Rockbottom economic status

Sarba Raj Khadka; Rakhee Lohani
Rural Reconstruction Nepal

Economic liberalisation began in 1992. The foreign investment policy endevoured to attract foreign private investment but undermined the national interest. Nepalese entrepreneurs with limited resources and technical capacity were unable to compete with foreign private investors and hence were negatively affected. Privatisation of education and health has created two distinct classes and has benefited the higher income groups, in a country where approximately 42% of the population live below the poverty line.

Nepalnow stands near the bottom of any international economic index. With a percapita income of USD 220 per annum, Nepal is the 12th poorest countryin the world and the poorest in South Asia. It is ranked 142 out of 173countries in the UN Human Development Report, 2002. Despite per capita growthrates averaging 2.2% per annum in the last two decades, poverty reduction hasbeen slow. A 1995-96 household survey found that approximately 42% of thepopulation lived below the poverty line.

Theprincipal development objective of the government, as emphasised in the NinthFive-Year Plan (1997-2002) and in the Poverty Reduction Strategy Paper (TenthFive-Year Plan, 2002-2007), is to reduce the number of people living in absolutepoverty. The Ninth Plan aimed at reducing the poverty rate from 42% to 32% by2002 and as a long-term plan had set the objective of reducing absolute povertyto 10% by 2017. However, the Mid-Term Review of the Ninth Plan put the nationalpoverty rate at 38%. Eighty percent of Nepal’s population lives in ruralareas, and rural and urban poverty rates are 41.4% and 23.9%, respectively,which shows that economic development is urban centered.

Lowincome, lack of employment opportunities (particularly in rural areas), poorpublic services, inefficient use of public resources and corruption have allcontributed to low and unequal development. Under the authoritarian Panchyatregime (1960-1990), the people understandably did not resist any governmentpolicies. However, it is troubling that this situation has continued even aftermulti-party democracy was re-instated in 1990.

Beginningof liberal economic policies

Industrialisationin Nepal has historically been state-led. During the 1960s and 1970s,state-owned enterprises (SOEs) were formed to promote import substitutionpolicies and create employment. Although the Bretton Woods Institutions imposedstructural adjustment policies in the 1980s, economic liberalisation actuallybegan in 1992. The Industrial Enterprise Act and the Transfer of Technology Actprimarily promoted competition and private investment. Major reform measuresincluded privatisation of public enterprises and entry of the private sectorinto health, education, imports and distribution of chemical fertilizers,infrastructure development and aviation services. Other reforms includedderegulation of industrial licensing, rationalisation of tax measures andgradual reduction of subsidies. The 1992 foreign investment policy setprovisions for attracting foreign private investment but undermined the nationalinterest. Nepalese entrepreneurs with limited resources and technical capacitywere unable to compete with foreign private investors and hence were frustratedby the induction of this regulation. Moreover, foreign private investors havetaken any available opportunity that might otherwise have been enjoyed by thenational investors.

Thefirst elected government launched the privatisation programme in 1992 to improveefficiency of public resource allocation, increase private investment, andrefocus government resources on the most critical areas of development. ThePrivatisation Act 2050 (1994) led to the privatisation of 17 enterprises duringthe Eighth and Ninth Plan Period (1992-2002).

Thusfar, privatisation has been extremely discouraging. Out of 17 enterprisesprivatised, four have already closed down, including Nepal Jute DevelopmentCorporation and Tobacco Development Corporation. Other privatised enterprises,such as the paper mill, textile and brick factories, are barely surviving. Inthe case of Bansbari Leather Shoe Factory, national pride has suffered due tothe hopeless circumstances of this enterprise. Machines have reportedly beentransferred to India under the pretext of transferring industry, and Indianemployees have displaced Nepalese employees. Still, the government argues thatemployment has increased, which certainly incenses national sentiment.

NepalBank Limited (NBL), the oldest bank in the country, which was privatised in1997, is also in a critical situation. According to its staff, the performanceof NBL before privatisation was sound despite cut-throat competition. The bankused to earn a good profit from its transactions and covered 30-35% of the totalbanking transactions in the country before privatisation, which has decreased toalmost 23% at present. Corruption is said to have begun on a massive scale afterprivatisation, jeopardising the existence of the bank itself.[1]To the dismay of planners, there is not even one success story of a publicenterprise improving after privatisation.

Althoughsuch basic services as water, sanitation, communication and health care have notyet been privatised, they are in the process. (Some other basic services, suchas housing and transport, have never been under government control.) Theparticipation of the private sector in telecommunications is limited to radiopaging, FM Radio, print media, television and the Internet. Private sectoroperators have been issued licences to provide electricity and telephoneservices, and private TV transmission also began recently.

Privatisationof education: creation of two distinct classes

Before1951, communities and individuals funded most schools. For the next 20 years,three types of schools existed: government-financed, government-aided andprivately-financed. In 1971, the National Education System Plan was introducedand outlined clear-cut guidelines of financial support for education, to beshared between the government and the people. The government decided to payteachers’ wages while the schools’ facilities were left to the communitiesto maintain. During the 1980s, the number of schools increased rapidly as didthe amount of private expenditure in schools. This prompted the government toreduce the amount of support it provided to schools and increased the number ofprivate education enterprises. Nepal now has more than 35,000 schools, 23% ofwhich are privately owned.

Sincethe 7th amendment of the Education Act in 2001, school education isno longer free. The previous democratic government had declared education freeup to the secondary level, but decided to allow public schools to raise monthlyfees from grade six onwards. The popular slogan of “Compulsory primaryeducation” is far from being realised, and compulsory secondary education isan even more distant dream.

TheNepalese people were not given access to basic education until the mid 20thcentury. Even with massive investment in the education sector since 1951, thepresent literacy rate is only 53.7%,[2]far behind that of other developing countries in the region. Moreover, becauseof poverty, traditional beliefs and lack of awareness, many girls are excludedfrom education. In 1999, for every 100 boys enrolled in primary schools, only 78girls were enrolled. In lower secondary and secondary levels, girl-boy enrolmentratios were 71% and 65%, respectively.[3]

Sincethe Nepal Communist Party (Maoist) launched the "people's war" morethan six years ago, the poor quality of public education and profitability ofprivate education have made schools a target of violence, including theabduction and murder of teachers, extortion, recruitment of students to jointheir militant force, or vandalism of school property. Several schools in remotevillages have closed, and teachers have fled in fear of their lives. Rebels haveso far killed nearly sixty teachers and physically abused hundred of others forfailing to provide them with “donations” or for disobeying their orders.[4]

Undoubtedly,hundreds of thousands of children in private schools have gained a higher degreeof education than they would have in government schools. However, thebeneficiaries of privatised education have largely been the school owners, theirrelatives and a handful of children, mostly from better-off families.Privatisation in education has strengthened regional, social and economicinequality and exclusion by leaving out poor, marginalised and rural people wholack the income to send their children to private schools. As a result, privateschools have not been established in the remote rural areas, where the peoplewith the lowest literacy rates live.

Mosturban residents, senior public servants, policy makers and senior politicians,all groups with a voice, no longer depend on public schools and do not considerthem a priority. Mainstream development policies ignore villages because ruralpeople have minimal political representation. This distinction in the quality ofeducation has created two groups: those educated in private schools who havemore opportunity for good jobs and those from the public schools who areconsidered less competent.

Althougheducation receives the largest allocation of government expenditure,[5]resource utilisation is not efficient. The quality of public schools, the onlyones available for poor people, is consistently low, and access for the poor isalso constrained by several socio-economic factors. Dropout, repetition andfailure rates are high in public schools. Less than 18% of primary schoolchildren complete primary grades on time, while secondary schools perform almostas badly. Low quality public education has also been linked to the increasingalienation between the local school system and the community, the high level ofabsenteeism and unprofessional conduct among school teachers, ineffective schoolmonitoring, and a faulty student evaluation system. Approximately 60% of primaryschool teachers are still untrained.[6]

Healthprivatisation: benefiting the middle and upper income groups

Theprivate sector is providing more health services, which has created morehealthcare options. However, in a country where 90% of the population is stilldeprived of health care, the government has neglected this basic service. Likemany other sectors, public health is in chaos. In several paying clinics,polyclinics and private hospitals medical services are provided at very highprices. Health benefits from the private sector’s investments are largelylimited to the middle and upper income groups residing in urban areas.

Therural poor, the majority of the population, have not benefited from privatisedhealth services. If they have any access to health care at all, they get it onlyin government hospitals, where services are either free or provided at minimumcost. However, the quality of the public health institutions is largelysub-standard, due to the absence of health personnel and medical supplies. Thehospitals and health centres in rural areas almost entirely lack doctors andnurses. The average ratio of doctors to people is four per 100,000.[7]The continuing violence has further disrupted whatever health services do existin remote areas. Health workers have deserted most of the health centres. In theabsence of adequate health services, more people are reported dying of treatableillnesses every day.

Thesecond long term health plan (1997-2017) has been prepared in light ofinvestment and priorities, morbidity rates and the proper utilisation ofresources. Despite significant budget increases for health and education, theper capita expenditure in these sectors is lower than in most other developingcountries. Almost 30% of the public expenditure in health is allocated tosectors other than primary health care. To improve these basic services, thegovernment has to allocate resources to the primary health needs of the peopleand ensure that adequate services are provided to all people, rich and poor.


Becauseof a changed global economic environment and pressure from Bretton WoodsInstitutions (and obviously the WTO), Nepal has been compelled to embark uponthe path of globalisation, liberalisation and privatisation. Since 1992, therole of the private sector in the national economy has increased. The governmentalso promoted the development of the private sector and decided to privatise theSOEs in phases. Even after privatisation, the anticipated progress of the SOEshas not been achieved. Rather, unemployment has sharply increased, theinvestment of national capital has gone up, tax collection is minimal and therevenue generated from the privatised units is invariably spent withoutexplanation.

Currently,privatisation of drinking water services is also under discussion. Privatisationwould result in much higher monthly rates, which are now reasonable.

Thepoliticisation and commercialisation of education, health, communication andother public sectors have prevented ordinary rural people from having access tobasic services. Financial irregularities, institutionalised corruption andmismanagement plague the development projects and programmes implemented in thename of the poor. There are no regular and effective monitoring mechanisms tomake these agencies accountable at any level.

Ifprivatisation (excluding the basic services sectors–health, education,drinking water, etc.) is conducted successfully, some potential economicbenefits are possible by increasing investment in both new and existing privateenterprises and eliminating the drawbacks of public enterprises. Through theeffective management of the production and distribution system, which mustinclude poor, marginalised and vulnerable communities, privatisation could helpfoster further investment and increase employment, production, income, andgovernment revenue, which would ultimately contribute to achieving thenation’s most fundamental goal—poverty reduction.


R.Adhikari and K. Adhikari. Privatisation:Expectation and Reality. Kathmandu, Nepal: Pro-Public, 2000.

HisMajesty’s Government of Nepal, Ministry of Finance. EconomicSurvey. Fiscal year 2001/2002, 2002.

Ministryof Finance, Privatisation Cell. MonitoringPrivatised Enterprises. A Report on Performance of Privatised Enterprises,1999.

WorldBank. Economic Update 2002. Report No. 23978, 2002.


[1] K.C. Rajkumar. “Time to Rethink Privatisation”, The Rising Nepal, 24 March 2000.

[2] Central Bureau of Statistics, National Planning Commission. Statistical Pocket Book. 2002.

[3] United Nations Country Team of Nepal. Progress Report (2002), Millennium Development Goals, United Nations House, 2002.

[4] "Spotlight”. The National News Magazine, 19 April 2002.

[5] More than 40% of the education sector's budget goes to secondary and tertiary education.

[6] National Planning Commission, HMG/N. "Concept Paper on PRSP/10th Plan", 2002, Singhadurbar, Kathmandu, Nepal.

[7] United Nations Development Programme (UNDP). Human Development Report 2002, Deepening Democracy in a Fragmented World, 2002.