Only 0.37% Nepalis now live below extreme poverty line, thanks to remittance, notes World Bank report

Nepal has made significant strides in reducing poverty since 1995 while “virtually eradicating” extreme poverty, the World Bank says in its recent report.

According to the report, only 0.37% of Nepalis now live below the extreme poverty line, a sharp reduction from 55% in 1995 — much faster than any other country with similar economic characteristics (peers). Besides, the proportion of people below poverty line has decreased from 90% in 1995 to below 50% in 2023.

The report defines when people have less than $2.15 a day to get by as extreme poverty level, and less than $6.85 a day as poverty level. However, the dramatic progress is attributed to remittance inflows rather than a stark economic growth, notes the report.

The report highlights youths migrating abroad for jobs as a key factor behind poverty reduction and resilience to the country’s underperforming economy. Over 7% of Nepalis have migrated abroad, seeking jobs primarily in Gulf countries and Malaysia, as the country lacks employment opportunities.

The report lists multiple shocks as the reasons behind migration during the review period (1995-2023). 

Maoist insurgency (1996-2006); change of political system, constitution drafting process and related unrest (2007-2015); the devastating 2015 Gorkha earthquake followed by India’s blockade; frequent natural disasters like landslides and floods; and the COVID-19 pandemic — all exacerbated by House dissolution in 2020 and 2021 and frequent government changes.

The remittance inflow, which ratioed only 7% of the country’s GDP in the 1996-2006 period, increased to 25% by 2023. It helped sustain private consumption and kept economic activity afloat, even as multiple shocks hit the economy, reads the report.

However, people uplifted from extreme poverty and poverty lines remain vulnerable to economic and climate shocks and other uninsured risks, states the report.

Between the review period, Nepal’s economy grew at 4.2% annually with inflation adjusted. The country could only outperform only two of the other seven South Asian economies — Pakistan and Sri Lanka, said the report.

While this growth could be viewed as “respectable”, considering political conflicts and instability and devastating earthquakes, the country still lagged behind countries with similar economic profiles (structural peers) and countries that represent desired development goals (aspirational peers).

Structural peers include Bangladesh, Bolivia, and Kyrgyz Republic, and aspirational peers, which have achieved higher income levels, include Cambodia, Lao PDR, and Moldova. Both peers were selected based on economic characteristics that closely resemble those of Nepal, including geography, strong remittance inflows, and significant hydropower potential.

The report points out the challenges hindering Nepal’s economic growth, including stagnated exports and shrinking manufacturing, which is declining steadily. Neither have increasing remittances translated into significant job creation or higher productivity in key sectors.

Underdeveloped tourism and slow hydropower sectors and lagging in digitisation are other challenges, which altogether hinder higher domestic growth and the creation of sufficient jobs.

The country’s 16th Development Plan aims for an average yearly economic growth of 7.1% until 2029, a very ambitious goal and much higher than what was achieved in the past, states the report. If things continue as they are, the World Bank assess that Nepal’s economy will only grow by about 4% annually (with inflation adjusted) in the long run.

At such a growth, Nepal’s income level would reach only 65% of its structural peers’ and less than one-third of its aspirational peers’ by 2050. The report recommends that bridging the gap requires a decisive policy shift to achieve and sustain higher growth.

To help Nepal achieve its goals, the report calls for policies that identify high-promise sectors and unlock their potential while supporting private sector development. For instance, targeted support for sectors such as hydropower, tourism, and digital services can generate significant economic and employment opportunities.

Addressing regulatory hurdles, improving infrastructure, fostering a more competitive business environment, and improving migration policies to increase benefits and reduce costs for migrants can further contribute to economic development, highlights the report.

To fully realise opportunities and capitalise emerging ones, Nepal must build the capabilities needed to translate potential into inclusive growth. Strengthening workforce skills, enhancing institutional capacity, and improving firms’ competitiveness are critical to boosting productivity and resilience.