Sunday, October 19, 2014

Nepal’s industrialization and global value chain

Here is an abstract from a recent ADB economics working paper by Yurendra Basnett and Posh Raj Pandey:

The world’s trade landscape is being shaped by global value chains, which present new opportunities as well as challenges to developing countries. While large developing countries are leveraging the benefits of global value chains, smaller economies have been less successful. In this paper we examine the constraints faced by Nepal, a land-locked least developed country, in participating in global value chains. We find that weak and ineffective industrial policy has led to de-industrialization, which in turn has reduced productive capacity. The high cost of transport and energy, inadequate provision of public goods and low levels of investment reduce the country’s ability to participate in global value chains. As a land-locked country, Nepal is dependent on regional neighbors for access to global markets. Shallow regional integration, the prevalence of non-tariff barriers, and inefficient transit trade further disadvantage Nepal.

Tuesday, October 14, 2014

Manufacturing-led growth is still more powerful than services-led growth in low-income countries

Dani Rodrik is skeptical that “a services-led model can deliver rapid growth and good jobs in the way that manufacturing once did”. Excerpts from a recent article on why productivity gains in services sector activities are self-limiting and mostly lower than in manufacturing sector. It has to do with the nature of services activities, which are mostly low value added, low productivity and non-tradable type in low-income countries.

Two things make services different from manufacturing. First, while some segments of services are tradable and are becoming more important in global commerce, these typically are highly skill-intensive sectors that employ comparatively few ordinary workers.
Banking, finance, insurance, and other business services, along with information and communications technology (ICT), are all high-productivity activities that pay high wages. They could act as growth escalators in economies where the work force is adequately trained. But developing economies typically have predominantly low-skilled labor forces. In such economies, tradable services cannot absorb more than a fraction of the labor supply.
That is why, for all of its success, the ICT sector in India has not been a primary driver of economic growth. By contrast, traditional manufacturing could offer a large number of jobs to workers straight off the farm, at productivity levels three to four times that in agriculture.
In today’s developing countries, the bulk of excess labor is absorbed in non-tradable services operating at very low levels of productivity, in activities such as retail trade and housework. In principle, many of these activities could benefit from better technologies, improved organization, and greater formalization. But here the second difference between services and manufacturing comes into play.
Partial productivity gains in non-tradable activities are ultimately self-limiting, because individual service activities cannot expand without turning their terms of trade against themselves – pushing down their own prices (and profitability). In manufacturing, small developing countries could thrive on the basis of a few export successes and diversify sequentially through time – t-shirts now, followed by the assembly of televisions and microwave ovens, and on up the chain of skill and value.
By contrast, in services, where market size is limited by domestic demand, continued success requires complementary and simultaneous gains in productivity in the rest of the economy. Focusing on a few sectors yields no quick winning opportunities. Growth therefore must rely on the much slower accumulation of economy-wide capabilities in the form of human capital and institutions.

2014 Noble Prize in Economic Sciences for Jean Tirole

The 2014 Noble Prize in Economic Sciences is awarded to French economist Jean Tirole of Université Toulouse 1 Capitole “for his analysis of market power and regulation”.

Here is the Nobel committee’s brief on his work and here is the detailed explanation. His main theoretical contributions is related to the understanding and regulation of industries with a few powerful firms (oligopoly), which influence prices, volume and quality. His research has helped governments to design regulations "so that large and mighty firms will act in society's best interest" and that there is a need to ensure that different industries may require different regulations. Other important issues that has Triole’s contributions in microeconomics are market failures, oligopoly, asymmetric information, game theory, competition regulation and industrial organization, procurement theory and optimal contracts. More on the depth and breadth of his work is outlined here and here.

Excerpts from the Nobel committee's brief:

Price caps can provide dominant firms with strong motives to reduce costs – a good thing for society – but may also permit excessive profits – a bad thing for society. Cooperation on price setting within a market is usually harmful, but cooperation regarding patent pools can benefit everyone involved. The merger of a firm and its supplier may lead to more rapid innovation, but it may also distort competition.
To arrive at these results, a new theory was needed for oligopoly markets, because not even extensive privatization creates enough space for more than a small number of firms. There was also a need for a new theory of regulation in situations of assymetric information, because regulators often have poor knowledge of firms’ conditions.
Tirole’s research would come to build upon new scientific methods, particularly in game theory and contract theory. There were great hopes that these methods would contribute to practical policy. Game theory would aid the systematic study of how firms react to different conditions and to each other’s behavior. The next step would be to propose appropriate regulation based on the new theory of incentive contracts between parties with different information. However, even though many people could see the research questions, they were difficult to solve.
Jean Tirole’s research contributions are characterised by thorough studies, respect for the peculiarities of different markets, and the skilful use of new analytical methods in economics. He has penetrated deep into the most central issues of oligopolies and assymetric information, but he has also managed to bring together his own and other’s results into a coherent framework for teaching, practical application, and continued research. Tirole’s emphasis on normative theories of regulation and competition policy has given his contributions great practical significance.

Tuesday, October 7, 2014

Export growth in South Asia

Here are two interesting charts from a recent WB’s South Asia Economic Focus Fall 2014 showing export growth in South Asia.

Nepal’s merchandise exports grew by just 3.2% over 2000-2013, the lowest in the region. India’s exports grew by 17.5%. Nepal clearly could not benefit from the increase in competitiveness as a result of depreciation of the currency. It raises few (mundane) issues:
  1. Despite favorable external condition (fairly strong external demand and recently the increase in competitiveness due to currency depreciation), the country could not boost exports as a result of the binding supply-side constraints, most notably the inadequate supply of infrastructure (energy, roads, irrigation, etc), recurring strikes and political instability. Some structural issues such as low labor productivity, lack of skilled manpower and policy implementation paralysis are also at play here. These have affected services export as well (most notably tourism).
  2. Nepal imports a lot of raw materials and intermediate goods as inputs to produce final products for export. A depreciation of currency tends to escalate input cost and hence the cost of the final product. This, added to the increase in cost of production due to supply-side constraints, makes exports less competitive.
  3. Exports to India account for almost 60% of total exports. Nepal has pegged its currency to the India rupee since 1993. It might have also resulted in low export growth as the country could not take full advantage of the relative increase in competitiveness arising from depreciation against convertible currencies.

Another interesting part of the report is the analysis on Dutch disease, which is potentially seen in Afghanistan, Bhutan, Maldives, and Nepal— all due to the massive foreign exchange inflows that are relatively independent from international trade, resulting in appreciation of real effective exchange rate. An earlier paper on remittances and Dutch Disease is here (presentation slides here), which shows an appreciation of REER, growth in real wages and declining manufacturing sector.

The report forecasts South Asia’s regional growth to be 6.0% in 2015 and 6.4% in 2016, largely driven by higher growth rates in India. Indian economy is forecast to grow at 5.6% in 2015. Nepal's GDP is expected grow by 4.5-5% in 2015. ADB forecast FY2015 growth at 4.6% in August 2014 issue of Macroeconomic Update.

Thursday, October 2, 2014

The disproportionate impact of inflation on small firms

Here is an abstract from a recent WB working paper that argues that inflation disproportionately reduces investment by small firms, which obviously have lower cash flows, because it erodes the value of their accumulated savings (= investment eventually).

In countries with limited access to finance, firms accumulate retained earnings to finance indivisible investment projects. McKinnon (1973) illustrates that when cash is used as a primary store of value, inflation may discourage investment as it increases the cost of accumulating retained earnings. This paper formalizes this argument in a dynamic framework and provides a simple calibration of the model that suggests sizable effects of inflation on investment. The mechanism is particularly relevant for small firms, as firms with lower cash flows must accumulate retained earnings for longer periods of time to meet the price of indivisible investment goods. Consistent with the model, empirical evidence suggests that inflation disproportionately reduces investment in small firms.

Tuesday, September 23, 2014

State of manufacturing establishments in Nepal

This blog post is adapted from Macroeconomic Update, August 2014, Vol.2, No.2.

The Central Bureau of Statistics (CBS) released the findings of National Census of Manufacturing Establishments (NCME) 2011/12 in June 2014. The census is carried out every five years and it covers all manufacturing firms engaging 10 or more persons.

The manufacturing census shows an increase in the number of light manufacture activities, but a decline in the number of slightly heavier manufacturing activities, indicating the impact of load-shedding in scaling-up and sustaining higher valued-added industrial activities. Between 2006/07 and 2011/12, the number of operating manufacturing establishments increased by 18.3%, mostly contributed by the growth of food and beverages; tobacco products; apparel; leather; leather products and footwear; wood products; chemical and chemical products; rubber and plastic products; non-metallic mineral products; fabricated metal products; machinery and equipment; and furniture manufacturing. Meanwhile, textiles; printing and publishing; basic metal; and transport equipment saw a decline in the number of manufacturing establishments.

The increase in the number of light manufacturing establishments has also increased the number of employees by 14.8%, reaching 194,989 employees in 2011/12. However, the average number of employees per manufacturing establishment has declined to 48 in 2011/2 from 57 in 2001/02.

Compared to the last NCME, wages and salaries nearly doubled, reaching NRs16.4 billion. With value of inputs totaling NRs241.8 billion and value of outputs totaling NRs322.6 billion, the total value addition reached NRs80.0 billion— a 97% growth between 2006/07 and 2011/12.

The efficiency of manufacturing establishments in the use of inputs seems to be eroding as evidenced from the increase in inputs as a percentage of output, and a decline in output input ratio. Input as a percentage of output stood at 75 in 2011/12, one percentage point higher than in 2006/07. Similarly, output input ratio was 1.33 in 2011/12, lower than 1.36 in 2006/07. A better measure of the efficiency of the use of inputs is value-added output ratio, which discounts the effect of inflation. Value-added output ratio is consistently decreasing, reaching 0.25 in 2011/12 from 0.37 in 1991/92— indicating that the manufacturing firms are using inputs more inefficiently and are incurring increasing cost of inputs as well.

Labor productivity (value added per employee) increased to NRs414,000 in 2011/12 from NRs241,000 in 2006/07. However, labor productivity growth was 71.8%, lower than wages and salaries growth of 104.4% (or growth of wages and salaries per employee of 78.1%) over the same period. At an annualized average rate, while labor productivity grew by 11.4% over 2007-2012, wages and salaries increased by 12.2%.

The number of districts with manufacturing establishments has dropped to 64 in 2011/12 from 67 in 2006/07. About 88% of the manufacturing firms are located in 23 districts, with the top five being Rupendehi, Kathmandu, Morang, Sunsari, and Parsa.

About 40.7% of total manufacturing firms reported that they have not been able to fulfill market demand, primarily due to the underutilization of capital arising from load-shedding, lack of raw materials, labor shortages, lack of finance and lack of skilled manpower. Furthermore, about 84.7% of firms reported that the lack of electricity was having impact on their operations. 

Overall, manufacturing sector has been weakening over the past several years. Its share of GDP declined to an estimated 5.6% in FY2014 from 8.2% of GDP in FY2002. The average growth rate has been a mere 3.2% in the last five years.

Saturday, September 20, 2014

Mainstreaming environment for economic growth and poverty reduction in Nepal

This blog post is adapted from Macroeconomic Update, August 2014, Vol.2, No.2. Here are earlier blog posts on real sector, fiscal sector, monetary sector, external sector, and FY2015 growth and inflation outlook.

Mainstreaming environment for economic growth and poverty reduction in Nepal[1]

I. Introduction

Nepal is endowed with rich natural resources (abundant water resources, forest and fertile lands, and unique landscape), a strategic geographical setting[2], and physical, biological, and cultural diversities. One of the major challenges for the government is to not only achieve high and inclusive economic growth, but also to ensure that it is environmentally sustainable, crucial for accelerating poverty reduction and sustaining the gains of the last. Economic activities without due consideration for environmental sustainability may start tapering off in the medium-term, undermining prosperity in the long run. Hence, high and sustainable economic growth becomes vital for sustained poverty reduction and creation of productive employment.

Nepal’s gross domestic product (GDP) growth pattern has so far has been minimally damaging to the environment as the industrial sector’s contribution to growth has been relatively low at one-tenth of the overall growth. The services sector's contribution has been the largest, but a majority of the goods are manufactured outside of Nepal and are imported for consumption, which is financed by remittance income. Agricultural sector’s contribution to GDP growth is dependent on the monsoon rains and the timely availability of agricultural inputs, most notably chemical fertilizers.

As investments are ramped up to generate increased electricity, develop infrastructure, and expand manufacturing activities in the short to medium term to achieve higher growth rate and create jobs, a key challenge would be to ensure that these activities are environment-friendly so that the resulting growth is not only high and inclusive, but also sustainable. Else, haphazard construction of infrastructure— including roads, water supply, irrigation, and hydro power plants— without the necessary due diligence for environmental sustainability may result in high socioeconomic costs to the country in the long run. In addition to these economic activities, the country's traditional agricultural practices also need to balance the need to boost land productivity and the optimal use of inputs.

II. State of the Environment: An Overview

As an indication of the overall low level of industrialization, Nepal’s per capita carbon dioxide (CO2) emission has been generally low, registering an average growth of just 7% in the last decade. In fact, Nepal’s per capita CO2 emission (in metric tons) is just 2.7% of China’s and the lowest among the regional economies (Figure 41). This also reflects the fact that Nepal’s GDP growth is largely driven by rain-fed agriculture production and services underpinned by remittance-induced demand for imported goods. Together these two sectors contribute about 90% of the GDP growth[3]. Hence, at this initial stage of development and the still relatively low level of environmental risks, Nepal has an opportunity to pursue industrialization in an environmentally sustainable manner by adopting the latest green industrial technology. However, there is a growing and emerging threat from the rate of loss of forests, particularly for habitat, illegal timber trade, forest fire, overgrazing, and uncontrolled extraction of medicinal plants.

This trend also indicates that the existing pattern of environmental challenges has little to do with the pace of economic growth. It is more affected by factors such as poor engineering and safeguards in unplanned infrastructure development, deforestation, haphazard solid waste management, land degradation, unsustainable and indiscriminate use of pesticides and agrochemicals, and unplanned urbanization. Even though these do not directly and significantly impact economic growth in the short term, they have the potential to indirectly decelerate the pace of growth in the medium to long term. The World Bank estimates that environmental degradation costs between 5% and 10% of GDP in Nepal, India, Bangladesh and Pakistan.[4]

The diversified biological resources, besides maintaining ecosystem equilibrium, provide ecological goods to local people and have great economic value to the rural population. Unfortunately, there is a steady degradation of forests over the last five decades. While the total forest area comprised 43.8% of total land in FY1965, it declined to 37.3% in FY2013 (Figure 42), with significant deforestation happening along the mid-hills and Terai belts. Forest areas have been encroached to expand farmland, settlement, infrastructure development and at times for timber trade. Nepal lost 2.7 million hectares of forest between 1965 and 2013, with an average annual de-vegetation of 56,710 hectares. Altogether 0.96 million hectares of total forest and shrub land is estimated to be lost to farming, urban, and infrastructural development over 1965-2013. The major causes of forest degradation are clearing trees for meeting household fuel wood demand, unstructured semi-processing of agriculture products, illegal in-country or trans-boundary timber sales, overgrazing, uncontrolled extraction of medicinal and aromatic plants (MAPs) and non-timber forest products (NTFPs), and forest fire. Poaching and illegal hunting of wildlife and their declining habitat has adversely affected wildlife population and their biodiversity value.

The rate of loss of forests is alarming, which has affected natural habitat, biodiversity and ecosystem. This has happened despite there being twenty protected areas, comprising of 10 national parks covering 1.08 million hectares, 3 wildlife reserves of 0.1 million hectares, 1 hunting reserve of 0.13 million hectare, and 6 conservation areas of 1.54 million hectares. These collectively cover 19.4% of the total area. Furthermore, approximately 1.23 million hectares of forest is managed by 17,685 community forest user groups. In addition, there are 9 Ramsar sites covering a total area of 34,445 hectares of land.

Land degradation is also an issue in all geographical areas of Nepal, affecting land productivity. Land degradation is primarily caused by water induced erosion, landslide, surface exposure, top soil erosion, riverbank cutting, floods, silt deposition, water logging, deforestation, and wind erosion. About 45.4% (6.7 million hectares) of the country’s total land area is affected by water induced erosion and about 4.0% (0.6 million hectares) by wind erosion. The area affected by flood is estimated to be about 8,987 sq. km and by waterlogging about 7,297 sq. km. The vulnerability to inundation and water logging in Tarai plains bordering India has increased due to the embankment of along the East-West highway dykes and barrages both within and across the border. Overall, about 2.2% of total land area (0.6 million hectares) is uncultivable due to flooding or soil erosion, up from 1.2% of total land in 2001 (0.3 million hectares). The Tarai belt and Far-western development region bear thet burnt of flooding or soil erosion leading to uncultivable land (Figure 43). Of the total uncultivable land, soil erosion, chemical degradation, and physical degradation contributed 65.6%, 3.4% and 31%, respectively in 2011 (Figure 44).



Meanwhile, higher stocking rates, uncontrolled grazing and haphazard lopping of fodder trees have reduced average productivity of grazing area in subtropical and temperate zones. The subalpine grasslands, mainly used for seasonal pasturage, are losing their productivity due to high stocking rates and overgrazing, lack of good management practices, and the invasion of non-herbage shrub and other non-edible species that are gradually replacing palatable grass species.

Nepal is second richest country for water availability in the world, possessing about 2.3% of the world water resources. Nepal possesses 12 BCM of groundwater, of which 5.8 BCM can be extracted annually, both in shallow and deep aquifers, without any adverse effects. Altogether 38 rivers have been dammed till early 2014 with an installed capacity of 700 MW. The Government of Nepal and the private sector installed, until 2012, micro hydropower plants (22 MW installed capacity; potential 100 MW), solar photovoltaic home system (300,000 no. equivalent to 6.78 MW; potential 4.5 kWh/m2/day), biogas plants (280,000; potential 1.9 million), improved cooking stoves (663,000; 2.5 million), improved water mills (7,600; potential 30,000), and wind power plants (10 kW; potential 3,000 MW). There is potential of producing 1.1 million ton biofuel (Jatropha curcas) in the country. The rivers in lower Siwaliks and rivulets in Middle Mountain and High Mountain regions have been partially dammed for surface irrigation with total command area of 0.96 million ha in the wet season.

Despite these potentials, there is acute water shortage in the urban centers because of unplanned urbanization, encroachment of water sources, and degradation of land as well as forests. For instance, static water level (SWL) and pumping water level (PWL) have depleted in Kathmandu Valley as a result of overuse, lack of water conservation practices, and haphazard construction. While SWL and PWL were 48.1 meters and 67.6 meters in 1976, respectively, in Bansbari of Kathmandu, it went up to 80.6 meters and 136.1 meters, respectively, in 1999.[5] This most likely has increased further in the last one-and-a-half decade given the rapid urbanization and increase in settlement areas in Kathmandu Valley.

The unplanned urbanization along with large-scale rural to urban migration has strained resources in major urban centers, resulting in rise in pollution and waste. It is further compounded by the misuse of pesticides and agrochemical, thus endangering the public’s health. For instance, the continued migration to Kathmandu Valley, unplanned urbanization and the resulting noise level has led to average recorded noise level higher than the on recommended by World Health Organization (WHO). In Kathmandu Valley, major centers such as Kupandole, Putalisadak, Thamel, Kalanki, Balaju industrial area, Maitighar, and Suryabinayak have day time noise level above the one prescribed by the WHO (Figure 45).

With just 0.6% of total area, Kathmandu Valley accounted for 9.5% of total population in 2011 and had a population density of 2,800 person per In 2001, Kathmandu Valley accounted for 7.1% of total population and had a population density of 1,830 persons per The lack of adequate measures to address air and water pollution affects economic growth as it negatively impacts public health, thus reducing productivity and escalating health costs. As a result of the air pollution in Kathmandu Valley, a disproportionate number of patients suffering from respiratory and cardiovascular ailments are admitted to hospitals each day.[6]

The Environmental Performance Index (EPI) 2014 ranks 139 out of 178 countries. Specifically, even when compared to countries with similar per capita income, on air quality[7], Nepal ranks 177 out of 178 countries (Figure 46). Furthermore, air quality in Kathmandu fails to meet WHO guidelines for safe levels. Air quality is represented by annual mean concentration of particulate matter of less than 10 microns of diameter (PM10) [ug/m3] and of less than 2.5 microns (PM2.5) in cities.[8] Mechanical processes such as construction activities, road dust re-suspension and wind produce PM10 and combustion sources (wood and biomass fuels) mostly produce PM2.5. Kathmandu’s annual average air quality levels stood at 50 μg/m3 and 114 μg/m3 for PM2.5 and PM10, respectively. These are far higher than the WHO guidelines of 10 μg/m3 and 20 μg/m3 for PM2.5 and PM10, respectively. While most of the regional cities in South Asia as well as other major cities in Asia fail to meet the WHO guidelines, the levels in Kathmandu is particularly high relative to these cities as well (Figure 47).


Furthermore, chemical fertilizer use has increased drastically since FY2010. After ending chemical fertilizers subsidy due to high fiscal costs and heavy leakages, the government again introduced such subsidies in FY2008. Over time, this led to the ‘crowding-out’ of private sector even though the government’s subsidy covered just 25% of total fertilizer demand. A large portion of the fertilizer demand is met through informal supply (estimated to be about two-thirds of total use and often sub-standard ones) from bordering Indian cities, where fertilizer is subsidized by the Indian government as well.[9] With no official private sector suppliers, the government supplied 185,000 metric tons of chemical fertilizers (urea, DAP and potash) in FY2013 (Figure 48) and provided partial subsidy equivalent to NRs 6 billion. The chemical fertilizer usage was 57 kg per hectare in FY2013, up from 47 kg per hectare in FY2012.[10]

III. Key Challenges

The key environmental issues faced by the country are: (i) unharmonious, outdated and ineffective environment related policies and guidelines; (ii) seemingly irreversible degradation as a result of the increasing human pressure on land, water and forests; (iii) poorly engineered or totally non-engineered rural roads and infrastructure causing watershed degradation, landslides and soil loss; (iv) increasing desertification in the Trans-Himalayan region due to deforestation; (v) climate change induced drying up of water sources; (vi) lack of national digitized hazard maps for disaster risk management planning; (vii) extensive clearing of forest and uncontrolled extraction of river bed materials from Siwalik; (viii) risk of land subsidence due to over extraction of groundwater, particularly in Kathmandu Valley; (ix) increasing level of air and water pollution, solid waste management, and sanitation and health hazards in rapidly growing urban areas; (x) lack of institutional capacity and technical knowhow within the department of environment; and (xi) weak coordination among disaster management related agencies, low level of preparedness, rudimentary early warning system, and lack of post disaster rehabilitation programs.

The major key challenges directly related to boosting economic activities are as follows:

Environmentally weak infrastructure development: The growth of the rural as well as semi-urban road networks, often either with poor or no engineering at all, has helped in the establishment of new towns, and linked with or opened up new market centers. However, these kinds of road construction have also come at a cost, particularly the non-engineered rural roads in the hills and mountains, which have been noted to have accelerated landslides, gully erosion, and loss of forest resources and natural habitats. Investment in hydropower is growing with both public and private sector investment. Even in hydropower projects, especially the small size ones developed particularly by the private sector, environmental sustainability of the infrastructure in terms of cumulative impacts through strategic and realistic environmental assessment is seldom conducted. Furthermore, large leakages in electricity distribution reduce net supply, forcing households to opt for pollution-intensive sources of energy.

Unplanned urbanization: The improved connectivity and the decade-long conflict caused large-scale migration from rural to urban areas, increasing urban population to about 17.1% in 2011 from 13.9% in 2001. Subsequently, urban and semi-urban towns have emerged rapidly and without much planning. The erratic, unplanned, and haphazard expansion of such town has led to undersupply of urban amenities, putting tremendous pressures on the available resources. Furthermore, the lack of public awareness on the benefits of planned urbanization and poor municipal management has compounded the problem, leading to intensified soil, air and water pollution, degraded land and vegetation, and unsanitary waste disposal. The annual population growth rate in Kathmandu Valley alone was 4.3%, much higher than 1.4% average for the entire country over 2001-2011. In 2011, Kathmandu Valley had a population of 2.5 million (Figure 49) and population density of 2,800 persons per Urban amenities and municipal management have not grown proportionally to the growth in urban population and the pressure on the available resources.

Misuse and indiscriminate use of pesticides and agrochemicals: The use of pesticides, insecticides and herbicides, various growth hormones and other agrochemicals has considerably increased in commercial agriculture and animal husbandry. However, their improper application has caused environmental and health hazards such as respiratory and skin diseases, and demise of critically endangered birds and mammals after scavenging dead livestock or insects treated with chemicals. Furthermore, it has also caused environmental problems following the seepage of pesticides to and contamination of water bodies. A total of 1,098 pesticides were registered in Nepal in 2013, up from 651 in 2010. Recently, there have been growing instances of inedible fresh vegetables and food products due to the overuse of pesticides and agrochemicals. A strict market monitoring mechanism and public awareness on the optimal usage of such production as agricultural inputs are required to lower the risks of health hazard. Furthermore, proactive promotion organic farming would also be useful.

Improper solid waste management (SWM): A huge amount of solid water is generated in the municipalities, most notably 457 metric tons per day in FY2012, up from just 29.9 metric tons per day in FY2007, by Kathmandu. Unfortunately, only 6 municipalities dispose of waste in sanitary landfill sites, which also not properly managed. Municipalities spent an average of 10% of their total budget on SWM, of which 60-70% is used for street sweeping, 20-30% for transport, and rest for final disposal. The lack resources and proper planning have been constraining municipalities’ capability to manage the increasing waste. In the absence of proper landfill sites, most of the municipalities directly dump the collected waste in rivers, forest or agriculture fields, increasing not only health hazards but also productivity of land. Furthermore, no separate arrangement exists to manage hazardous and medical wastes. Interventions including policy formulation, adoption of 3R (reduce, reuse and recycle) principle, capacity building of local bodies, public participation and public-private partnership are few interventions that may be helpful in developing an effective SWM program.

IV. Government’s Strategy

The concept of environmental protection and conservation has been embedded in the periodic national development plans since 1962. Till the 6th periodic plan (1980-85), the government prioritized forest conservation and watershed management, wildlife conservation, water and sanitation, and urban management. Since 1985, major environmental mainstreaming initiatives were undertaken, environment-friendly policies were introduced, and environment management strategies were integrated into the sector plans. Thus far, Nepal is a signatory to 21 environment related international conventions.

Currently, the environmental priorities of the government include: (i) forest conservation and management through community participation; (ii) wildlife and biodiversity conservation through establishing protected areas; (iii) reducing vulnerability to the impacts of climate change; (iv) disaster relief and risk management; (vi) environmental sustainability in development projects; (vii) achieving the Millennium Development Goals; (viii) improving air quality and waste management in urban areas; (ix) use of alternate renewable energy and energy efficient technology in rural areas; (ix) watershed management –ecological restoration in fragile Siwalik range; and (x) improved drinking water and sanitation.

Environment Protection Act (EPA), 1997 and Environment Protection Rule (EPR), 1997 (amended in 2007) are the two major legal provisions aimed at minimizing the adverse environmental impact due to development activities, and integrating environmental sustainability into development projects. These legislations have made either Initial Environment Examination (IEE) or Environment Impact Assessment (EIA) mandatory for government and private sector projects, safeguarding environmental and social issues in all development projects. However, the weak government capacity for effective implementation and monitoring of IEE/EIA recommended mitigation measures has been a long running issue in Nepal. There is also a need for updating the one-and-a-half decade old EPA and EPR in the context of emerging environmental and climate change issues.

Progress on effective environment protection and management is hampered by weak governance, political instability, and slack implementation of environment related Acts and Rules. Deforestation, degradation in Siwalik Range and lower hills, over harvesting of medicinal plants and non-timber forest products, use of explosives and chemicals for fishing in rivers, excessive groundwater abstraction, unwarranted mining in riverbed and on fragile area, environmental degradation in urban areas (air and water pollution, solid wastes), conversion of fertile arable land into built-up areas are the results of weak enforcement of the existing legislation.

V. Recommendations

Some of the major recommendations to stimulate environment-friendly inclusive economic growth are as follows:

  • Strengthen the country safeguards system
  • Promote environment friendly infrastructure development
  • Promote planned and regulated urban growth
  • Encourage environment-friendly and climate resilient agriculture
  • Stop land degradation and desertification
  • Protect terrestrial and aquatic ecosystem and biodiversity
  • Mainstream climate change risks
  • Scale up renewable energy
  • Effective disaster risk management (DRM)

VI. Conclusion

Currently, one of the major challenges faced by the country is to ensure not only a high and inclusive economic growth, but also to make it environment-friendly. Economic activities without due consideration for environmental sustainability may start tapering off in the medium-term, and then possibly retard prosperity in the long term. Thus far, since growth is largely driven by exogenous factors such as monsoon-fed agriculture production and remittances-induced services sector growth, economic activities have been at best minimally damaging to the environment. This is also reflected in the declining share of industrial sector in GDP. However, as a major push for electricity generation, infrastructure development and stimulation of manufacturing activities takes place in the short to medium term to achieve a high growth rate and to create productive employment opportunities, the challenge would be to ensure that these activities are made environment-friendly so that the resulting growth is not only high and inclusive, but also sustainable.

The low per capita carbon dioxide emission compared to other regional economies and the shrinking of industrial sector means that the existing pattern of environmental challenges has little to do with the pace of economic growth. It is affected more by other factors such as poor engineering and safeguards embedded in infrastructural undertakings, deforestation, haphazard solid waste management, land degradation, unsustainable and indiscriminate use of pesticides and agrochemicals, and unplanned urbanization. In effect, these point to the lack of implementation of existing safeguards, obsolete legal frameworks, and institutional slackness as well as weakness. The existing pattern of environmental challenges has to potential to decelerate the pace of growth in the medium to long term.

Overall, Nepal’s forest area is depleting, land degrading, groundwater is drying up, pollution is increasing in major urban areas, and the use of pesticides and agrochemicals is increasing. This poses a number of challenges directly affecting economic activities: (i) environmentally weak infrastructure development; (ii) unplanned urbanization; (iii) misuse and indiscriminate use of pesticides and agrochemicals; and (iv) improper solid waste management. Though the government introduced a number of key legislations, which may need updating to reflect the present context, and embedded environment protection and conservation in its periodic plans, the implementation aspect has been rather disappointing— resulting in delays in the implementation of development projects.

The government could take a number of measures to stimulate environment-friendly inclusive economic growth such as: (i) strengthen the country safeguards system; (ii) promote environment-friendly infrastructure development; (iii) promote planned and regulated urban growth; (iv) encourage environment-friendly and climate resilient agriculture; (v) cease land degradation and desertification; (vi) protect terrestrial and aquatic ecosystem and biodiversity; (vii) mainstream climate change risks; (ix) scale up renewable energy; and (x) prepare effective disaster risk management. 

[1] This section was written in collaboration with Deepak Bahadur Singh, Senior Environment Officer at NRM. It draws in supporting information from a forthcoming report titled Country Environment Note Nepal 2014.

[2] Although Nepal lies near the northern limit of the tropics, because of rugged topography, there is a wide range of climates experienced from the summer tropical heat and humidity of the lowlands to the colder dry continental and alpine winter through the middle and northern mountainous region. The remarkable differences in climatic conditions are due to the enormous range of altitude within a short north-south distance. Nepal possesses eight ecological zones: lower tropical zone, upper tropical, subtropical, temperate, subalpine, alpine, Trans-Himalayan and Nival (Tundra and Arctic). The tropical and subtropical zones occupy 58%, temperate zone 12%, subalpine 9%, alpine 8%, Trans-Himalayan 8% and Nival 5% of the country’s land area.

[3] ADB. 2013. Macroeconomic Update Nepal August 2013. Vol1. No.2. Kathmandu.


[5] CBS. 2014. Environment Statistics of Nepal 2013. Kathmandu: Central Bureau of Statistics.

[6] A. Lodge. 21 March 2014. Has Air Pollution Made Kathmandu Unlivable?. The Guardian.

[7] It is a composite of three indicators: (i) air pollution- average exposure to PM2.5 (fine particulate matter); (ii) PM2.5 exceedance; and (iii) household air quality – indoor solid fuel usage.

[8] WHO. 2005. Air Quality Guidelines for Particulate Matter, Ozone, Nitrogen dioxide, and Sulfur dioxide - Global Update 2005. Geneva: World Health Organization.

[9] The Agriculture Sector Performance Review estimates that about two-thirds of total fertilizer demand in Nepal met by supplies through informal sources. Total chemical fertilizer demand is estimated to be about 0.6 metric tons.

[10] MOF.2014. Economic Survey 2012/13. Kathmandu: Ministry of Finance.