Nepal’s potential in digital sector faces regulatory, skill and cost issues

The World Bank has published a report titled ‘Unlocking Nepal’s Growth Potential’ this month, identifying four sectors with growth potential — one of them the digital sector. 

Due to limited data availability, the WB’s assessment of the digital sector potential is focused on ICT services and manufacturing (goods), although the country also provides Business Process Outsourcing and IT-enabled Services (BPO-ITES) and other digital services. 

According to the report, the country’s ICT is private-sector led with investment reaching NRs 7.1 billion between 2017 and 2023 across 109 small and large industries, creating 6,746 jobs. 

Albeit small, the ICT sector has large contributions to the GDP. Its exports have made up an average of 10% of the total services exports over the past six years, amounting to 0.3% of the GDP. Its contribution to the annual growth rate between 2012 to 2024 has been 0.3% points.

Nepal also outperforms most South Asian peers in exporting digitally delivered services and employment in the ICT sector. Its exports-to-GDP ratio and ICT employment-to-total employment ratio were 1.6% each, coming second to India and Pakistan respectively.

Its performance is also better than most South Asian countries — 1.7% of the nominal GDP in 2022 — except for India.

Despite its South Asian standing and export potential, the country’s ICT goods exports remain relatively low. Lack of FDI in the sector makes it less competitive compared to other global players like China and Vietnam, whose ICT goods sector is characterised by substantial amounts of FDI.

Meanwhile, its import is four percent of the total merchandise imports in 2024, averaging 1.2% of GDP from 2014 to 2024.

The economically active population in the ICT sector has grown by 5.1% compounded annual growth between 2011 to 2021 which is greater than the average growth of the economically active population in the country’s total labour force (4.2%). However the sector still remains small in size when it comes to employing the workforce of the country with only 0.35% absorption.

Unavailability of skilled labour is a major issue, identifies the WB, highlighting that only 0.16% of the population have completed education in ICT and only 2% in STEM. Furthermore CTEVT enrollment is much below the available seat capacity even though there has been a steady growth in enrollment in IT Diploma programmes between 2019 to 2022. 

Nepal has made some progress in development of digital infrastructure but still faces challenges in increasing broadband coverage and reducing technology costs. Digital infrastructure includes both hard infrastructure [internet access, telecommunication networks, data centres] and soft infrastructure [software, regulatory frameworks].

Being landlocked, the country does not have direct access to global submarine cables and relies on India and China for international bandwidth which adds costs due to taxes, tariffs and foreign currency fluctuations. In 2023, Nepali companies spent NRs 4.3 billion while importing bandwidth.

Compared to its regional peers, Nepal’s bandwidth coverage is relatively better but the figures remain concerning. Nearly half the population lives 10 km away from the fiber optics infrastructure which is an essential infrastructure for high speed internet. The fiber-optics backbone coverage spans only 4,932 km limiting the capacity and speed of the country’s digital networks and coverage.

However the mobile network coverage has expanded significantly over the years. Since 2014, 3G coverage has reached 90% of population in 2023, 4G has reached 88% of the population since introduction in 2017 while 5G has reached 5% since it is yet to be commercially introduced. Despite the reach, the quality of the network remains poor compared to other regional peers.

Despite near-universal mobile broadband coverage, 3G and 4G penetration remains limited. The 3G market penetration was 25% whereas the 4G market penetration was 69.3%, creating a usage gap of 65% and 18.7% respectively.

The country has also surpassed its peers in development of data infrastructure like Internet Exchange Point (IXP), cloud computing and data centres. Nepal Internet Exchange Point (npIX), established in 2002, helps reduce data transit costs as it enables local data exchange. But, despite a surge in membership, the low traffic per capita remains low indicating limited use amongst members that include telecommunication companies, ISPs and government agencies.

With its progress in developing and pushing the use of applications like the NagarikApp and ConnectIPS, Nepal remains committed to developing its digital public infrastructure (DPI), says the report.

NagarikApp which has over 800,000 users, offers services from more than 30 government agencies. Recently, the National ID card was integrated into the application giving users easy access to NID details. Similarly, ConnectIPS, introduced in 2018, enables seamless payments and fund transfers for various governments and non-government services for 3.8 million users.

The report identifies COVID 19 pandemic to be a key event in pushing digital adoption amongst firms and households. Despite the surge, there still are sectors where digital adoption is yet to pick up.

Most formal firms have access to high-speed fixed broadband internet services according to the World Bank Enterprises Survey. Over 90% of the large, medium and small firms have fixed broadband internet usage, with the usage higher in the service sector than in the manufacturing sector. 

Despite growth in access, only half of the firms have online presence (website) in 2023, driven mostly by higher adoption amongst small firms. Retail sector has grown the most from 2013 to 2023 — a 47.2% growth in ten years.

The hotel sector has the highest digital payment adoption whereas the manufacturing sector lags behind significantly with only 10% of the firms using digital payments. Larger firms, who had the higher share in digital payments, faced the challenge of increased transaction costs. Meanwhile medium-sized firms received a greater portion of their sales revenue through digital mediums.

There is progress in household digital adoption but there is a notable usage gap. Internet usage rose from 3.3% in 2011 to 38% in 2021 but the population coverage is 48% creating a usage gap of 10%. Computer and mobile ownership has also increased over the years, with a compounded annual growth rate of 10.8% and 9.7% respectively.

Digital payment adoption in households increased but is significantly less than regional peers. The share of adults making or receiving digital payments in Nepal increased from 9.9% to 28.6% between 2014 and 2021. This is lower than the average share in lower-middle income countries (LMICs) and South Asian peers, where digital payment adoption rates were 38.3% and 33.7% on average in 2014 and 2021.

The report identifies higher costs, inadequate regulatory frameworks, slow progress in expansion, lack of digital skills and delay in adoption of digital technology.

ISPs are pressured with heavy taxation which is eventually passed down to the consumers, increasing the cost of fixed broadband internet. Digital devices, especially smartphones, now amount to 33% of monthly income in 2023, making it increasingly difficult for low-income individuals and households to access them.

Over 30% of firms in 2022 are affected by frequent internet outages, leading to an average downtime of 3.5 hours and a 2.1% annual sales loss. The impact varies by firm size and sector with larger firms facing shorter disruptions but higher revenue declines. Meanwhile smaller firms endure longer outages but greater financial repercussions.

Nepal’s digital sector regulations are outdated, says the report, pointing out Nepal Telecommunications Act 1997 which was made over 25 years ago. The report also highlights Nepal Telecommunications Authority’s (NTA) dependence on the Ministry of Communication and Information Technology (MoCIT), which adds complexity to the regulatory landscape.

In 2022, Nepal obtained a below average score of 60 points out of 100 in the ICT Regulatory Tracker Score [other LMICs average is 66.1] due to weaknesses in regulatory regime and competition framework.

Nepali workforces lack of basic digital skills and low digital literacy rates severely limit its ability to engage with modern technology.  91% of  Nepali adults (15 and above) are unable to complete basic digital tasks like copying and pasting text within documents.

Wiley’s Digital Skill Gap Index ranks Nepal 124th out of 134 economies, performing poorly in key areas such as information literacy, communication, and digital content creation. 

The country also faces problems with integration of DPI elements like digital signatures, IDs and faces security challenges resulting in increased paper-based services between 2018 and 2022 while regional peers have moved away from it.

Nepal’s tough terrains, remote locations, low-income levels and sparse population limit the commercial viability of internet services in rural areas. Limited number of potential customers per kilometer of network, which increases cost for service providers, reduces incentive for them to invest in rural areas. To combat this the government has created a Rural Telecommunications Development Fund (RTDF) but it faces repeated delays in its activities.