϯ͕ϬϬϬ ϱ ϭ͕ϬϬϬ Ϭ Ϭ Ͳϱ &ŝŐϯ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ͲϭϬ &ŝŐϱ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Source. Ministry of Agriculture and Livestock Development and World Bank staff calculations. Source. NSO and World Bank staff calculations. ĚĚŝƚŝŽŶĂůŝŶƐƚĂůůĞĚĐĂƉĂĐŝƚLJ;/WWͿ͕ŵĞŐĂǁĂƚƚ ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƐĞƌǀŝĐĞƐƐĞĐƚŽƌΖƐŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ ĚĚŝƚŝŽŶĂůŝŶƐƚĂůůĞĚĐĂƉĂĐŝƚLJ;EͿ͕ŵĞŐĂǁĂƚƚ ĐĐŽŵŵŽĚĂƚŝŽŶĂŶĚĨŽŽĚƐĞƌǀŝĐĞĂĐƚŝǀŝƚŝĞƐ ZĞĂůĞƐƚĂƚĞĂĐƚŝǀŝƚŝĞƐ Industrial sector ĚĚŝƚŝŽŶĂůŝŶƐƚĂůůĞĚĐĂƉĂĐŝƚLJ;ƚŽƚĂůͿ͕ŵĞŐĂǁĂƚƚ Services Sector dƌĂŶƐƉŽƌƚĂƚŝŽŶĂŶĚƐƚŽƌĂŐĞ KƚŚĞƌƐĞƌǀŝĐĞƐ tŚŽůĞƐĂůĞĂŶĚƌĞƚĂŝů Services sector’s growth rate /ŶĚƵƐƚƌŝĂůƐĞĐƚŽƌΖƐŐƌŽǁƚŚƌĂƚĞ͕LJͬLJ͕ƉĞƌĐĞŶƚ;Z,^Ϳ ϲ ϴϬϬ ϭϱ The electricity sub-sector expanded by 17.4 percent, Accommodation, ϰ food service, and transport powered ϲϬϬ ϭϬ preventing a further contraction of the industrial sector. the Ϯservices sector’s 4.5 percent growth in FY24 (Figure ϰϬϬ ϱ In FY24, an additional 452.6 MW of hydroelectric capacity, 6). Ϭ Transportation, accommodation, and food service ϮϬϬ Ϭ primarily from the private sector, was installed (Figure 4). subsectors ͲϮ experienced double-digit expansions, fueled by a Ϭ Ͳϱ &ŝŐϰ While the &zϭϴ manufacturing &zϭϵ &zϮϬ and &zϮϭ construction &zϮϮ &zϮϯ sectors faced &zϮϰ substantial Ͳϰ 30.7 percent surge in tourist arrivals. In contrast, headwinds and declined by 1.6 percent and 2.1 percent, &ŝŐϲ wholesale and&zϭϰ &zϭϮ &zϭϯ &zϭϱ trade, retail Nepal’s &zϭϲ &zϭϳ second-largest &zϭϴ &zϭϵ GDP&zϮϰ &zϮϬ &zϮϭ &zϮϮ &zϮϯ respectively, as suggested by a drop in cement production contributor, grew marginally by 0.2 percent, reflecting a slow and other key construction materials (Figure 5). These recovery in merchandise imports. The real estate subsector, downturns were further reflected in slower producer however, benefited from a 16 percent increase in retail sales price growth in manufacturing and decreasing prices for in FY24, driven by the August 2023 amendment to Land Use construction materials.2 The lower refined oil production Regulations and a 9.6 percent expansion in real estate sector due to reduced export margins following India’s tariff revision credit3. Credit growth was supported by an increased first residential home loan limit, a higher debt-to-income ratio, also contributed to the slowdown in the manufacturing and reduced risk weights for real estate loans. sector. 1 The major components of the Manufacturing Production Index are as follows: i) Cement, ii) Bars and rods, hot-rolled, of iron or steel, iii) Rice, and iv) Vegetable oils. 2 The input price index of construction materials and the construction materials component of the wholesale price index both contracted. 3 In April 2023, the government extended the deadline for land classification to mid-August 2024, temporarily allowing land fragmentation without classification. Before this extension, the sale and purchase of land, as well as using land as collateral, were prohibited without classification. THE WORLD BANK | 13 ;ĐŽŵƉŽŶĞŶƚƐŽĨŵĂŶƵĨĂĐƚƵƌŝŶŐƉƌŽĚƵĐƚŝŽŶŝŶĚĞdžͿ ZŝĐĞ ůůŽƚŚĞƌƐ sĞŐĞƚĂďůĞŽŝů ĂƌƐĂŶĚƌŽĚƐ͕ŚŽƚͲƌŽůůĞĚ͕ŽĨŝƌŽŶŽƌƐƚĞĞů ĞŵĞŶƚ ƌŝĐŬƐ KǀĞƌĂůůŵĂŶƵĨĂĐƚƵƌŝŶŐƉƌŽĚƵĐƚŝŽŶŝŶĚĞdž RECENT ϮϬ ECONOMIC DEVELOPMENTS ϭϱ ϭϬ ϱ Ϭ Ͳϱ &ŝŐϱ ͲϭϬ Figure&zϭϳ &zϭϴ &zϭϵ 6. Transport &zϮϬ and &zϮϭ &zϮϮ &zϮϯ accommodation &zϮϰ subsectors Public consumption and investment followed a similar fueled services sector growth. downward trend. High-frequency data indicate public ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽƐĞƌǀŝĐĞƐƐĞĐƚŽƌΖƐŐƌŽǁƚŚƌĂƚĞ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ consumption declined, partly due to austerity measures (see ĐĐŽŵŵŽĚĂƚŝŽŶĂŶĚĨŽŽĚƐĞƌǀŝĐĞĂĐƚŝǀŝƚŝĞƐ dƌĂŶƐƉŽƌƚĂƚŝŽŶĂŶĚƐƚŽƌĂŐĞ ZĞĂůĞƐƚĂƚĞĂĐƚŝǀŝƚŝĞƐ tŚŽůĞƐĂůĞĂŶĚƌĞƚĂŝů Fiscal Sector section). Public investment also fell, driven by ϲ KƚŚĞƌƐĞƌǀŝĐĞƐ Services sector’s growth rate lower revenue execution and persistent structural challenges ϰ in the implementation of capital expenditure. Ϯ Ϭ Inflation has moderated ͲϮ Ͳϰ Average headline inflation moderated to 5.4 percent in &ŝŐϲ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ FY24 from 7.7 percent in FY23, falling below the NRB’s Source. NSO and World Bank staff calculations. target of 6.5 percent (Figure 7). This decline was primarily driven by a drop in non-food and services inflation, which fell from 8.6 percent in FY23 to 4.6 percent in FY24. The slowdown Gross Domestic Product by Demand  in housing and utility prices, along with a contraction in transportation prices-reflecting lower fuel costs-contributed On the demand side, private consumption was bolstered to this easing.  by strong remittance inflows. Comprising over 80 percent of GDP, private consumption grew by 1.1 percent Food and beverage inflation declined slightly by 0.2 in FY24, slightly exceeding the record low of 0.7 percent in percentage points to 6.5 percent, mainly due to lower FY23. High-frequency indicators suggest that double-digit ghee and oil prices. However, food prices remained elevated growth in remittances and digital payments contributed to (Figure 7), driven by higher vegetable and cereals inflation. Key this improvement. However, private investment slowed, factors included increased minimum support prices for paddy reflected in declining high-frequency indicators such as and wheat, India’s restrictive rice export measures, an export private investment commitments, imports of intermediate ban on onions by India, which lasted until early May 2024 and capital goods, and non-financial business credit (see before being replaced by a minimum export price, the removal External and Monetary and Financial Sector sections). of VAT exemptions on certain vegetables, and weather shocks. Moreover, Nepal’s inflation is influenced by India’s inflation due to the currency peg. Since India’s inflation was on a declining trend, this has benefitted Nepal in FY24. Figure 7. Average headline inflation moderated in FY24 due to lower non-food and services inflation. ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŚĞĂĚůŝŶĞŝŶĨůĂƚŝŽŶ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ &ŽŽĚĂŶĚďĞǀĞƌĂŐĞ ,ŽƵƐŝŶŐĂŶĚƵƚŝůŝƚŝĞƐ dƌĂŶƐƉŽƌƚĂƚŝŽŶ KƚŚĞƌŶŽŶͲĨŽŽĚĂŶĚƐĞƌǀŝĐĞƐ EĞƉĂůŽǀĞƌĂůůŝŶĨůĂƚŝŽŶ /ŶĚŝĂŽǀĞƌĂůůŝŶĨůĂƚŝŽŶ ϭϮ ϭϬ ϴ ϲ ϰ Ϯ Ϭ ͲϮ &ŝŐϳ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Source. NRB and World Bank staff calculations. džƚĞƌŶĂů14 ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 A.2 External Sector The external sector strengthened further, with the first current exchange reserves, which, by the end of FY24, covered 13 account balance surplus in eight years, driven by a surge in months of imports, well above the policy threshold of 7 remittances and a decline in imports, leading to an increase in months (Figure 9). foreign exchange reserves. Merchandise imports fell by 2.1 percentage points to 27.5 ;ĐŽŶƚƌŝďƵƚŝŽŶƚŽŚĞĂĚůŝŶĞŝŶĨůĂƚŝŽŶ͕ƉĞƌĐĞŶƚĂŐĞƉŽŝŶƚƐͿ Nepal’s current account balance &ŽŽĚĂŶĚďĞǀĞƌĂŐĞ turned positive ,ŽƵƐŝŶŐĂŶĚƵƚŝůŝƚŝĞƐ for percent of GDP. This decline was largely due to lower imports EĞƉĂůŽǀĞƌĂůůŝŶĨůĂƚŝŽŶ dƌĂŶƐƉŽƌƚĂƚŝŽŶ first time the ϭϮ in eight yearsKƚŚĞƌŶŽŶͲĨŽŽĚĂŶĚƐĞƌǀŝĐĞƐ in FY24, driven by a /ŶĚŝĂŽǀĞƌĂůůŝŶĨůĂƚŝŽŶ surge of intermediate goods (Figure 10), influenced by several key in remittances ϭϬ and a decline in imports (Figure 8). factors. Among them were reduced imports of crude edible Remittances ϴ increased from 23.2 percent to 25.3 percent of oil following India’s tariff cuts4, a drop in imports of broken GDP, while ϲ imports of goods and services decreased from 34.7 rice and rice in husk (paddy or rough) driven by India’s export /ŵƉŽƌƚĐŽǀĞƌĂŐĞ͕ŵŽŶƚŚƐ percent to 32.9 percent of GDP. Exports of goods and services ϰ restriction (on broken rice) and the imposition of a 20 percent &ŽƌĞŝŐŶĞdžĐŚĂŶŐĞƌĞƐĞƌǀĞƐ͕h^ďŝůůŝŽŶ ϭϲ also saw Ϯ an increase, growing by 0.6 percentage points to 7.6 export ϭϰ duty (on rice in husk), and a decrease in unwrought percent Ϭ of GDP, primarily due to a boost in services exports. goldϭϮ imports due to higher customs duties. Additionally, &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ &ŝŐϳ This ͲϮ combination of factors led to an improvement in foreign ϭϬ billet imports fell after the introduction of an excise duty and ϴ theϲremoval of customs duties on sponge iron, while diesel Figure 8. The current account balance turned positive in imports ϰ dropped in response to falling global oil prices. Ϯ FY24… &ŝŐϵ džƚĞƌŶĂů Ϭ 10. Merchandise Figure &zϭϲ &zϭϳ &zϭϴ &zϮϬ continued imports &zϭϵ &zϮϭ &zϮϮ to decline &zϮϯ &zϮϰ in ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ FY24 due to a lower import of intermediate goods. 'ŽŽĚƐŝŵƉŽƌƚƐ 'ŽŽĚƐĞdžƉŽƌƚƐ ^ĞƌǀŝĐĞŝŵƉŽƌƚƐ ^ĞƌǀŝĐĞĞdžƉŽƌƚƐ ZĞŵŝƚƚĂŶĐĞƐ ƵƌƌĞŶƚĂĐĐŽƵŶƚďĂůĂŶĐĞ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ /ŶƚĞƌŵĞĚŝĂƚĞŐŽŽĚƐ ĂƉŝƚĂůŐŽŽĚƐ ϯϬ ŽŶƐƵŵƉƚŝŽŶŐŽŽĚƐ KǀĞƌĂůůŐŽŽĚƐŝŵƉŽƌƚƐ ϭϬ ϱϬ ͲϭϬ ϰϬ ͲϯϬ ϯϬ ͲϱϬ &ŝŐϴ ϮϬ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ϭϬ Source. NRB and World Bank staff calculations. Ϭ &ŝŐϭϬ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Figure 9. …leading to an accumulation of foreign Source. Department of Customs, NRB, and World Bank staff calculations. exchange reserves. Note: Goods imports do not include electricity imports. /ŵƉŽƌƚĐŽǀĞƌĂŐĞ͕ŵŽŶƚŚƐ &ŽƌĞŝŐŶĞdžĐŚĂŶŐĞƌĞƐĞƌǀĞƐ͕h^ďŝůůŝŽŶ Services imports expanded by 0.3 percentage points, ϭϲ reaching 5.4 percent of GDP in FY24. The growth in service ϭϰ ϭϮ imports was mainly due to rising educational service imports ϭϬ (Figure 11), which grew from 1.9 percent to 2.2 percent of ϴ ϲ GDP, as more than 100,000 no-objection certificates (NOCs) ϰ were issued by the Ministry of Education to students seeking Ϯ &ŝŐϵ to study in more than 50 countries in FY24. Ϭ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Source. NRB and World Bank staff calculations. ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ /ŶƚĞƌŵĞĚŝĂƚĞŐŽŽĚƐ ĂƉŝƚĂůŐŽŽĚƐ ŽŶƐƵŵƉƚŝŽŶŐŽŽĚƐ KǀĞƌĂůůŐŽŽĚƐŝŵƉŽƌƚƐ ϱϬ ϰϬ ϯϬ 4 ϮϬ has benefited in the past from trade preferences in edible oils, despite not producing crude edible oil domestically. When India reduced its import duties on crude and Nepal ϭϬ edible oils (palm and soybean) from non-SAARC countries, the advantage Nepal previously enjoyed by refining imported crude edible oils and exporting them to India refined diminished. This led to a decline in Nepal’s imports of crude edible oils. Ϭ &ŝŐϭϬ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ THE WORLD BANK | 15 RECENT ECONOMIC DEVELOPMENTS Figure 11. Service imports increased in part due to a refined palm and soybean oil exports (Figure 13). However, higher import of educational services. this decline was partially offset by a 0.2 percentage point increase in electricity exports, reaching 0.3 percent of GDP, ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ and a rise in industrial supplies exports including cement /ŵƉŽƌƚƐŽĨŽƚŚĞƌƐĞƌǀŝĐĞƐ /ŵƉŽƌƚƐŽĨĞĚƵĐĂƚŝŽŶĂůƐĞƌǀŝĐĞƐ KǀĞƌĂůůƐĞƌǀŝĐĞƐŝŵƉŽƌƚƐ and steel/iron, which added over 0.1 percentage points to ϲ GDP. Importantly, Nepal’s electricity exports remain on par ϱ with its imports. To further enhance the export sector, the ϰ government added iron, steel, and electricity to its list of high- ϯ potential export items in the new Nepal Trade Integration Ϯ Strategy, launched in July 2023. ϭ Ϭ &ŝŐϭϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Figure 13. In contrast, merchandise exports declined due to a reduction in refined edible oil exports6. Source. NRB and World Bank staff calculations. ;ĐŽŵƉŽŶĞŶƚƐŽĨŐŽŽĚƐĞdžƉŽƌƚƐĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Nepal’s export performance was largely driven by a ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ůĞĐƚƌŝĐŝƚLJ WĂůŵŽŝů ^ŽLJĂďĞĂŶŽŝů ĂƌĚĂŵŽŵ significant increase in service /ŵƉŽƌƚƐŽĨŽƚŚĞƌƐĞƌǀŝĐĞƐ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ exports, which rose by 0.8 /ŵƉŽƌƚƐŽĨĞĚƵĐĂƚŝŽŶĂůƐĞƌǀŝĐĞƐ ĂƌƉĞƚ KƚŚĞƌŐŽŽĚƐ KǀĞƌĂůůƐĞƌǀŝĐĞƐŝŵƉŽƌƚƐ KǀĞƌĂůůŐŽŽĚƐĞdžƉŽƌƚƐ percentage ϲ points to 4.4 percent of GDP, džƉŽƌƚŽĨ/dƐĞƌǀŝĐĞƐ supported by džƉŽƌƚŽĨƚƌĂǀĞůĂŶĚƚƌĂŶƐƉƌŽƚĂƚŝŽŶƐĞƌǀŝĐĞƐϱ more ϱ than 30 percent surge in tourist arrivals (Figure 12). džƉŽƌƚŽĨŽƚŚĞƌƐĞƌǀŝĐĞƐ KǀĞƌĂůůƐĞƌǀŝĐĞƐĞdžƉŽƌƚƐ ϰ ϲ Whileϰ exports of ICT services remained steady at 0.3 percent ϯ ϯ ϱ of GDP, Ϯ merchandise exports declined by 0.2 percentage Ϯ ϰ points ϭ to 3.2 percent of GDP, mainly due to a reduction in &ŝŐϭϯ ϭ Ϭ ϯ &ŝŐϭϭ Ϭ Ϯ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Figure ϭ 12. Service exports also expanded due to a surge of tourist Ϭ arrivals5. Source. Department of Customs, NRB, and World Bank staff calculations. &ŝŐϭϮ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ;ŵŝŐƌĂŶƚǁŽƌŬĞƌƐŽƵƚĨůŽǁ͕ƚŚŽƵƐĂŶĚƐͿ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Official remittance inflows reached a nine-year high džƉŽƌƚŽĨ/dƐĞƌǀŝĐĞƐ džƉŽƌƚŽĨƚƌĂǀĞůĂŶĚƚƌĂŶƐƉƌŽƚĂƚŝŽŶƐĞƌǀŝĐĞƐ ƵƌŽƉĞ DŝĚĚůĞĂƐƚ DĂůĂLJƐŝĂ KƚŚĞƌƐ dŽƚĂů džƉŽƌƚŽĨŽƚŚĞƌƐĞƌǀŝĐĞƐ KǀĞƌĂůůƐĞƌǀŝĐĞƐĞdžƉŽƌƚƐ in FY24 of 25.3 percent of GDP (Table 1), just slightly ϲϬϬ ϲ below ϱϬϬ the 25.5 percent recorded during the fiscal year ϱ of the ϰϬϬ Great Earthquake. The lagged effect of record-high ϰ ϯ migration ϯϬϬ in FY23 and the 1.8 percent depreciation of the Ϯ Nepalese ϮϬϬ rupee (NPR) against the US dollar were key drivers ϭ of remittance ϭϬϬ growth. Additionally, there has been a gradual Ϭ &ŝŐϭϰ diversification &ŝŐϭϮ Ϭ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ &zϭϴ migration of&zϭϵ &zϮϬ destinations, &zϮϭ &zϮϮ with more &zϮϯ migrant &zϮϰ workers increasingly heading to European countries such as Poland, Romania, Cyprus, and Malta. This diversification Source. NRB and World Bank staff calculations. has contributed significantly to overall remittance inflows Note: Goods imports do not include electricity imports. (Figure 14). However, over 80 percent of new migrant workers Table 1. Selected External Sector Indicators (percent of GDP)   FY18 FY19 FY20 FY21 FY22 FY23 FY24e Current Account Balance -7.1 -6.9 -0.9 -7.7 -12.5 -0.9 3.9 Balance of Goods and Services -32.8 -33.7 -27.3 -32.8 -35.6 -27.7 -25.3 Total Exports of Goods and Services 7.8 7.8 6.8 5.1 6.7 7.0 7.6 Total Imports of Goods and Services 40.6 41.4 34.1 37.9 42.3 34.7 32.9 Remittances 21.8 22.8 22.5 22.1 20.2 23.2 25.3 Net Foreign Direct Investment 0.5 0.3 0.5 0.4 0.4 0.1 0.1 Gross Official Reserves (USD billion) 10.1 9.5 11.7 11.8 9.5 11.7 15.3 Source. Nepal Rastra Bank and World Bank staff calculations 5 Other exported services include maintenance and repair services (n.i.e.), construction, insurance and pension services, charges for the use of intellectual property (n.i.e.), other business services, and government goods and services (n.i.e.). 6 Other exported goods include fabrics, textiles, yarn and rope, iron and steel, dog and cat food, tea, and various other items. 16 ůĞĐƚƌŝĐŝƚLJ WĂůŵŽŝů ^ŽLJĂďĞĂŶŽŝů ĂƌĚĂŵŽŵ ĂƌƉĞƚ KƚŚĞƌŐŽŽĚƐ KǀĞƌĂůůŐŽŽĚƐĞdžƉŽƌƚƐ ϱ ϰ NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 ϯ Ϯ &ŝŐϭϯ ϭ Ϭ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Figure 14. Higher migration to European countries led to Figure 15. Nominal effective exchange rate remained higher remittances relatively unchanged, while real effective exchange rate appreciated. ;ŵŝŐƌĂŶƚǁŽƌŬĞƌƐŽƵƚĨůŽǁ͕ƚŚŽƵƐĂŶĚƐͿ ƵƌŽƉĞ DŝĚĚůĞĂƐƚ DĂůĂLJƐŝĂ KƚŚĞƌƐ dŽƚĂů ;ƵŐƵƐƚϮϬϬϮсϭϬϬͿ EZ ZZ ϲϬϬ ϭϱϬ ϱϬϬ ϭϰϬ ϰϬϬ ϭϯϬ ϯϬϬ ϭϮϬ ϭϭϬ ϮϬϬ ϭϬϬ ϭϬϬ ϵϬ &ŝŐϭϰ Ϭ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ &ŝŐϭϱ ϴϬ ϳϬ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Source. NRB and World Bank Staff calculations. Source. World Bank Staff calculations. continue to seek employment in the Middle East and DŽŶĞƚĂƌLJ Malaysia (Figure 14). However, the real effective exchange rate (REER), which adjusts the NEER for relative changes in consumer prices, ;ǁĞŝŐŚƚĞĚĂǀĞƌĂŐĞ͕ƉĞƌĐĞŶƚͿ Nepal’s exchange rate developments in FY24 reflected appreciated by 1.5 percent /ŶƚĞƌďĂŶŬƌĂƚĞ in FY24 (Figure hƉƉĞƌďŽƵŶĚƌĂƚĞ 15). This REER >ŽǁĞƌďŽƵŶĚƌĂƚĞ WŽůŝĐLJƌĂƚĞ mixed trends. The nominal effective exchange rate (NEER), ϭϬ appreciation, despite the stability in the NEER, indicates that ϵ calculated as the geometric weighted average of nominal consumer ϴ prices in Nepal rose at a faster pace than in its bilateral exchange rates between the NPR and a basket of ϳ major trading partners. ϲ currencies from major trading partners, remained relatively ϱ stable, appreciating slightly by 0.1 percent in FY24. ϰ ϯ Ϯ ϭ A.3 Monetary and Financial Sector &ŝŐϭϲ Ϭ ƉƌͲϭϴ DĂƌͲϭϵ DĂƌͲϮϬ :ƵůͲϮϭ ƉƌͲϮϮ ƉƌͲϮϯ DĂƌͲϮϰ :ƵůͲϮϬ :ƵŶͲϭϴ ƵŐͲϭϴ :ƵŶͲϭϵ ƵŐͲϭϵ KĐƚͲϭϵ ĞĐͲϭϵ KĐƚͲϮϬ :ƵŶͲϮϮ :ƵŶͲϮϯ ĞĐͲϮϬ ƵŐͲϮϯ KĐƚͲϮϯ ƵŐͲϮϰ DĂLJͲϮϬ DĂLJͲϮϭ DĂLJͲϮϰ :ĂŶͲϭϵ :ĂŶͲϮϯ :ĂŶͲϮϰ EŽǀͲϭϴ &ĞďͲϮϭ ^ĞƉͲϮϭ EŽǀͲϮϭ &ĞďͲϮϮ ^ĞƉͲϮϮ EŽǀͲϮϮ Monetary policy remained cautiously accommodative. inflation rate exceeds the ceiling or actual import capacity falls below the policy minimum and vice versa. Accordingly, The NRB sets the policy rate based on the annual inflation the NRB reduced the policy rate by 50 basis points to 6.5 rate and foreign exchange reserve import capacity. Per the percent at the beginning of FY24 and by another 100 basis monetary policy rule, the policy rate increases if the actual points to 5.5 percent in December 2023 (Figure 16). Figure 16. The NRB reduced the policy rate twice in FY24... Sources: NRB and World Bank staff calculations. THE WORLD BANK | 17 RECENT ECONOMIC DEVELOPMENTS The NRB employed open market operations to absorb points. Medium-term development bonds also saw a 2.1 liquidity and maintain the interbank rate within the percentage point decline in their weighted average interest bounds of the interest rate corridor in the second half of rate. Base rates and lending and deposit rates of commercial FY24 (Figure 17). During the first half of FY24, the actual banks followed suit. The average base rate of commercial interbank rate remained below the corridor’s lower bound, banks dropped by 2 percentage points to 8 percent in FY24, indicating insufficient liquidity absorption. However, in leading to a 2.1 and 2.4 percentage point decrease in weighted the second half, the NRB aggressively absorbed over NPR average deposit and lending rates, respectively. By the end of 4 trillion (net) liquidity, keeping the interbank rate close FY24, both deposit and lending rates remained in the single to the lower bound. Of this amount, NPR 3.5 trillion was digits, at 5.8 percent and 9.9 percent, respectively. absorbed through the newly introduced standing deposit facility (FY24), designed to enhance the interest rate Figure 19. …the interest rate on development bond. corridor’s effectiveness. Despite these efforts, net liquidity ;ǁĞŝŐŚƚĞĚĂǀĞƌĂŐĞŝŶƚĞƌĞƐƚƌĂƚĞŽŶĚĞǀĞůŽƉŵĞŶƚďŽŶĚ͕ƉĞƌĐĞŶƚͿ - defined as net liquid assets to total deposits- remained ϭϬ above the regulatory requirement of 20 percent in FY24. ϴ Figure 17. …and absorbed liquidity through the newly ϲ introduced standing deposit facility to keep the interbank ϰ rate within the interest rate corridor… Ϯ Ϭ ;ůŝƋƵŝĚŝƚLJŝŶũĞĐƚŝŽŶ;нͿĂŶĚĂďƐŽƌƉƚŝŽŶ;ͲͿ͕EWZďŝůůŝŽŶͿ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ KǀĞƌŶŝŐŚƚůŝƋƵŝĚŝƚLJĨĂĐŝůŝƚLJ;K>&Ϳ ^ƚĂŶĚŝŶŐůŝƋƵŝĚŝƚLJĨĂĐŝůŝƚLJ;^>&Ϳ &ŝŐϭϵ ĞƉŽƐŝƚĂƵĐƚŝŽŶ ^ƚĂŶĚŝŶŐĚĞƉŽƐŝƚĨĂĐŝůŝƚLJ;^&Ϳ KƚŚĞƌĂďƐŽƌƉƚŝŽŶ KƚŚĞƌŝŶũĞĐƚŝŽŶ EĞƚĂďƐŽƌƉƚŝŽŶ Source. NRB and World Bank staff calculations. ;ĚĞƉŽƐŝƚƐďLJƐŽƵƌĐĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϵ͕ϬϬϬ dŽƚĂůĚĞƉŽƐŝƚƐ ZĞĂůŝŶƚĞƌĞƐƚƌĂƚĞ;Z,^Ϳ ϳ͕ϬϬϬ ϱ͕ϬϬϬ Nominal interest rates fell less than inflation rates, Ϯ͘ϱ ϭϮϬ ϯ͕ϬϬϬ ϭϬϬ Ϯ͘Ϭ ϭ͕ϬϬϬ resulting in a rise in real interest rates (Figure 20). Together ϴϬ ϭ͘ϱ Ͳϭ͕ϬϬϬ with higher ϲϬ remittances, the rise in real interest rateϭ͘Ϭ led &ŝŐϭϳ Ͳϯ͕ϬϬϬ Ͳϱ͕ϬϬϬ to an increase ϰϬ in deposits as a share of ;ǁĞŝŐŚƚĞĚŝŶƚĞƌĞƐƚƌĂƚĞŽŶĚĞǀĞůŽƉŵĞŶƚďŽŶĚ͕ƉĞƌĐĞŶƚͿ GDP by 6.3 percentage Ϭ͘ϱ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ points ϭϬ ϮϬ to 113.3 percent in FY24 (Figure 20). Individual Ϭ͘Ϭ ;ůŝƋƵŝĚŝƚLJŝŶũĞĐƚŝŽŶ;нͿĂŶĚĂďƐŽƌƉƚŝŽŶ;ͲͿ͕EWZďŝůůŝŽŶͿ Source. NRBKǀĞƌŶŝŐŚƚůŝƋƵŝĚŝƚLJĨĂĐŝůŝƚLJ;K>&Ϳ and World Bank staff calculations. ^ƚĂŶĚŝŶŐůŝƋƵŝĚŝƚLJĨĂĐŝůŝƚLJ;^>&Ϳ deposits, ϴ Ϭ accounting for over 60 percent of overall deposits, ͲϬ͘ϱ &ŝŐϮϬ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Short-term ĞƉŽƐŝƚĂƵĐƚŝŽŶ and medium-term nominal ^ƚĂŶĚŝŶŐĚĞƉŽƐŝƚĨĂĐŝůŝƚLJ;^&Ϳ market interest contributed ϲ significantly to this growth, with savings deposits KƚŚĞƌĂďƐŽƌďƚŝŽŶ KƚŚĞƌŝŶũĞĐƚŝŽŶ ;ƉĞƌĐĞŶƚͿ EĞƚĂďƐŽƌƉƚŝŽŶ rates declined, reflecting the lagged impact of lower leading ϰ among the various types of deposits.  ϵ͕ϬϬϬ dͲďŝůůƐϮϴĚĂLJƐ /ŶƚĞƌĞƐƚƌĂƚĞŽŶĚĞƉŽƐŝƚ ĂƐĞƌĂƚĞ >ĞŶĚŝŶŐƌĂƚĞ policyϳ͕ϬϬϬrates and increased liquidity in the market (Figures Ϯ ϭϰ ϱ͕ϬϬϬ Figure 20. Real interest rate rose leading to the increase 18 and ϭϮ 19). The weighted average interest rate on 28-day T-bills Ϭ ϯ͕ϬϬϬ in deposits. &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ decreased ϭϬ ϭ͕ϬϬϬ by 1.4 percentage points, while the interest rates on &ŝŐϭϵ ϴ Ͳϭ͕ϬϬϬ 91-day,ϲ Ͳϯ͕ϬϬϬ 182-day, and 364-day T-bills fell by over 3 percentage &ŝŐϭϳ ϰ ;ĚĞƉŽƐŝƚƐďLJƐŽƵƌĐĞ͕ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ͳϱ͕ϬϬϬ Ϯ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ dŽƚĂůĚĞƉŽƐŝƚƐ ZĞĂůŝŶƚĞƌĞƐƚƌĂƚĞ;Z,^Ϳ Figure 18. … as a result, short-term and medium-term Ϭ ϭϮϬ Ϯ͘ϱ ƵŐͲϭϰ ƵŐͲϭϱ ƵŐͲϭϲ ƵŐͲϭϳ ƵŐͲϭϴ ƵŐͲϭϵ ƵŐͲϮϬ ƵŐͲϮϭ ƵŐͲϮϮ ƵŐͲϮϯ ƵŐͲϮϰ &ĞďͲϭϱ &ĞďͲϭϲ &ĞďͲϭϳ &ĞďͲϭϴ &ĞďͲϭϵ &ĞďͲϮϬ &ĞďͲϮϭ &ĞďͲϮϮ &ĞďͲϮϯ &ĞďͲϮϰ &ŝŐϭϴ interest rate declined including… ϭϬϬ Ϯ͘Ϭ ϴϬ ϭ͘ϱ ;ƉĞƌĐĞŶƚͿ ϲϬ ϭ͘Ϭ dͲďŝůůƐϮϴĚĂLJƐ /ŶƚĞƌĞƐƚƌĂƚĞŽŶĚĞƉŽƐŝƚ ĂƐĞƌĂƚĞ >ĞŶĚŝŶŐƌĂƚĞ ϰϬ Ϭ͘ϱ ϭϰ ϮϬ Ϭ͘Ϭ ϭϮ Ϭ ͲϬ͘ϱ ϭϬ &ŝŐϮϬ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ϴ ϲ ϰ Source. NRB and World Bank staff calculations. Ϯ Ϭ ƵŐͲϭϰ ƵŐͲϭϱ ƵŐͲϭϲ ƵŐͲϭϳ ƵŐͲϭϴ ƵŐͲϭϵ ƵŐͲϮϬ ƵŐͲϮϭ ƵŐͲϮϮ ƵŐͲϮϯ ƵŐͲϮϰ &ĞďͲϭϱ &ĞďͲϭϲ &ĞďͲϭϳ &ĞďͲϭϴ &ĞďͲϭϵ &ĞďͲϮϬ &ĞďͲϮϭ &ĞďͲϮϮ &ĞďͲϮϯ &ĞďͲϮϰ &ŝŐϭϴ Source. NRB and World Bank staff calculations. 18 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 Despite the increase in deposits and the decrease in boosting the LTV ratio for real estate loans within Kathmandu the lending rate, private sector credit as a share of GDP Valley from 40 percent to 50 percent; iv) raising the monthly remained stagnant in FY24 (Figure 21). Non-financial debt-to-income ratio to 60 percent for home loans up to NPR business credit, the largest category, held steady at 56.3 5 million; v) lowering the risk weight for real estate loans percent of GDP in FY24. However, a closer look at the data secured by shares above NPR 5 million from 150 percent to reveals that this stability was due to a decline in working 125 percent; vi) increasing the single obligor limit for lending capital loans being offset by an increase in term loans. This against shares as collateral; vii) reducing the loan loss shift was partly driven by the working capital guideline provisioning requirement for ‘good loans’ from 1.3 percent to requirement that term loans be used to finance permanent 1.2 percent; and viii) raising the debt service to gross income working capital. Meanwhile, household credit—comprising ratio for real estate loans from 50 percent to 70 percent over one-third of total private sector credit, including education, hire purchase, personal, and real estate loans— The NRB also relaxed working capital guidelines declined by 0.8 percentage points. This decrease more than requirement with a focus on the manufacturing sector. outweighed the gains from accrued interest and the rise Key changes for the manufacturing sector included: i) in private credit to non-government financial institutions, exemption from working capital guidelines for the use of primarily microfinance institutions. working capital loans up to NPR 30 million; and ii) increase in the working capital loan limit from NPR 20 million to NPR 40 Figure 21. However, private sector credit remained million. Moreover, amendments applicable to all businesses stagnant... included: i) increase in the loan limit for fluctuating working capital needs to 40 percent of the annual turnover, up from ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ƌĞĚŝƚƚŽŶŽŶͲŐŽǀĞƌŶŵĞŶƚĂůĨŝŶĂŶĐŝĂůŝŶƐƚŝƚƵƚŝŽŶƐ the previous 25 percent; ii) requirement for maintaining ƌĞĚŝƚƚŽŶŽŶͲĨŝŶĂŶĐŝĂůƉƌŝǀĂƚĞĐŽƌƉŽƌĂƚŝŽŶƐĂŶĚŚŽƵƐĞŚŽůĚƐ;ŝŶƚĞƌĞƐƚĂĐĐƌƵĞĚͿ ƌĞĚŝƚƚŽŚŽƵƐĞŚŽůĚƐ;ƉƌŝŶĐŝƉĂůͿ less than 10 percent of outstanding loans for at least seven ƌĞĚŝƚƚŽŶŽŶͲĨŝŶĂŶĐŝĂůƉƌŝǀĂƚĞĐŽƌƉŽƌĂƚŝŽŶƐ;ƉƌŝŶĐŝƉĂůͿ dŽƚĂůƉƌŝǀĂƚĞƐĞĐƚŽƌĐƌĞĚŝƚ days during any fiscal year, up from zero percent previously; >ĞŶĚŝŶŐƌĂƚĞ;ŶŽŵŝŶĂůͿ͕ƉĞƌĐĞŶƚ;Z,^Ϳ ϮϬ and iii) provision for emergency working capital loans for ϭϬϬ ϴϬ ϭϱ seasonal businesses (such as those involved in purchasing ϲϬ ϭϬ chemical fertilizers, and festival-related enterprises) based ϰϬ ϮϬ ϱ on specific justifications. Ϭ Ϭ &ŝŐϮϭ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ &zϮϭ &zϮϮ &zϮϯ &zϮϰ With private sector credit stagnant, broad money supply ƌĞĚŝƚƚŽŶŽŶͲŐŽǀĞƌŶŵĞŶƚĂůĨŝŶĂŶĐŝĂůŝŶƐƚŝƚƵƚŝŽŶƐ ƌĞĚŝƚƚŽŶŽŶͲĨŝŶĂŶĐŝĂůƉƌŝǀĂƚĞĐŽƌƉŽƌĂƚŝŽŶƐĂŶĚŚŽƵƐĞŚŽůĚƐ;ŝŶƚĞƌĞƐƚĂĐĐƌƵĞĚͿ (M2) expanded due to a rise in foreign assets. In FY24, ƌĞĚŝƚƚŽŚŽƵƐĞŚŽůĚƐ;ƉƌŝŶĐŝƉĂůͿ Source. NRB and World Bank staff calculations. ƌĞĚŝƚƚŽŶŽŶͲĨŝŶĂŶĐŝĂůƉƌŝǀĂƚĞĐŽƌƉŽƌĂƚŝŽŶƐ;ƉƌŝŶĐŝƉĂůͿ broad money supply increased by 6.8 percentage points to dŽƚĂůƉƌŝǀĂƚĞƐĞĐƚŽƌĐƌĞĚŝƚ >ĞŶĚŝŶŐƌĂƚĞ;ŶŽŵŝŶĂůͿ͕ƉĞƌĐĞŶƚ;Z,^Ϳ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ 122.1 percent of GDP (Figure 22). This growth was primarily ϮϬ The stagnant private sector credit as a share of GDP could ϭϬϬ EĞƚĨŽƌĞŝŐŶĂƐƐĞƚƐ ůĂŝŵƐŽŶƉƌŝǀĂƚĞƐĞĐƚŽƌ ϴϬ by higher foreign assets, resulting from lower imports driven ϭϱ reflect: i) weak KƚŚĞƌƐ domestic demand; ii) the NRB’s focus on ƌŽĂĚŵŽŶĞLJ;DϮͿ ϲϬ ϮϱϬ and increased remittances (see External Sector section ϭϬfor reducing the over-concentration of credit, prioritizing small ϰϬ ϮϬϬ details). ϮϬ ϱ medium-sized productive loans, and strengthening both andϭϱϬ Ϭ Ϭ &ŝŐϮϭ the ϭϬϬ quality ϱϬ and accessibility of credit; and iii) an increasing &zϮϭ &zϮϮ &zϮϯ &zϮϰ number of blacklisted individuals, partly due to updates in Figure 22.… despite this, broad money supply (M2) Ϭ ͲϱϬ existing provisions, including blacklisting individuals solely expanded due to a rise in foreign assets. &ŝŐϮϮ ͲϭϬϬ based on cheque &zϭϲ &zϭϳ dishonor, &zϭϴ &zϭϵ and &zϮϬ freezing &zϮϭ the bank &zϮϮ &zϮϯ accounts &zϮϰ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ of blacklisted persons, restricting them from banking EĞƚĨŽƌĞŝŐŶĂƐƐĞƚƐ ůĂŝŵƐŽŶƉƌŝǀĂƚĞƐĞĐƚŽƌ transactions, including the extension of credit. ϮϱϬ KƚŚĞƌƐ ƌŽĂĚŵŽŶĞLJ;DϮͿ ϮϬϬ In response, the NRB introduced several key measures ϭϱϬ ϭϬϬ aimed at stimulating private sector credit, particularly ϱϬ within the real estate sector. These initiatives included: i) Ϭ ͲϱϬ raising the maximum loan amount for first-time residential &ŝŐϮϮ ͲϭϬϬ home buyers from NPR 15 million to NPR 20 million; ii) &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ increasing the loan-to-value (LTV) ratio for personal loans up to NPR 5 million from 30-40 percent to 50 percent; iii) Source. NRB and World Bank staff calculations. THE WORLD BANK | 19 RECENT ECONOMIC DEVELOPMENTS The banking sector faced growing pressures on asset quality, (CAR) of 11.5 percent, including a countercyclical buffer profitability, and capital adequacy. of 0.5 percent, but recent pressures have emerged. At the end of FY24, the CAR of commercial banks stood at 12.8 The banking sector’s asset quality continued to percent, with state-owned and private commercial banks deteriorate, with the non-performing loans (NPLs) ratio having CARs of 12.9 percent and 12.8 percent, respectively reaching a record high of 3.8 percent by the end of mid- (Figure 25). To alleviate pressure on capital adequacy, the July 2024. This increase was broad-based across private NRB implemented several measures, including: (i) reducing and public commercial banks, but more pronounced in the loan loss provisioning requirement for ‘good loans’ from the private sector (Figure 23). Consequently, the number 1.3 percent to 1.2 percent, and (ii) increasing the threshold for of blacklisted borrowers surged by over 70 percent in FY24. loans extended to agricultural, small, cottage, and medium- The NRB’s policy in December 2023, which allowed for the scale enterprises under the ‘Regulatory Retail Portfolio’ from restructuring and rescheduling of loans in select sectors, NPR 10 million to NPR 20 million. Despite these measures, likely prevented a further spike in NPLs. one private commercial bank ended FY24 with a CAR below the regulatory minimum of 11.5 percent. Commercial banks Figure 23. Banking sector’s asset quality deteriorated and that fail to meet this minimum face various corrective was more pronounced for private commercial banks… actions, such as restrictions on expanding lending activities and distributing dividends. ;EW>ƌĂƚŝŽ ŽĨĐŽŵŵĞƌĐŝĂůďĂŶŬƐ͕ƉĞƌĐĞŶƚͿ 'ŽǀĞƌŶŵĞŶƚŽǁŶĞĚďĂŶŬƐ WƌŝǀĂƚĞďĂŶŬƐ ϱ͘Ϭ KǀĞƌĂůůĐŽŵŵĞƌĐŝĂůďĂŶŬƐ Figure 25. Banking sector’s capital adequacy ratio remained above the regulatory minimum. ϰ͘Ϭ ϯ͘Ϭ ;ZŽĨĐŽŵŵĞƌĐŝĂůďĂŶŬƐ͕ƉĞƌĐĞŶƚͿ Ϯ͘Ϭ 'ŽǀĞƌŶŵĞŶƚŽǁŶĞĚďĂŶŬƐ WƌŝǀĂƚĞďĂŶŬƐ ϭ͘Ϭ KǀĞƌĂůůĐŽŵŵĞƌĐŝĂůďĂŶŬƐ ϮϬ Ϭ͘Ϭ &ŝŐϮϯ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ϭϴ ϭϲ Source. NRB and World Bank staff calculations. ϭϰ ;ĂƐ ƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞƚͿ ϭϮ Rising NPLs led to increased EĞƚŝŶƚĞƌĞƐƚŝŶĐŽŵĞ EĞƚƉƌŽĨŝƚ loan-loss provisions, >ŽĂŶůŽƐƐƉƌŽǀŝƐŝŽŶ ϭϬ &ŝŐϮϱ dampening the profitability of the banking sector. ϰ͘Ϭ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ϯ͘ϱ ;EW>ƌĂƚŝŽ ŽĨĐŽŵŵĞƌĐŝĂůďĂŶŬƐ͕ƉĞƌĐĞŶƚͿ Commercial ϯ͘Ϭ by 8.8 percent in FY24, bank net profits declinedWƌŝǀĂƚĞďĂŶŬƐ 'ŽǀĞƌŶŵĞŶƚŽǁŶĞĚďĂŶŬƐ Source. NRB and World Bank staff calculations. as loan-loss Ϯ͘ϱ provisions surged KǀĞƌĂůůĐŽŵŵĞƌĐŝĂůďĂŶŬƐ by 29.5 percent (Figure 24). Ϯ͘Ϭ Thisϱϭ͘ϱ NPR 19.4 billion increase in provisions outweighed the ;ZŽĨĐŽŵŵĞƌĐŝĂůďĂŶŬƐ͕ƉĞƌĐĞŶƚͿ NPRϰϭ͘Ϭ 5.5 billion increase in net interest income. The NRB’s 'ŽǀĞƌŶŵĞŶƚŽǁŶĞĚďĂŶŬƐ Nepal’s stock market remained subdued WƌŝǀĂƚĞďĂŶŬƐ relative to the peak dƌĂĚŝŶŐǀŽůƵŵĞ͕ƐŚĂƌĞƵŶŝƚƐŝŶŵŝůůŝŽŶƐ Ϭ͘ϱ KǀĞƌĂůůĐŽŵŵĞƌĐŝĂůďĂŶŬƐ decision ϯ Ϭ͘Ϭ to lower the loan loss provisioning requirement for of June ϮϬ 2021. EW^/ŶĚĞdž &ŝŐϮϰ ‘good dƌĂĚŝŶŐǀĂůƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W;Z,^Ϳ Ϯ loans’ FY24 helped &zϭϲ in &zϭϳ &zϭϴ mitigate &zϭϵ &zϮϬ the &zϮϭ impact &zϮϮ on &zϮϯloan-loss &zϮϰ ϭϴ ϰ͕ϬϬϬ ϰϬ provisions. ϭ The ϯ͕ϱϬϬ market’s performance remained below its June stock ϭϲ ϯ͕ϬϬϬ ϯϬ Ϭ peak in FY24 (Figure 26). The index rose by 6.8 percent, 2021Ϯ͕ϱϬϬ ϭϰ &ŝŐϮϯ Figure 24. &zϭϲ … leading &zϭϳ an increase &zϭϴ to&zϭϵ &zϮϬ in loan-loss &zϮϭ &zϮϮ &zϮϯprovisions &zϮϰ surpassing Ϯ͕ϬϬϬ the previous year’s 4.4 percent growth, in part due ϮϬ ϭϮ ϭ͕ϱϬϬ and lower profitability. to the lower interest rate. However, the index experienced ϭϬ ϭ͕ϬϬϬ ϭϬ &ŝŐϮϱ ϱϬϬ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ;ĂƐĂ ƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Ϭ Ϭ &ŝŐϮϲ EĞƚŝŶƚĞƌĞƐƚŝŶĐŽŵĞ EĞƚƉƌŽĨŝƚ >ŽĂŶůŽƐƐƉƌŽǀŝƐŝŽŶ Figure 26. &zϭϵ &zϮϬ market’s The stock &zϮϭ performance &zϮϮ &zϮϯ remained &zϮϰ ϰ͘Ϭ below its June 2021 peak in FY24. ϯ͘ϱ ϯ͘Ϭ dƌĂĚŝŶŐǀŽůƵŵĞ͕ƐŚĂƌĞƵŶŝƚƐŝŶŵŝůůŝŽŶƐ Ϯ͘ϱ EW^/ŶĚĞdž Ϯ͘Ϭ dƌĂĚŝŶŐǀĂůƵĞ͕ĂƐĂƐŚĂƌĞŽĨ'W;Z,^Ϳ ϭ͘ϱ ϰ͕ϬϬϬ ϰϬ ϭ͘Ϭ ϯ͕ϱϬϬ Ϭ͘ϱ ϯ͕ϬϬϬ ϯϬ Ϭ͘Ϭ Ϯ͕ϱϬϬ &ŝŐϮϰ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Ϯ͕ϬϬϬ ϮϬ ϭ͕ϱϬϬ ϭ͕ϬϬϬ ϭϬ Source. NRB and World Bank staff calculations. ϱϬϬ Ϭ Ϭ &ŝŐϮϲ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ The banking sector’s capital adequacy remained well above the regulatory minimum capital adequacy ratio Source. NRB and World Bank staff calculations. 20 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 significant fluctuations throughout FY24, ranging from a low NPR 5 million (up from NPR 2.5 million previously), while of 1852.1 in October 2023 to a high of 2240.4 in July 2024. maintaining a 100 percent risk weight for loans up to NPR 5 Trading value and volume also increased by over 50 percent. million (extended from NPR 2.5 million under the previous Consequently, capital gains tax from the stock market surged policy). Additionally, the NRB raised the maximum single by over 85 percent. obligor limit for lending against shares from NPR 120 million to NPR 150 million for individual investors and NPR 200 To bolster the stock market, the NRB modified the risk million for institutional investors dedicated to the securities weighting for share mortgage loans, increasing the limit to market. NPR 5 million with a 150 percent risk weight for loans above A.4 Fiscal Sector &ŝƐĐĂů ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ dĂdžƌĞǀĞŶƵĞ EŽŶͲƚƌĂĚĞƚĂdžƌĞǀĞŶƵĞ Nepal’s fiscal deficit dropped sharply as spending contracted, KƚŚĞƌƌĞǀĞŶƵĞ austerity measures targeting recurrent 'ƌĂŶƚ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ expenditures. These while revenue stabilized at its lowest point in eight years. measures focused on reducing costs related to allowances, Ϯϱ Public debt remains sustainable owing to a large share of fuel,ϮϬ office supplies, and other administrative expenses. concessional external debt and prudent fiscal management. Additionally, ϭϱ the lower-than-expected revenue collection contributed ϭϬ to reduced capital spending, particularly in Government revenue (including grants) remained at construction ϱ projects.  an eight-year low in FY24 (Figure 27). The stagnation was Ϭ &ŝŐϮϳ Figure &zϭϮ 28. &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ However, spending declined driven by a the result of a 0.7 percentage point rise in tax and non-tax revenues, which offset a 0.6 percentage point decline in decrease in recurrent spending… miscellaneous revenues. Tax revenue increased from 16.2 ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ percent to 16.6 percent of GDP, primarily driven by a 0.3 ZĞĐƵƌƌĞŶƚĞdžƉĞŶĚŝƚƵƌĞ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ percentage point increase in income tax. This was largely ϯϬ influenced by FY24 budget provisions that mandated banks, Ϯϱ financial institutions, and insurance companies to pay ϮϬ income tax on profits derived from mergers, acquisitions, ϭϱ and Further Public Offerings (FPOs) at premium rates. VAT ϭϬ revenue increased in part due to VAT imposed on air travel ϱ Ϭ (except for inbound in case of international travel), carriage &ŝŐϮϴ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ service, and cargo services (except for export). Source. MoF and World Bank staff calculations. Figure 27. Revenue (including grants) remained steady at an eight-year low in FY24. &ŝƐĐĂů ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ The overall decline in spending also reflects a continued dĂdžƌĞǀĞŶƵĞ EŽŶͲƚƌĂĚĞƚĂdžƌĞǀĞŶƵĞ deterioration in budget execution, with execution rates KƚŚĞƌƌĞǀĞŶƵĞ 'ƌĂŶƚ ZĞǀĞŶƵĞĂŶĚŐƌĂŶƚƐ falling below 80 percent in both FY23 and FY24 (Figure 29). Ϯϱ The execution rate for the capital spending budget has been ϮϬ lower than that for the recurrent spending budget. The latter ϭϱ deteriorated in FY23 and FY247, partly due to reduced fiscal ϭϬ ϱ transfers to subnational governments. At the provincial level, Ϭ spending budget execution also worsened, remaining below &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ &ŝŐϮϳ the federal rate, with a rate of 67.4 percent in FY24. Unlike in previous years (except FY20), federal revenue (including Source. Ministry of Finance (MoF) and World Bank staff calculations. grants) budget execution was lower than spending budget ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Government spending declined significantly from 25.2 execution in FY23 and FY24, standing at around 71 percent ZĞĐƵƌƌĞŶƚĞdžƉĞŶĚŝƚƵƌĞ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ percent of GDP in FY23 to 21.9 percent of GDP in FY24. and 75 percent, respectively, due to overly optimistic revenue ϯϬ ThisϮϱreduction was mainly driven by a 2.2 percentage point growth projections. Key factors contributing to low spending decrease ϮϬ in recurrent spending (Figure 28), which resulted budget execution rates include: (i) persistently low capital fromϭϱ lower fiscal transfers to subnational governments and spending budget execution, attributed to weak technical ϭϬ ϱ 7 FY24, the execution rates for the recurring and capital budgets were 83.4 percent and 63.5 percent, respectively. In Ϭ &ŝŐϮϴ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ THE WORLD BANK | 21 RECENT ECONOMIC DEVELOPMENTS capacity, particularly at the subnational level, and high staff Lower spending and steady revenue led to a significant turnover among technical staff; and (ii) unrealistic budget narrowing of the fiscal deficit (including grants) to revenue projections. 2.6 percent of GDP in FY24, the lowest in seven years (Figure 31). This resulted in a slight decline in public debt Figure 29. …reflecting a continued deterioration in to 42.7 percent of GDP8. Public debt remains sustainable, spending budget execution. supported by a high share of concessional external debt and prudent fiscal management. The National Natural Resources ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ &ĞĚĞƌĂůƌĞǀĞŶƵĞ &ĞĚĞƌĂůƐƉĞŶĚŝŶŐ and Fiscal Commission sets annual ceilings on domestic &ĞĚĞƌĂůƌĞĐƵƌƌĞŶƚƐƉĞŶĚŝŶŐ &ĞĚĞƌĂůĐĂƉŝƚĂůƐƉĞŶĚŝŶŐ WƌŽǀŝŶĐŝĂůƐƉĞŶĚŝŶŐ borrowing for all three tiers of government. For the federal ϭϮϬ government, the borrowing ceilings were set at 5.5 percent of ϭϬϬ projected GDP for FY24 and 5 percent for FY25. Additionally, ϴϬ ϲϬ the Public Debt Act limits external public debt to one-third of ϰϬ the previous fiscal year’s GDP. In March 2024, the Public Debt ϮϬ Management Regulations were approved, which transferred Ϭ &ŝŐϮϵ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ all domestic debt management responsibilities from the NRB to the newly established Public Debt Management Office. Source. MoF and World Bank staff calculations. The bunching of spending towards the last quarter or Figure 31. Lower spending and steady revenue led to a month of the fiscal year continues to persist. In FY24, 35.2 significant narrowing of the fiscal deficit (including grants). ;ďƵŶĐŚŝŶŐŽĨƌĞǀĞŶƵĞĂŶĚƐƉĞŶĚŝŶŐƚŽǁĂƌĚƚŚĞůĂƐƚƋƵĂƌƚĞƌ͕ƉĞƌĐĞŶƚͿ of overall spending percentdŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ occurred in the last quarter, with ZĞĐƵƌƌĞŶƚĞdžƉĞŶĚŝƚƵƌĞ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ ZĞǀĞŶƵĞ ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ 16.5 ϴϬ percent being spent in the final month alone (Figure 30). džƉĞŶĚŝƚƵƌĞ ZĞǀĞŶƵĞ &ŝƐĐĂůďĂůĂŶĐĞ;Z,^Ϳ ϳϬ ϯϬ ϯ This ϲϬ pattern was more pronounced for capital spending than Ϯ Ϯϱ for ϱϬrecurrent spending. Nearly half (50 percent) of capital ϭ ϰϬ ϮϬ Ϭ spending ϯϬ took place in the last quarter, and 30 percent in Ͳϭ ϭϱ ͲϮ theϮϬ last month, compared to 32.4 percent and 13.7 percent Ͳϯ &ŝŐϯϬ ϭϬ ϭϬ Ͳϰ of recurrent Ϭ spending during the same periods, respectively. Ͳϱ ;ďƵĚŐĞƚĞdžĞĐƵƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ One contributing factor &ĞĚĞƌĂůƌĞǀĞŶƵĞ could be the mismatch &ĞĚĞƌĂůƐƉĞŶĚŝŶŐ between &ŝŐϯϭ Ϭ Ͳϲ Ͳϳ revenue and spending, which tends to &ĞĚĞƌĂůƌĞĐƵƌƌĞŶƚƐƉĞŶĚŝŶŐ affect capital spending &ĞĚĞƌĂůĐĂƉŝƚĂůƐƉĞŶĚŝŶŐ &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ WƌŽǀŝŶĐŝĂůƐƉĞŶĚŝŶŐ ϭϮϬ significantly than recurrent spending. Recurrent more Source. MoF and World Bank staff calculations. expenditures ϭϬϬ are often mandatory, while capital spending ϴϬ is more discretionary. This uneven distribution of spending ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϲϬ Public debt is nearly evenly split ŽŵĞƐƚŝĐĚĞďƚŝŶƚĞƌĞƐƚƉĂLJŵĞŶƚƐ between domestic ŽŵĞƐƚŝĐĚĞďƚĂŵŽƌƚŝnjĂƚŝŽŶ towards the fiscal year’s end can result not only in lower- ϰϬ and external sources, with domestic džƚĞƌŶĂůĚĞďƚŝŶƚĞƌĞƐƚƉĂLJŵĞŶƚƐ debt accounting džƚĞƌŶĂůĚĞďƚĂŵŽƌƚŝnjĂƚŝŽŶ quality ϮϬ project investments but also inflationary pressures, WƵďůŝĐĚĞďƚƉĂLJŵĞŶƚƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ for 49 percent of total public debt and external debt ϭϬ as the Ϭ surge in spending may drive up the aggregate demand &ŝŐϮϵ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ comprising ϴ the remaining 51 percent (Table 2). Domestic and prices during the final quarter or month.  public debt, denominated in local currency, mainly consists ϲ Figure 30. The bunching of spending towards the final of development ϰ bonds with maturities ranging from 2 quarter or month of the fiscal year also continues to persist. to 15Ϯ years and Treasury bills (T-bills) with maturities of &ŝŐϯϮ less Ϭthan one year. By the end of FY24, T-bills constituted &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ ;ďƵŶĐŚŝŶŐŽĨƌĞǀĞŶƵĞĂŶĚƐƉĞŶĚŝŶŐƚŽǁĂƌĚƚŚĞůĂƐƚƋƵĂƌƚĞƌ͕ƉĞƌĐĞŶƚͿ around 34 percent of domestic debt, while development dŽƚĂůĞdžƉĞŶĚŝƚƵƌĞ ZĞĐƵƌƌĞŶƚĞdžƉĞŶĚŝƚƵƌĞ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ ZĞǀĞŶƵĞ bonds made up 65 percent. Citizen savings bonds and ϴϬ ϳϬ foreign employment bonds accounted for the remaining 1 ϲϬ percent. Banks and financial institutions hold 96.1 percent of ϱϬ ϰϬ domestic public debt, with the NRB holding 1.7 percent and ϯϬ other entities holding the remaining 2.2 percent. Compared ϮϬ ϭϬ to external debt, domestic debt poses greater refinancing &ŝŐϯϬ Ϭ and interest rate risks, largely because external debt consists &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ predominantly of concessional loans, which offer lower Source. MoF and World Bank staff calculations. interest rates and longer maturities. 8 The figure excludes the negative balance of the Treasury Single Account, as it is not considered part of public debt by the authorities. 22 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 Table 2. Nepal’s Stock of Public Debt in NPR billion and as a percentage of GDP FY21 FY22 FY23 FY24e Share Share Share Share Share Share Share Share of of of of of of of of total GDP total GDP total GDP total GDP Financing Source Stock (%) (%) Stock (%) (%) Stock (%) (%) Stock (%) (%) Public and publicly 934.7 53.8 21.5 1025.8 51.0 20.6 1170.2 51.0 20.5 1253.2 51.5 22.0 guaranteed external debt Multilateral 822.0 47.3 18.9 894.5 44.4 18.0 1029.8 44.9 18.1 1115.1 45.8 19.5 o/w World Bank 471.2 27.1 10.8 509.7 25.3 10.2 580.3 25.3 10.2 612.3 25.2 10.7 o/w ADB 293.8 16.9 6.8 315.0 15.6 6.3 370.1 16.1 6.5 406.1 16.7 7.1 o/w IMF 32.8 1.9 0.8 43.7 2.2 0.9 52.1 2.3 0.9 63.3 2.6 1.1 Bilateral 112.7 6.5 2.6 131.4 6.5 2.6 140.5 6.1 2.5 138.1 5.7 2.4 o/w Non-Paris Club 63.9 3.7 1.5 75.8 3.8 1.5 78.9 3.4 1.4 80.7 3.3 1.4 o/w China 31.3 1.8 0.7 35.3 1.8 0.7 34.6 1.5 0.6 35.3 1.4 0.6 o/w India 30.8 1.8 0.7 36.4 1.8 0.7 39.6 1.7 0.7 40.5 1.7 0.7 o/w Paris Club 48.8 2.8 1.1 55.6 2.8 1.1 61.5 2.7 1.1 57.4 2.4 1.0 Domestic public debt 802.9 46.2 18.4 987.4 49.0 19.8 1125.2 49.0 19.7 1180.9 48.5 20.7 Treasury Bills 279.6 16.1 6.4 355.8 17.7 7.2 457.8 19.9 8.0 403.7 16.6 7.1 Development Bonds 513.9 29.6 11.8 620.4 30.8 12.5 656.4 28.6 11.5 761.9 31.3 13.4 Others 9.4 0.5 0.2 11.2 0.6 0.2 10.9 0.5 0.2 15.3 0.6 0.3 ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ Total 1737.6 100.0 39.92 2013.3 100.0 40.5 džƉĞŶĚŝƚƵƌĞ2295.4 100.0 42.9 2434.1 ZĞǀĞŶƵĞ 100.0 &ŝƐĐĂůďĂůĂŶĐĞ;Z,^Ϳ 42.7 Nominal GDP (NPR billion) 4352.6 4976.6 ϯϬ 5348.5 5704.8 ϯ Ϯ Ϯϱ ϭ Nominal Exchange Rate 117.9 120.8 ϮϬ 130.7 133.0 Ϭ Average (NPR/USD) Ͳϭ ϭϱ ͲϮ Ͳϯ Source. Public Debt Management Office, NSO, and World Bank staff calculations. ϭϬ Ͳϰ ϱ Ͳϱ &ŝŐϯϭ Ͳϲ Ϭ Ͳϳ Public debt servicing surged to a record high in FY24, Figure 32. However, public debt servicing surged to a &zϭϮ &zϭϯ &zϭϰ &zϭϱ &zϭϲ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ surpassing capital expenditure for the first time. record high in FY24, surpassing capital expenditure for the Amortization of public debt rose by 1.1 percentage points, first time. reaching 3.9 percent of GDP (Figure 32). At the same time ;ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ interest expenditure rose to a record high of 1.44 percent ŽŵĞƐƚŝĐĚĞďƚŝŶƚĞƌĞƐƚƉĂLJŵĞŶƚƐ ŽŵĞƐƚŝĐĚĞďƚĂŵŽƌƚŝnjĂƚŝŽŶ of GDP. The increase in both amortization and interest džƚĞƌŶĂůĚĞďƚŝŶƚĞƌĞƐƚƉĂLJŵĞŶƚƐ džƚĞƌŶĂůĚĞďƚĂŵŽƌƚŝnjĂƚŝŽŶ WƵďůŝĐĚĞďƚƉĂLJŵĞŶƚƐ ĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ payments was driven by higher redemption of domestic debt ϭϬ and elevated interest rates on domestic debt from previous ϴ fiscal years (FY22 and FY23), a result of tighter liquidity ϲ conditions in the financial sector during that period.  ϰ Ϯ &ŝŐϯϮ Ϭ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &zϮϰ Source. MoF and World Bank staff calculations. THE WORLD BANK | 23 NEPAL DEVELOPMENT UPDATE 24 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 B OUTLOOK, RISKS, AND CHALLENGES THE WORLD BANK | 25 B OUTLOOK, RISKS, AND CHALLENGES B.1 REAL SECTOR GDP growth is projected to accelerate to 5.1 percent in Nepal’s industrial sector is expected to grow over the FY25 and 5.5 percent in FY26 (Table 3). The wholesale, retail, medium term, driven by a significant expansion in construction, and manufacturing sectors, which together electricity and construction. Over the past decade, more account for over one-fifth of GDP, are expected to benefit from than 9,500 MW of hydropower projects have been licensed the NRB’s loosening of monetary policy and relaxed regulatory for construction, with many already underway and others requirements such as a lower working capital requirement and expected to come online during the projection period, given an easing of loan classification and loan-loss provisioning for their long gestation times. The government’s ambitious business that continue servicing loans despite closures due to goal of exceeding 11,700 MW of installed electricity capacity unforeseen circumstance. These measures are anticipated to by FY29 is anticipated to fuel industrial growth. Meanwhile, stimulate private investment, while remittance-driven private a series of monetary policy measures aimed at supporting consumption and exports of hydropower and tourism are the construction sector—such as extensions for loan expected to further bolster economic growth. repayments, moratoriums on blacklisting, and relaxed credit rating requirements—are likely to stimulate activity in this The services sector is forecasted to remain a key growth crucial industry. driver, with tourism, real estate, and trade leading the way. Accommodation and food services are expected to The agricultural sector is projected to grow over benefit from a surge in domestic and international tourism, the medium term, primarily due to increased paddy fueled by government initiatives aimed at attracting 1.6 production. A significant increase in the main season rice million international visitors in FY25 through various tourism planted area from 94.6 percent in FY23 to 98.5 percent in promotion programs. This growth will be further bolstered by FY24, thanks to favorable rainfall, is expected to boost output the presence of international five-star hotel chains currently and drive growth to 3.3 percent in FY25. Assuming continued operating in Nepal. Furthermore, a recovery in merchandise favorable monsoon conditions, growth is projected to reach imports is anticipated to boost the wholesale and retail 3.4 percent in FY26. sectors. Consumer price inflation is expected to remain moderate, Real estate services are poised for expansion, driven by a supported by declining global commodity prices and combination of the NRB’s policies that include increased increased agricultural production. Lower expected loan limits, higher debt-to-income ratios, and reduced risk inflation in India, combined with Nepal’s currency peg, could weights for first-time homebuyers. Additionally, a recent help mitigate imported inflation. Although rising minimum amendment to the Land Use Regulation, which allows land paddy support prices, the removal of VAT exemptions on fragmentation without classification until mid-July 2025, select goods, the imposition of VAT on services such as offline is expected to continue supporting the sector. As of August air transport and digital payments, and the introduction 2024, only 133 of the 753 municipalities have fully classified of excise duties on items like laptops may create upward their land as agricultural or non-agricultural, while 325 have pressure on inflation, these effects are likely to be offset by partially classified their land, and 295 have yet to begin. the aforementioned factors. 26 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 Table 3. Macroeconomic projections of selected key indicators. (annual percent change unless indicated otherwise) FY22 FY23 FY24e FY25f FY26f Real GDP growth, at constant market prices 5.6 2.0 3.9 5.1 5.5 Private Consumption 6.8 0.7 1.1 1.8 2.9 Government Consumption 9.6 -21.2 -11.1 5.8 5.5 Gross Fixed Capital Formation 3.4 -10.0 18.4 16.5 13.1 Exports, Goods and Services 34.1 3.3 18.1 11.3 13.2 Imports, Goods and Services 16.4 -18.7 -2.3 10.4 9.7 Real GDP growth, at constant factor prices 5.3 2.3 3.5 5.1 5.5 Agriculture 2.4 2.8 3.0 3.3 3.4 Industry 10.7 1.4 1.3 4.9 7.5 Services 5.3 2.4 4.5 6.1 6.0 Inflation (Consumer Price Index) 6.3 7.7 5.4 5.0 4.5 Current Account Balance (% of GDP) -12.5 -0.9 3.9 2.6 1.7 Net Foreign Direct Investment (% of GDP) 0.4 0.1 0.1 0.2 0.2 Fiscal Balance (% of GDP) -3.6 -5.8 -2.6 -2.2 -1.9 Revenues (% of GDP) 22.9 19.3 19.4 20.0 20.3 Debt (% of GDP) 40.5 42.9 42.7 42.2 41.3 Primary Balance (% of GDP) -2.7 -4.5 -1.1 -0.8 -0.7 Sources: MoF, NRB, and NSO for history and estimates. World Bank staff for forecasts. Notes: e =estimate; f = forecast. B.2 EXTERNAL SECTOR The trade deficit is anticipated to widen in the medium and service exports are expected to grow due to the term, though it will likely remain below the record high strengthening tourism industry. of FY22. This increase will primarily stem from a rise in both The widening trade deficit, coupled with stable merchandise and service imports. Merchandise imports remittances, is anticipated to narrow the current account are projected to increase due to robust domestic demand, surplus from 3.9 percent of GDP in FY24 to an average although they may remain below FY22 levels due to factors of 2.2 percent of GDP over FY25-26. Remittances are such as lower commodity prices, reduced electricity imports, projected to stabilize around 25 percent of GDP. Inflows of and the cessation of one-time imports like COVID-19 foreign direct investment (FDI) are projected to remain very vaccines. Moreover, the recent expansion of the exchange low, despite efforts to attract more FDI. Under the baseline facility limit for merchandise imports will contribute to this scenario, foreign exchange reserves are expected to remain growth. Service imports are likely to increase as Nepalese sufficient to cover over nine months of imports by the end citizens continue to emigrate for work and study, and of FY26. as foreign exchange restrictions for outbound travel are relaxed. Electricity exports are expected to rise significantly, THE WORLD BANK | 27 OUTLOOK, RISKS, AND CHALLENGES B.3 MONETARY AND FINANCIAL SECTOR OUTLOOK The NRB is expected to gradually ease monetary policy Rupee as a nominal anchor for monetary policy throughout over the medium term. After a 50-basis point reduction to the forecast period. 5 percent in the policy interest rate at the beginning of FY25, the rate is anticipated to remain unchanged throughout Pressure on capital adequacy will be mitigated through the year. However, a further 50-basis point cut is forecasted various measures. Key measures, as announced in the FY25 for the start of FY26, lowering the policy interest rate to 4.5 monetary policy, include a reduction in loan-loss provisions, percent, which is slightly above the pandemic low but below revisions to risk weights, and an increase in the regulatory pre-pandemic levels. The NRB is also expected to maintain retail portfolio. These measures are expected to continue the exchange rate peg of the Nepalese Rupee to the Indian into FY26. B.4 FISCAL SECTOR A gradual reduction in the fiscal deficit is expected over projected to rise, its execution will likely remain constrained the medium term, driven by decreased recurrent by the slow implementation of the national project bank. expenditure and new revenue measures. Lower recurrent spending is expected to come from lower fiscal The fiscal deficit is expected to be financed through transfer to subnational governments. The FY25 budget external concessional and domestic borrowing. Public introduces several tax measures, including a green tax, the debt is projected to further decline to 41.3 percent of GDP by implementation of the recently approved Domestic Revenue the end of FY26, driven by smaller fiscal deficits and higher Mobilization Strategy9, the removal of VAT exemptions on economic growth. The forecast assumes that the government select goods, and planned increases in duties on certain will adhere to the fiscal rule regarding the domestic borrowing items, all of which are expected to boost revenue collection. ceiling, as recommended by the National Natural Resources However, these gains may be partially offset by the reversal and Fiscal Commission, and the external debt ceiling set by of certain tax amendments. While capital expenditure is the Public Debt Management Act of 2022. B.5 RISKS AND CHALLENGES While the medium-term outlook for Nepal remains There is also a risk of a growth slowdown in the event generally positive, it is subject to several downside risks. of economic shock in migrant-receiving countries. Increased vulnerabilities in the financial system, such as a International remittances play a significant role in Nepal’s rise in non-performing loans, could curtail private sector economy, affecting household consumption, poverty credit. Policy discontinuity resulting from frequent changes reduction, and human capital development. However, in political administrations, along with the short tenures migration also poses challenges, such as high costs, unequal of officials, might deter investors. Delays in implementing opportunities, and poor working conditions for migrants. capital expenditure could hinder infrastructure development, The Special Focus chapter of this Nepal Development negatively impacting growth. Externally, regional instability Update on international migration and household well- and trade disruptions could reduce tourism and domestic being highlights these key challenges and the necessary demand. Natural disasters pose additional risks to sustaining reforms. To maximize the benefits of migration and ensure welfare gains. long-term economic growth, the government would need to focus on implementing an effective and inclusive migration management system, while creating conditions for job creation in the domestic market. For a more comprehensive analysis, please refer to the second part of this report. 9 The strategy projects an increase of 1.3 percentage points of GDP of revenue between FY24 and FY26. 28 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 THE WORLD BANK | 29 NEPAL DEVELOPMENT UPDATE 30 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 C SPECIAL FOCUS: INTERNATIONAL MIGRATION AND WELL- BEING IN NEPAL: MAXIMIZING BENEFITS AND LEVERAGING LONG-TERMGROWTH THE WORLD BANK | 31 NEPAL DEVELOPMENT UPDATE C SPECIAL FOCUS: INTERNATIONAL MIGRATION AND WELL-BEING IN NEPAL: MAXIMIZING BENEFITS AND LEVERAGING LONG- TERM GROWTH This special focus chapter summarizes the latest evidence on international migration from Nepal and its impacts on the domestic economy, household welfare, and human development. The first part of the chapter overviews the overall migration trend, its benefits to the sending households and the Nepali economy, and associated risks. Updated profiles of migrants, destination choices, and returnees’ assimilation into the domestic economy are discussed in the second part. Part three concludes the chapter with policy discussion. C.1 THE STATE OF MIGRATION Temporary international migration remains integral to Seeking employment abroad has been an important Nepal’s economy, livelihood, poverty reduction, and human strategy to cope with structural domestic labor market development. However, emigration from Nepal is expensive, issues, particularly for younger Nepalis. Although there and the benefits come with costs. has been a marginal increase in migration for educational purposes over the last decade, the primary reason for International migration has become integral to Nepal’s migration remains temporary employment (Figure 33). economy and society. After a rapid rise in the previous The propensity to migrate remains disproportionately high decade, emigration has stabilized at a higher rate over for the working-age population, especially youth, who the last decade (Figure 33). According to the latest Nepal experience disproportionately high domestic unemployment Housing and Population Census in 2021, 23.3 percent rates. Based on the 2023 Nepal Living Standard Survey (NLSS of households had at least one member living abroad, IV), nearly one-quarter of those aged 15 to 24 did not have and absentees accounted for 7.5 percent of the country’s a job, almost double the overall unemployment rate of 12.5 population. percent. The share of youth not in employment, education, or training (NEET) was 35.7 percent. These patterns have 32 ϭϵ͘ϲ ϮϬ ϭϲ͘ϵ ϭϱ ϭϬ͘ϰ ϵ͘ϲ ϭϬ ϳ͘ϯ ϳ͘ϱ ϱ Ϯ͘Ϯ ϯ͘Ϭ NEPAL Ϭ DEVELOPMENT UPDATE | OCTOBER 2024 ^ŚĂƌĞŽĨ ďƐĞŶƚĞĞƐĂƐ dŽƚĂů DĂůĞ &ĞŵĂůĞ ŚŽƵƐĞŚŽůĚǁŝƚŚ ƐŚĂƌĞŽĨ ĂďƐĞŶƚĞĞͬƐ ƉŽƉƵůĂƚŝŽŶ &ŝŐϯϯ ůů;йͿ ^ŚĂƌĞŽĨǁŽƌŬŝŶŐĂŐĞƉŽƉƵůĂƚŝŽŶ;йͿ Figure 33. International migration from Nepal is high and primarily for economic work. ϮϬϭϭ ϮϬϮϭ ;ƌĞĂƐŽŶĨŽƌŵŝŐƌĂƚŝŽŶ͕ƉĞƌĐĞŶƚŽĨĂďƐĞŶƚĞĞƐͿ ϯϬ Ϯϱ͘ϰ tŽƌŬƌĞůĂƚĞĚ ^ƚƵĚLJ ĞƉĞŶĚĞŶƚŽƌŽƚŚĞƌ Ϯϱ Ϯϯ͘ϯ ϭϵ͘ϲ ϴϮ͘Ϯ ϮϬ ϭϲ͘ϵ ϵϬ ϳϳ͘ϵ ϭϱ ϴϬ ϭϬ͘ϰ ϵ͘ϲ ϳ͘ϯ ϳ͘ϱ ϳϬ ϭϬ Ϯ͘Ϯ ϯ͘Ϭ ϲϬ ;ƌĞŵŝƚƚĂŶĐĞƐ ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ ϱ ϱϬ ĨŐŚĂŶŝƐƚĂŶ ĂŶŐůĂĚĞƐŚ ŚƵƚĂŶ Ϭ ϰϬ /ŶĚŝĂ DĂůĚŝǀĞƐ EĞƉĂů ^ŚĂƌĞŽĨ ďƐĞŶƚĞĞƐĂƐ dŽƚĂů DĂůĞ &ĞŵĂůĞ ϯϬ WĂŬŝƐƚĂŶ ^ŽƵƚŚƐŝĂ tŽƌůĚ ŚŽƵƐĞŚŽůĚǁŝƚŚ ƐŚĂƌĞŽĨ ϯϬ ϭϭ͘ϵ ϭϮ͘ϲ ϮϬ ĂďƐĞŶƚĞĞͬƐ ƉŽƉƵůĂƚŝŽŶ &ŝŐϯϯ ϮϱϭϬ ϵ͘ϲ ϱ͘ϵ ϮϬ Ϭ &ŝŐϯϯ ůů;йͿ ^ŚĂƌĞŽĨǁŽƌŬŝŶŐĂŐĞƉŽƉƵůĂƚŝŽŶ;йͿ ϮϬϭϭ ϮϬϮϭ ϭϱ ϭϬ 2011 and 2021 Source. World Bank staff calculation using the Nepal Housing and Population Censuses ϱ ;ƌĞĂƐŽŶĨŽƌŵŝŐƌĂƚŝŽŶ͕ƉĞƌĐĞŶƚŽĨĂďƐĞŶƚĞĞƐͿ Ϭ increased slightly since 2018, ^ƚƵĚLJ underscoring the structural Figure 35. Financial flows from migrants abroad account ϮϬϬϳ ϮϬϬϵ ϮϬϭϭ ϮϬϭϯ ϮϬϭϱ ϭϵϵϭ ϭϵϵϯ ϭϵϵϱ ϭϵϵϳ ϭϵϵϵ ϮϬϬϭ ϮϬϬϯ ϮϬϬϱ ϮϬϭϳ ϮϬϭϵ ϮϬϮϭ ϮϬϮϯ tŽƌŬƌĞůĂƚĞĚ ĞƉĞŶĚĞŶƚŽƌŽƚŚĞƌ &ŝŐϯϰ challenge of creating sufficient high-quality jobs in Nepal. for significantly more of Nepali households’ finances ϵϬ ϴϮ͘Ϯ ϳϳ͘ϵ ϴϬ across the distribution than their peers in the region. Remittance ϳϬ inflows to Nepal rank among the highest ϲϬ in the ϱϬ world and significantly contribute to sustaining ;ƌĞŵŝƚƚĂŶĐĞƐĂƐĂƐŚĂƌĞŽĨŚŽƵƐĞŚŽůĚĐŽŶƐƵŵƉƚŝŽŶ͕ƉĞƌĐĞŶƚͿ household ϰϬ expenditures. In FY24, officially recorded ĂŶŐůĂĚĞƐŚ ŚƵƚĂŶ EĞƉĂů WĂŬŝƐƚĂŶ ^ƌŝ>ĂŶŬĂ ϯϬ remittance ϮϬ inflowsϭϭ͘ϵ to Nepal accounted for more than one- ϭϮ͘ϲ ϯϬ Ϯϱ &ŝŐϯϯ ϭϬ of GDP, nearly three times as much fourth ϱ͘ϵ ϵ͘ϲ as the second- Ϭ ϮϬ highest remittance-receiving ϮϬϭϭ country in South Asia, Pakistan, ϮϬϮϭ ϭϱ with 7.8 percent of its GDP (Figure 34). This places Nepal ϭϬ in the top five countries receiving these financial flows ϱ globally. Remittances significantly surpass FDI and official Ϭ EĂƚŝŽŶĂů YϭͲŽƚƚŽŵ YϮ Yϯ Yϰ YϱͲdŽƉ development assistance and remain a vital source of foreign &ŝŐϯϱ ŽŶƐƵŵƉƚŝŽŶƋƵŝŶƚŝůĞƐ exchange. They benefit households across the income distribution, especially when compared to households Source. World Bank staff estimates using Bangladesh’s 2022 HIES, in the neighboring countries (Figure 35). In 2023, a Nepali Bhutan’s 2022 BLSS, Pakistan’s 2018 HIES, Nepal’s 2022/23 NLSS, and Sri household, on average, was likely to receive more than 20 Lanka’s 2019 HIES. percent of its expenditure from remittances. This is almost three times higher than the average household in the of household expenditure among the bottom quintile to regional peer countries. Remittances ranged from 17 percent nearly 25 percent among Nepalis in the richest quintile. Figure 34. Nepal’s personal remittance to GDP ratio is Over 30 percent of the poverty reduction between 2011 among the highest in the world. and 2023 is directly attributed to personal remittances (World Bank, Forthcoming). Increasingly, more households ;ƌĞŵŝƚƚĂŶĐĞƐ ĂƐĂƐŚĂƌĞŽĨ'W͕ƉĞƌĐĞŶƚͿ across the wealth distribution are benefitting from ĨŐŚĂŶŝƐƚĂŶ ĂŶŐůĂĚĞƐŚ ŚƵƚĂŶ /ŶĚŝĂ DĂůĚŝǀĞƐ EĞƉĂů international migration. The proportion of households WĂŬŝƐƚĂŶ ^ŽƵƚŚƐŝĂ tŽƌůĚ ϯϬ receiving remittances and per capita remittances from Ϯϱ an absentee household member abroad has increased ϮϬ substantially over the past decade, including for households ϭϱ at the lower end of the wealth distribution (World Bank, ϭϬ ϱ Forthcoming). This is in line with the historical role migration Ϭ and remittances have played, having accounted for 27 percent of the poverty reduction between 1995 and 2010 ϮϬϬϳ ϮϬϬϵ ϮϬϭϭ ϮϬϭϯ ϮϬϭϱ ϭϵϵϭ ϭϵϵϯ ϭϵϵϱ ϭϵϵϳ ϭϵϵϵ ϮϬϬϭ ϮϬϬϯ ϮϬϬϱ ϮϬϭϳ ϮϬϭϵ ϮϬϮϭ ϮϬϮϯ &ŝŐϯϰ at the national level and 33 percent in rural areas (Tiwari, Source. World Development Indicators (BX.TRF.PWKR.DT.GD.ZS; accessed 2016).10 on September 15, 2024) ;ƌĞŵŝƚƚĂŶĐĞƐĂƐĂƐŚĂƌĞŽĨŚŽƵƐĞŚŽůĚĐŽŶƐƵŵƉƚŝŽŶ͕ƉĞƌĐĞŶƚͿ ĂŶŐůĂĚĞƐŚ ŚƵƚĂŶ EĞƉĂů WĂŬŝƐƚĂŶ ^ƌŝ>ĂŶŬĂ ϯϬ Ϯϱ ϮϬ ϭϱ is also true for other periods. For example, between 1995 and 2004, Lokshin et al. (2010) found that one-fifth of the poverty reduction was due to increased work-related This 10 migration ϭϬ and remittances. When accounting for local spillovers, Shrestha M. (2017a) found that migration to the Gulf and Malaysia explained 40 percent of poverty reduction between 2001 and 2011. ϱ Ϭ EĂƚŝŽŶĂů YϭͲŽƚƚŽŵ YϮ Yϯ Yϰ YϱͲdŽƉ THE WORLD BANK | 33 &ŝŐϯϱ ŽŶƐƵŵƉƚŝŽŶƋƵŝŶƚŝůĞƐ ϲϬ ϱϬ ϰϬ ϯϬ SPECIAL FOCUS: INTERNATIONAL NEPAL DEVELOPMENT UPDATE MIGRATION AND WELL-BEING IN NEPAL ϮϬ ϭϬ &ŝŐϯϲ Ϭ ϭ Ϯ ϯ ϰ ϱ ϲ ϳ ϴ ϵ ϭϬ ;ƉŽŽƌĞƐƚͿ ;ƌŝĐŚĞƐƚͿ ŽŶƐƵŵƉƚŝŽŶĚĞĐŝůĞ Fueled by increasing incomes from abroad, Nepali Figure 37. Remittances are primarily used for daily households experienced over a 65 percent rise in consumption and repaying loans. consumption over the last decade. The average per- ;ƐŚĂƌĞŽĨƌĞŵŝƚƚĂŶĐĞƐĞŶĚŝŶŐŵŝŐƌĂŶƚƐ͕ƉĞƌĐĞŶƚͿ person consumption expenditure increased by 66 percent &ŝƌƐƚƵƐĞ ^ĞĐŽŶĚƵƐĞ between 2011 and 2023. This is more pronounced for the ĂŝůLJĐŽŶƐƵŵƉƚŝŽŶ households at the bottom of the expenditure distribution ĚƵĐĂƚŝŽŶ (Figure 36). While it increased by 71 percent for the bottom 40 ,ŽƵƐĞͬůĂŶĚͬŽƚŚĞƌĂƐƐĞƚƐ ƵƐŝŶĞƐƐͬŝŶǀĞƐƚŵĞŶƚ percent, consumption expenditure among those in the top ^ĂǀŝŶŐƐ 6 deciles increased by 68 percent. Increased consumption is ZĞƉĂLJůŽĂŶ consistent with the findings on the use of remittances. KƚŚĞƌ &ŝŐϯϳ Ϭ ϭϬ ϮϬ ϯϬ ϰϬ ϱϬ ϲϬ ϳϬ ϴϬ Figure 36. Household expenditures have improved across the distribution. Source. World Bank staff estimates using the NLSS 2022/23 data. ;ƉĞƌĐĞŶƚĐŚĂŶŐĞŝŶŚŽƵƐĞŚŽůĚĐŽŶƐƵŵƉƚŝŽŶďĞƚǁĞĞŶϮϬϭϭĂŶĚϮϬϮϯͿ ϴϬ Apart from household consumption, remittances from a ϳϬ member abroad are strongly linked with human capital ϲϬ ϱϬ investments. The NLSS 2022/23 data shows a strong ϰϬ association between remittances and decreasing probability ϯϬ ϮϬ of being poor, higher non-food consumption, and increased &ŝŐϯϲ ϭϬ investment in education and health (Table 4). Remittances Ϭ ϭ ;ƉŽŽƌĞƐƚͿ Ϯ ϯ ϰ ϱ ϲ ϳ ϴ ϵ ϭϬ ;ƌŝĐŚĞƐƚͿ from family members living abroad positively correlate with ŽŶƐƵŵƉƚŝŽŶĚĞĐŝůĞ non-food expenses, particularly education and healthcare. Controlling for other characteristics, a one percent increase Source. World Bank staff estimates using the NLSS 2022/23 data. in per capita remittances is associated with a 0.04 and Note: Figure 36 presents the share of migrants by usage of their ;ƐŚĂƌĞŽĨƌĞŵŝƚƚĂŶĐĞƐĞŶĚŝŶŐŵŝŐƌĂŶƚƐ͕ƉĞƌĐĞŶƚͿ 0.02 percent increase in per capita education and health &ŝƌƐƚƵƐĞ remittances by their families at home. ^ĞĐŽŶĚƵƐĞ Refer to the NLSS IV methodological expenditures. These findings are particularly significant note (Nepal Statistics Office; World Bank, Forthcoming) for the 2011 and ĂŝůLJĐŽŶƐƵŵƉƚŝŽŶ 2023 comparison and creation of welfare aggregate. ĚƵĐĂƚŝŽŶ given the track record of migration and remittances leading ,ŽƵƐĞͬůĂŶĚͬŽƚŚĞƌĂƐƐĞƚƐ to positive educational outcomes in Nepal, particularly for ƵƐŝŶĞƐƐͬŝŶǀĞƐƚŵĞŶƚ Household ^ĂǀŝŶŐƐ use of remittances from family members girls (Shrestha, 2017a). abroad primarily ZĞƉĂLJůŽĂŶ revolves around daily consumption and KƚŚĞƌ Controlling for other characteristics, having a family &ŝŐϯϳ repaying loans (Figure Ϭ ϭϬ 37). ϮϬ Most ϰϬ migrants ϯϬ ϱϬ ϲϬ (70 ϴϬ ϳϬ percent) send member abroad improves the subjective adequacy remittances mainly to support their family’s daily consumption. of household living standards and resilience to food Given high migration costs and Nepali workers relying on high- insecurity (Figure 38). Households with a member abroad interest loans to finance their moves abroad (Kharel, Bhattarai, are significantly less likely to report less than adequate family & Tumsa, 2023a), it is unsurprising that almost one-fifth of living standards compared to non-migrant households. migrants send remittances to repay their loans. Similarly, migrant households tend to have less experience Table 4. Remittances from a member abroad are strongly linked with household consumption and human capital investments.    Log (Per capita consumption)  Poverty status    Total  Food   Nonfood  Education  Health  Log (remittances)  -0.000807*  -5.00e-07  -0.000839  0.00155**  0.0403***  0.0198***    (0.000412)  (0.000565)  (0.000537)  (0.000772)  (0.00839)  (0.00343)                Observations  9,600  9,600  9,600  9,600  9,600  9,600  R-squared  0.162  0.344  0.248  0.329  0.265  0.042  Number of clusters  800  800  800  800  800  800  Source. World Bank Staff estimates using the NLSS 2022/23 data.  Note: Controls used in the regressions are household head’s caste/ethnicity, highest adult education in the household, household size, log of road distance of municipality from Kathmandu, Urban/Rural status of municipality, and province fixed effects. Standard errors, clustered at the primary sampling unit (PSU), are reported in parentheses. *** p<0.01, ** p<0.05, * p<0.1. 34 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 Figure 38. Adequacy of family’s standard of living and food security. Facili�es less than adequate for family's need Residen�al facility Clothing Health care Children's schooling Total income over the past one month Food security Were you worried you would not have enough food to eat? Were you unable to eat healthy and nutri�ous food? Did you eat only a few kinds of food? Did you have to skip a meal? Did you eat less than you thought you should? Did your household run out of food? Were you hungry but did not eat? Did you go without ea�ng for a whole day? -.1 -.05 0 .05 Source. World Bank staff estimates using the NLSS 2022/23 data. Note: Coefficient on a household with and without an international migrant indicator and its 95% CI reported in the figure. Each coefficient is a separate regression model. Controls used in the regressions are household head’s caste/ethnicity, highest adult education in the household, household size, log of road distance of municipality from Kathmandu, Urban/Rural status of municipality, and province fixed effects. Standard errors are clustered at the primary sampling units (PSU). of food insecurity in the past 12 months. Compared to non- Organization (ILO), Nepali migrants faced the second highest migrant households, they are less likely to worry about not costs of migrating to GCC countries after migrants from having enough food (2.3 percent), eating less variety of food Pakistan. The average per-migrant cost of migrating to Qatar (2.9 percent), skipping meals (0.6 percent), or running out of from Nepal in 2016 was 1.14 times Nepal’s annual GDP per food (1.2 percent). These results align with the established capita. The migration costs to Saudi Arabia and Malaysia evidence that migrant household members abroad act as were as high as 80 percent of the GDP per capita. Migration insurance for the household in the context of high exposure to costs in South Asia are generally high and among the highest shocks and limited access to formal assistance (Yang & Choi, globally, often equaling several months of migrants’ salary 2007). Relatedly, the correlation between the labor income (Ahmed & Bossavie, 2022). This is particularly taxing for Nepali loss during COVID-19 and economic distress was close to zero migrant workers. Despite the “free-visa, free-ticket” policy for migrant households in Nepal (World Bank, 2021). implemented in 2015 for the GCC countries and Malaysia, which allows recruitment agencies to charge a maximum of International migration from Nepal, however, is costly, only 10,000 NPR as service fees, most recruitment agencies putting significant strain on those who migrate while continue to charge more than ten times that amount discouraging others from migrating altogether. Based (Kharel, Bhattarai, & Tumsa, 2023a). Additionally, 85 percent on the 2016 Migration Cost survey conducted by the World of migrant workers rely on informal loans to finance their Bank’s Global Knowledge Partnership on Migration and moves, facing an average interest rate of 27 percent (Kharel, Development (KNOMAD) and the International Labour Bhattarai, & Tumsa, 2023a). THE WORLD BANK | 35 SPECIAL FOCUS: INTERNATIONAL NEPAL DEVELOPMENT UPDATE MIGRATION AND WELL-BEING IN NEPAL The economic rewards of sending family members abroad High levels of contract fraud during the recruitment come with several costs. Much of social and domestic life in phase continue to be a challenge, while migrants abroad the household is put on hold when young male member/s face considerable health, safety, and legal challenges, go abroad temporarily and possibly for multiple stints (World including a high incidence of deaths. Prospective migrants Bank, 2018). While international remittances have improved often encounter contract deception about the nature of the job investment in child health and education in Nepal, many abroad and fake contracts altogether. Most of the complaints children face the prospect of not having both parents present filed at the Migration Resource Centers (MRCs) are related to during their formative years. The absence of a parent may “cheating” during the pre-departure phase (MoLESS, 2020). have important emotional and psychological implications Furthermore, the death toll has been rising over the years for the left-behind children (Fellmeth, et al., 2018) and may with an increasing number of international migrants. Yearly even impact their academic performance (Antman, 2013). deaths of migrants have mounted to over 1,000 in recent years, Additionally, a growing body of literature shows mixed with an annual rate of more than 150 in each of the Gulf and evidence regarding the impacts of migration on left-behind Malaysia destinations (MOLESS, 2022; Kathmandu Post, 2024). members’ non-monetary outcomes, especially on female Migrants in these destinations endure harsh living and working members. It can reduce women’s labor participation and conditions without access to healthcare, social protection, increase their agricultural and unpaid family work (Bossavie, and other basic services while facing high occupational 2023; Lokshin & Glinskaya, 2009; Phadera, 2019; Binzel & hazards and long working hours. These poor conditions and Assaad, 2011). Moreover, it may overburden the left-behind lack of social support, along with the persistent pressure to members with extra pressure to take up additional household send remittance home, contribute to migrants’ poor mental responsibilities (Démurger, 2015). and physical health (MOLESS, 2022) and can remain persistent even during old age (Ghimire & Bhandari, 2020). C.2 MIGRATION TRENDS International migration from Nepal continues to be dominated entering the labor market. Out of the 2.2 million individuals by young men and remains concentrated on the GCC countries living abroad in 2021, 80 percent were male, 44.5 percent and Malaysia for largely unskilled work. Limited but important were between the ages 15 and 24, and another 31.3 percent new destinations have emerged in recent years, and the average were between 25 and 34 when they left the country (National skills and wages of migrants have risen. However, migration and Statistics Office, 2023). The age profile of international ;ĚŝƐƚƌŝďƵƚŝŽŶŽĨŵŝŐƌĂŶƚƐ͕ƉĞƌĐĞŶƚͿ destination choices are still limited by socioeconomic factors, has remained unchanged migrants ŝƐƚƌŝďƵƚŝŽŶŽĨŵŝŐƌĂŶƚƐϮϬϭϭ since 2011 (Figure 39). ŝƐƚƌŝďƵƚŝŽŶŽĨŵŝŐƌĂŶƚƐϮϬϮϭ and reassimilation of returnees into the domestic labor market Nepalis ϰϱ seek foreign employment early in their careers, with ϰϬ remains a challenge. 17.0 ϯϱ percent of 15 to 24-year-olds and 14.9 percent of 25 to ϯϬ 34-year-olds having already left the country for work in 2021 Ϯϱ Going abroad for employment is predominantly a male (Figure ϮϬ 39). As a result, many Nepali workers spend most of ϭϱ youth phenomenon. Male youth, who experience higher their ϭϬ economically productive years employed abroad, often domestic unemployment than older Nepalis, account for engaging ϱ in multiple migration spells, and moving across Ϭ &ŝŐϯϵ most international migrants; for many, it is their first job when different destinations (World 2020). ϱϱƚŽϲϰ ϲϱƉůƵƐ Bank,ϰϱƚŽϱϰ ϬƚŽϭϰ ϭϱƚŽϮϰ ϮϱƚŽϯϰ ϯϱƚŽϰϰ ŐĞĐŽŚŽƌƚ Figure 39. Economic migration is a young and male phenomenon. ;ĚŝƐƚƌŝďƵƚŝŽŶŽĨŵŝŐƌĂŶƚƐ͕ƉĞƌĐĞŶƚͿ ;ƐŚĂƌĞŽĨƉŽƉƵůĂƚŝŽŶĂďƌŽĂĚ͕ϮϬϮϭ͕ƉĞƌĐĞŶƚͿ ŝƐƚƌŝďƵƚŝŽŶŽĨŵŝŐƌĂŶƚƐϮϬϭϭ ŝƐƚƌŝďƵƚŝŽŶŽĨŵŝŐƌĂŶƚƐϮϬϮϭ ůů DĂůĞ &ĞŵĂůĞ ϰϱ ϯϱ ϰϬ ϯϱ ϯϬ ϯϬ Ϯϱ Ϯϱ ϮϬ ϮϬ ϭϱ ϭϱ ϭϬ ϭϬ ϱ &ŝŐϯϵ ϱ Ϭ &ŝŐϯϵ Ϭ ϬƚŽϭϰ ϭϱƚŽϮϰ ϮϱƚŽϯϰ ϯϱƚŽϰϰ ϰϱƚŽϱϰ ϱϱƚŽϲϰ ϲϱƉůƵƐ ŐĞĐŽŚŽƌƚ ϬƚŽϭϰ ϭϱƚŽϮϰ ϮϱƚŽϯϰ ϯϱƚŽϰϰ ϰϱƚŽϱϰ ϱϱƚŽϲϰ ϲϱƉůƵƐ ŝƌƚŚĐŽŚŽƌƚ Source. World Bank staff estimates using the Nepal Housing and Population Censuses 2011 and 2021 ;ƐŚĂƌĞŽĨƉŽƉƵůĂƚŝŽŶĂďƌŽĂĚ͕ϮϬϮϭ͕ƉĞƌĐĞŶƚͿ ůů DĂůĞ &ĞŵĂůĞ ϯϱ ϯϬ 36 Ϯϱ ϮϬ ϭϱ ϭϬ NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 The education level of international migrants is generally decrease in the number of people migrating for unskilled low, reflecting Nepal’s overall low education level. occupations and an increase in migrant wages (Figure 41).11 In 2021, over 60 percent of the absentee population had Between FY2017 and FY2022, the average monthly migrant obtained only secondary education (grades 9 to 10) or less salary increased by over 100 percent from NPR 28,701 to before leaving the country, while a quarter had achieved 58,856. Considering Nepali workers spent multiple stints Intermediate and SLC/SEE levels and beyond (Figure 40). abroad, migrants are likely to navigate to better opportunities The average years of education of international migrants is with different employers. While there is a positive income 8.6 years, which mirrors Nepal’s low overall education level. trajectory during employment abroad (Sapkota, Shrestha, Despite some improvements over the last three decades & Shrestha, 2021), the observed salary increase may not ;ĚŝƐƚƌŝďƵƚŝŽŶďLJĞĚƵĐĂƚŝŽŶĂƚƚŚĞƚŝŵĞŽĨĚĞƉĂƌƚƵƌĞ͕ƉĞƌĐĞŶƚͿ (Ruppert Bulmer, Shrestha, & Marshalian, 2020), the average entirely be due to ϮϬϭϭ higher returnsϮϬϮϭ from re-migration. New EŽͲůĞǀĞů years of education among the working-age non-migrant migrants may have higher Ϯϱй skill sets and migrate to newer, population (15 plus) is only 6.3 years, which is lower than the more remunerative destinations. WŽƐƚŐƌĂĚƵĂƚĞ ϮϬй ϭϱй Indeed, countries in Central WƌŝŵĂƌLJ average level of international migrants. Conversely, domestic and Eastern Europe, the ϭϬй UK, Malta, and Turkey have become ϱй migrants have the highest average education level at 10.2 more prominent 'ƌĂĚƵĂƚĞ new emerging Ϭй destinations in recent years, >ŽǁĞƌͲƐĞĐŽŶĚĂƌLJ years (authors’ calculation using NLSS IV). especially among women migrants (MOLESS, 2022). &ŝŐϰϬ /ŶƚĞƌŵĞĚŝĂƚĞ ^ĞĐŽŶĚĂƌLJ Figure 40. Emigration is concentrated among those with Figure 41. However, there is a gradual shift towards more ^>ͬ^ intermediate/high school education or less. skilled occupations, and average earnings overseas are also increasing. ;ĚŝƐƚƌŝďƵƚŝŽŶďLJĞĚƵĐĂƚŝŽŶĂƚƚŚĞƚŝŵĞŽĨĚĞƉĂƌƚƵƌĞ͕ƉĞƌĐĞŶƚͿ ϮϬϭϭ ϮϬϮϭ ZĞŶĞǁĂůƉĞƌŵŝƚƐ͕ƉĞƌĐĞŶƚ EŽͲůĞǀĞů Ϯϱй hŶƐŬŝůůĞĚŽĐĐƵƉĂƚŝŽŶ͕ƉĞƌĐĞŶƚ ϮϬй DŽŶƚŚůLJƐĂůĂƌLJŝŶϮϬϭϳ͕ƚŚŽƵƐĂŶĚEWZ;Z,^Ϳ WŽƐƚŐƌĂĚƵĂƚĞ WƌŝŵĂƌLJ ϭϱй ϳϬ ϲϱ ϭϬй ϲϬ ϱϱ ϱй ϱϬ 'ƌĂĚƵĂƚĞ Ϭй >ŽǁĞƌͲƐĞĐŽŶĚĂƌLJ ϰϬ ϰϱ ϯϬ ϯϱ ;ĐŚĂŶŐĞŝŶƚŚĞƐŚĂƌĞŽĨŵŝŐƌĂŶƚƐďLJĚĞƐƚŝŶĂƚŝŽŶƐďĞƚǁĞĞŶϮϬϭϭĂŶĚϮϬϮϭ͕ƉĞƌĐĞŶƚͿ ϮϬ &ŝŐϰϬ /ŶƚĞƌŵĞĚŝĂƚĞ ^ĞĐŽŶĚĂƌLJ Ϯϱ ϭϬ /ŶĚŝĂ 'ƵůĨΘDĂůĂLJƐŝĂ ttW ^>ͬ^ Ϭ <ŽƐŚŝ ϭϱ &zϭϳ &zϭϴ ϮϬй &zϮϬ &zϭϵ &zϮϭ &zϮϮ &zϮϯ &ŝŐϰϭ ϭϱй Source. World Bank staff estimates using the Nepal Housing and dŽƚĂů ϭϬй DĂĚŚĞƐŚ Population Censuses 2011 and 2021 ϱй Source. Foreign Employment Information Ϭй Management System (FEIMS) data Ͳϱй ZĞŶĞǁĂůƉĞƌŵŝƚƐ͕ƉĞƌĐĞŶƚ Nepalis primarily migrate for elementary occupations to hŶƐŬŝůůĞĚŽĐĐƵƉĂƚŝŽŶ͕ƉĞƌĐĞŶƚ Migration to more lucrative but more expensive ^ƵĚƵƌƉĂƐĐŚŝŵ ͲϭϬй Ͳϭϱй ĂŐŵĂƚŝ GCC countries and Malaysia, but new destinations have DŽŶƚŚůLJƐĂůĂƌLJŝŶϮϬϭϳ͕ƚŚŽƵƐĂŶĚEWZ;Z,^Ϳ destinations is increasing in wealthier provinces, while ϳϬ ϲϱ emerged ϲϬ in recent years, and migrants’ average skills low-cost and low-return destinations remain a mainstay ϱϱ andϱϬ wages have risen. Data from the Foreign Employment <ĂƌŶĂůŝ provinces (Figure among the poorer 42). Between 2011 'ĂŶĚĂŬŝ ϰϱ Information ϰϬ Management System (FEIMS) show a gradual and 2021, the share of migrants to India (low cost-low return ϯϬ &ŝŐϰϮ >ƵŵďŝŶŝ ϯϱ ϮϬ Figure ϭϬ 42. Access to higher remunerative migration destinations Ϯϱ improved over the last decade but remained unequal across provinces. Ϭ ϭϱ &zϭϳ &zϭϴ &zϭϵ &zϮϬ &zϮϭ &zϮϮ &zϮϯ &ŝŐϰϭ ;ĐŚĂŶŐĞŝŶƚŚĞƐŚĂƌĞŽĨŵŝŐƌĂŶƚƐďLJĚĞƐƚŝŶĂƚŝŽŶƐďĞƚǁĞĞŶϮϬϭϭĂŶĚϮϬϮϭ͕ƉĞƌĐĞŶƚͿ ;ƐŚĂƌĞŽĨŵŝŐƌĂŶƚƐŝŶϮϬϮϭ͕ƉĞƌĐĞŶƚͿ /ŶĚŝĂ 'ƵůĨΘDĂůĂLJƐŝĂ ttW /ŶĚŝĂ 'ƵůĨΘDĂůĂLJƐŝĂ ttW <ŽƐŚŝ ϭϬϬ ϯ ϰ ϯ ϭϴ ϭϮ ϳ ϭϵ ϮϬй ϯϮ Ϯϱ ϭϱй ϴϬ ϱϬ dŽƚĂů ϭϬй DĂĚŚĞƐŚ ϰϯ ϱй ϲϬ ϴϭ ϰϳ Ϭй ϲϵ ϰϵ ϵϭ Ͳϱй ϰϬ ϳϭ ͲϭϬй ϰϮ ϮϬ ϰϱ ϯϰ ^ƵĚƵƌƉĂƐĐŚŝŵ Ͳϭϱй ĂŐŵĂƚŝ ϭϰ ϭϲ ϭϵ Ϭ ϴ <ĂƌŶĂůŝ 'ĂŶĚĂŬŝ &ŝŐϰϮ &ŝŐϰϮ >ƵŵďŝŶŝ Source. World Bank staff estimates using the Nepal Housing and Population Censuses 2011 and 2021 All migrants seeking foreign employment, except in India, require an employment permit from the Department of Foreign Employment (DOFE), and the information is collected 11 ;ƐŚĂƌĞŽĨŵŝŐƌĂŶƚƐŝŶϮϬϮϭ͕ƉĞƌĐĞŶƚͿ in the FEIMS. /ŶĚŝĂ 'ƵůĨΘDĂůĂLJƐŝĂ ttW ϭϬϬ ϯ ϰ ϯ ϭϴ ϭϮ ϳ ϭϵ ϴϬ ϯϮ Ϯϱ THE WORLD BANK | 37 ϱϬ ϰϯ ϲϬ ϴϭ ϰϳ ϲϵ ϰϵ ϵϭ ϰϬ ϳϭ SPECIAL FOCUS: INTERNATIONAL NEPAL DEVELOPMENT UPDATE MIGRATION AND WELL-BEING IN NEPAL destination) and the GCC & Malaysia (medium cost-medium pattern of household wealth and destination choices (Figure return destinations) decreased by 3.8 and 5.5 percentage 43). While the propensity to sending a member to India points, respectively, while the share to most lucrative but with decreases with the wealth level, having a migrant in the GCC high migration cost Wealthy Western, Asia, and Pacific (WWAP) countries and Malaysia is highest among middle and upper- destinations increased by 9.3 percentage points. This trend is middle-class households (deciles 5 to 8). However, only driven by migrants from the most well-off provinces of Bagmati households in the wealthiest decile have a meaningful and and Gandaki, where migration to WWAP countries rose by statistically significant probability of sending a migrant to a over 19 percentage points. In Koshi and Madhesh provinces WWAP destination, most likely due to sufficient liquidity to (medium wealthy), GCC and Malaysia are the most popular cover the higher migration costs. destinations, while India remains the dominant destination in Once returned from abroad, migrants face significant the poorest provinces of Karnali and Sudurpashchim. challenges in reassimilating into the domestic economy, Similarly, there is a strong link between household and the data on returnees is still limited. GCC countries and wealth and the destination type, suggesting liquidity Malaysia do not offer a path to permanent residence; thus, constraints restrict migration choices. There is a clear most of the migration from Nepal is temporary. Nepal has yet Figure 43. There is a strong wealth and migration association by destination. India Gulf & Malaysia WWAP Wealth Decile 1 Poorest 2 3 4 5 6 7 8 9 10 Richest 0 .1 .2 .3 0 .1 .2 .3 0 .1 .2 .3 Source. World Bank staff estimates using the NLSS 2022/23 data. Note: Predictive margins and their 95% confidence levels after fitting logistic models are reported in the figure. Other controls used in the models are the household head’s caste/ethnicity, highest adult education in the household, household size, number of adult male members, number of domestic migrants, log of road distance of municipality from Kathmandu, Urban/Rural status of municipality, municipality destination-specific international migration rates, and province fixed effects. Standard errors are clustered at the primary sampling unit (PSU) level. 38 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 to create a systematic record-keeping system for returnees. reservation wages. Given the undersupply of jobs at the Once back in Nepal, returnees face limited opportunities to expected higher wages, returning migrants may be further reassimilate into the domestic economy. Based on the 2017/18 discouraged from entering the job market. Nepal Labor Force Survey (NLFS), one of the few surveys with returnees’ information, the majority of the returnees were Remigration is high and indicates structural weaknesses in the domestic economy, reflecting a poor environment either unemployed (14.3 percent) or remained out of the labor to utilize the skills and capital from abroad. In a 2020 World force (41.5 percent) and even among those with jobs, over 75 Bank survey of 2000 returnees, 40 percent reported migrating percent were employed in the informal sector (MoLESS, 2020). more than once, and 32 percent reported migrating to more Younger returnees faced even greater challenges, with lower than one country, with individuals spending 1.5 years on employment and wages in the initial years and significantly average between adjacent migration spells (Sharma, Sherpa, & lower labor force participation rates than non-migrant youths (Sapkota, Shrestha, & Shrestha, 2021). Goyal, 2020). The FEIMS data shows high renewal rates of labor permits, which is another indication of a lack of opportunities The mismatch between the skill sets the returnees bring at home. Among the employed returnees in the NLFS 2017/18, from abroad and the demand of the domestic labor almost half (43.7 percent) were either employers, own account market further adds to the challenge. Only a fraction of workers, or contributing workers, mostly informally (MoLESS, returnees utilizes the skills learned abroad. According to the 2020). Similarly, in a survey of 1,400 returnees conducted in NLFS 2017/18, only 15.1 percent of returnees were employed Koshi province, the highest proportion were employed in basic in the same occupational category as abroad (MoLESS, 2020). self-employment agriculture, mainly farming and plantation The migration experience is also likely to have increased (34.9 percent) (IOM, 2021). C.3 MAKING THE MOST OF MIGRATION Nepal’s policy focus should be on reducing costs, increasing unequal access, improve safety, and increase returns. benefits, and leveraging long-term growth through an effective Despite the significant improvements over the last decade, and inclusive migration management system. international migration opportunities remain unequal, and many continue to face contract fraud. To find jobs abroad, Systematic migration management through an inclusive many rely on sub-agents, relatives, and friends (International institutionalized system is critical for sustainability and Trade Union Confederation, 2023), which may provide maximizing the rewards from migration. Nepal’s current inaccurate information leading to incorrect expectations and predominantly low-skilled economic migration matches the outright fraud. For example, potential migrants from Nepal strong demand at the destination countries. This provides overestimate the increase in earnings and mortality risk a basis for designing policies that focus on increasing associated with working in Malaysia and the GCC countries benefits and reducing migration costs (World Bank, 2023) for (Shrestha M. , 2020). Thus, efforts to improve the reach of contemporaneous migrations with an eye for longer-run skill verifiable information on available destinations can help and destination diversification. lower costs and increase returns for potential migrants. Furthermore, most of the migrant workers rely on very Incorporating migration explicitly within Nepal’s high-interest informal loans to finance their moves (Kharel, development and poverty reduction strategy will provide Bhattarai, & Tumsa, 2023a). Improving access to information a platform to work towards such a system and will have and availability of low-cost capital can enable poorer larger benefits that are shared across the distribution (World populations to access higher-return jobs and destinations. Bank, 2023). This will entail reducing costs and increasing benefits in all three stages of migration, namely before, Pre-departure training should be improved with short during, and post-migration, which are discussed in this language, financial planning, and other practical skills section. without increasing the cost burden to improve migrants’ preparedness. The current 12-hour pre-departure Improving communication on available opportunities orientation course has limited efficacy in improving the and domestic exit processes, including costs and transition experience of migrants aboard (Aryal & Kharel, formal financing opportunities, can help address 2023). Many migrants report not having basic language skills THE WORLD BANK | 39 SPECIAL FOCUS: INTERNATIONAL NEPAL DEVELOPMENT UPDATE MIGRATION AND WELL-BEING IN NEPAL when starting their work as a key impediment (Migration for involve ensuring labor mobility, providing skill training, development, 2023). Improved Pre-Departure Orientation and recognizing skills in these agreements. Following the Seminars (PDOS) with financial decision-making training example of India and the Philippines, Nepal should prioritize increase the likelihood of migrant workers having a bank establishing effective consular support in its missions abroad account, decrease travel-related difficulties and problems to monitor the welfare of migrants. relating to settlement, such as obtaining a social security Programs focused on job matching, recognition of number and opening a bank account (Barsbai et al. 2020). skills learned abroad (sector-specific and soft skills), Expanding formal bilateral arrangements and mutual reskilling per domestic labor demand, and promoting skills recognition with destination countries is key to entrepreneurship among returnees through long-term reducing the cost of migration and ensuring protection support are some pathways Nepal can improve returnee and welfare of migrants. Out of the top thirteen countries reintegration. The current programs for retraining/reskilling where over 10,000 permits have been issued from 2020/21 to and promoting returnee entrepreneurship with soft loans 2022/23, only 7 have formal labor relations. Saudi Arabia and remain out of reach for most, with very few returnees having Kuwait, the second and fifth largest destinations for Nepali information or utilizing them ( ​IOM, 2021)​. The efficacy of workers, do not have a Bilateral Labor Agreement (BLA) or these programs is not obvious since no rigorous evaluations a Memorandum of Understanding (MoU) with Nepal. The have been done. Unlike job-specific skills, soft skills such lack of formal arrangements may result in informal labor as work ethic, time management, and communication/ movements, leading to high costs for migrants, making customer care are highly transferable across different sectors. protection and welfare expensive or inaccessible, and Returnees are most likely to report improvement in these preventing the labor market from reaching its full potential. skills while working abroad and can be easily applied to jobs in Nepal, particularly in the growing service sector. Attention Strengthening provisions for worker protection and to these skills remains limited, and a better understanding of improvement in labor market outcomes in formal bilateral which, when combined with industry-specific reskilling, can arrangements and building effective consular support reduce friction, and improve placements. abroad will likely improve safety and economic returns. The existing bilateral labor agreements do not adequately Ultimately addressing the structural issues in the address worker protection and welfare to enhance labor domestic labor market will be important for Nepal in market outcomes at the destination. While these agreements creating a vibrant economy where local opportunities have helped open recruitment channels, they fail to ensure can retain people and/or harness new skills.  A conducive worker protection and welfare. Additionally, they do not domestic economic environment will not only foster the address factors that can improve labor market outcomes use of the capital and skills returnees bring from abroad, for migrants abroad, such as job mobility, skills certification, but it will also improve opportunities for those left behind and recognition (The Five Corridors Project, 2021). In and broaden choices if faced with migration decisions in addition to detailing workers’ protection and ensuring the first place. 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Risks to Poverty, Vulnerability, and Inequality from COVID-19: Nepal Light Poverty Assessment. Washington: World Bank. Retrieved from https://hdl.handle.net/10986/36358 World Bank. (2023). World Development Report 2023: Migrants, Refugees, and Societies. Washington, DC: World Bank. Retrieved from https://openknowledge.worldbank.org/handle/10986/39696 World Bank. (Forthcoming). Decomposing poverty in Nepal: High remittances inflows and low private sector growth. Washington: World Bank. Yang, D., & Choi, H. (2007). Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines. The World Bank Economic Review , 21(3), 219-248. doi:doi:10.1093/wber/lhm003 42 NEPAL DEVELOPMENT UPDATE | OCTOBER 2024 THE WORLD BANK | 43 NEPAL DEVELOPMENT UPDATE 44 NEPAL DEVELOPMENT UPDATE The World Bank Nepal Country Office, P.O. Box 798 Yak and Yeti Hotel Complex Durbar Marg, Kathmandu, Nepal Tel.: 4236000 Email: infonepal@worldbank.org www.worldbank.org/np www.facebook.com/WorldBankNepal 46