Why Nepal’s poverty rate is stuck

India announced recently that it was ‘close to victory in its fight against poverty’, with only 2.2% of its population living below the World Bank-defined extreme poverty line. Ten years ago, it was 12%.

In China, President Xi Jinping announced three years ago that the country had eliminated absolute poverty, after lifting 800 million people out of poverty in four decades.  

Nepal, sandwiched between the Asian giants, however, has not been able to match the pace of its two neighbours in reducing extreme poverty despite notable progress since 1990.

Using the previous poverty threshold, Nepal’s absolute poverty rate theoretically fell from 25.16% in 2011 to only 3.6% in 2023. 

However, the threshold for per capita expenditure has since been raised from Rs43,000 per year (factoring increased consumption and inflation) to nearly Rs73,000, which means the new 2023 poverty rate rose to 20.27%.

This means one in every five Nepalis lives in extreme poverty, and the state’s intervention in poverty reduction, international development assistance, and private sector investment have made little difference in improving living standards. Which begs the question: where has all the money gone?  

“Those who have opportunity, knowledge and access to resources have benefitted greatly, while farmers and underserved communities have been left further behind,” explains economist Keshav Acharya. 

The flatline in poverty reduction also raises doubts about the government's investment in poverty alleviation. In the last 11 years, it has allocated more than Rs11 trillion in budget but only a third was spent on capital expenses which helps create jobs, and kickstart the economy.

Domestic and international non-governmental organisations have spent more than Rs300 billion in Nepal’s social sector in the last six years. The international community has also poured in $1.5 billion in the past decade, with USAID alone providing Rs200 billion in aid to Nepal over the last 20 years. Private banks and financial institutions have disbursed another Rs4 trillion in loans in the last decade.

All this investment should have made a dent in poverty reduction even if the cash was distributed directly to households. But the money and its intended use has rarely benefitted the people who need it the most – driving an increasing number of young Nepalis abroad in search of work.

Critics say that much of the foreign aid is tied to international consultants, most of it is channelled through INGOs or local NGOs which have high overhead costs and very little of it trickles down to the grassroots.

Most of the poorest families in Nepal are trapped in poverty because they rely on subsistence agriculture and cannot work the system to access state services. Non-governmental efforts, on the other hand, mostly have local impact with little upscaling and replication.   

“The actual hard cash very rarely makes it to the hands of the people who need it the most,” says economist Dilli Raj Khanal. “And the economy has not expanded in proportion to the investment in poverty alleviation. In particular, credit expansion has contributed little to economic growth and poverty reduction.”

The 2021 census showed that 57% of Nepali families still depend on agriculture, and the Fourth Nepal Living Standards Survey last year showed that 38% of Nepali families whose primary earner is engaged in farming lives in poverty. 

This means the household income of farming families in Nepal has not increased due to persistently low productivity, and the agricultural sector has remained stagnant despite the government spending Rs100 billion in subsidies and farm loans over the last five years.

Despite studies after studies by the government itself showing that the subsidies do not reach most small-scale farmers, the money keeps being allocated and evaporating along the way. The 2021 census showed that only 7% of farmers received government subsidies.  

Persistent poverty in Nepal is also linked to skewed land ownership. Over 23% of families who own less than 0.2 hectares of farms live in poverty, while 11.4% of families who have more than two hectares of land are poor. The percentage of landless Nepalis in rural areas is about 16%, and one-third of them live in poverty.  

In the last decade, Nepal’s economy has been shifting away from farming. Agriculture now accounts for less than 25% of the economy, while the service sector has grown to 63%. This also means the income gap has widened between farmers and others.

The poverty rate is calculated based on the cost of the calories intake per day of a person to lead a healthy and active life.  Nepalis require 2,236 calories per day on average, which costs around Rs35,000 annually. But consumption expenditure also has to be factored in non-food costs which include lodging, clothing, and household items, and added up these costs equals the expenditure on food. By this measure, Nepalis who are unable to spend more than Rs200 a day, or Rs72,908 a year fall below the poverty line.  

The main reason for less-than-expected decrease in poverty is poor delivery and governance failure. Other factors include the 2015 earthquake and the Covid-19 pandemic. The 16th Periodic Plan (2024-29) cites 4% of Nepalis being pushed below the poverty line due to Covid-19.

The poverty rate would have been much higher if it was not for money Nepalis working overseas send home. Studies have shown that remittances have led to an increase in household income, access to better education and health services.

The 2024 Living Standards Survey showed that 77% of Nepali households receive remittances, two-thirds from relatives working in India or overseas. 

“No doubt, remittances play a major role in lifting people out of poverty in Nepal, and the state’s economic initiatives have not contributed meaningfully to poverty reduction,” says Khanal.

Nepal is soon graduating to middle-income status, largely because of remittances, even though this is not a sustainable long-term insurance against poverty.

“Policy-wise, Nepal is moving in the opposite direction in reducing poverty,” says Pushkar Bajracharya, a former member of the National Planning Commission. “Programs and budgets directly meant for poverty reduction like the Poverty Alleviation Fund have been abandoned. And the most significant failure is in job creation.”

Bajracharya argues that the government must extend the social safety net to the neediest population to ensure sustainable results in poverty reduction. And since the poorest people are subsistence farmers, that is where efforts must go.  

Relying on remittance

A new report published by the Nepal Rastra Bank has once again reiterated what we all knew — the role of remittances sent by Nepalis working abroad does not just help Nepali households but the national economy as well.

What is new in the central bank report is just how much more dependent we as a nation are becoming on remittances every year. In the absence of investment in productive, job-creating sectors, the remittances are mostly used to pay for burgeoning imports of food, fuel and consumer goods.

The report, ‘Current Macroeconomic and Financial Situation of Nepal’ for the financial year 2023-24 published on Sunday shows that remittance inflows increased 16.5% to more than Rs1.45 trillion during the past fiscal year. Remittances now make up a quarter of the country’s economy.

The record rise in remittances is proportionate to the increase in numbers of Nepalis moving abroad for employment. More than 741,302 Nepalis went overseas to work last year. Among them, 460,103 obtained first-time approval for foreign labour, while 281,199 renewed their permits.

The most pronounced impact of the increase in remittances is on Nepal’s macro-economic indicators. It helped make up for Nepal’s Rs1.44 trillion trade deficit last year, and in fact remittance income is almost exactly equal to the trade deficit.

Nepal’s foreign reserves have also held strong, standing at $15.27 billion, which is a 30.4% increase from last year and sufficient to cover 13 months worth of imports. The central bank’s usual target is to hold enough foreign currency to cover imports for seven months.

The reason for the growth of hard currency reserves is also the drop in imports due to belt-tightening measures, as well as fall in demand due to sluggish domestic economy.

The current account also remained at a surplus of Rs221.3 billion during the 2023-24 review year, compared to a deficit of Rs.46.57 billion in 2022-23. A current account surplus means that there is more money coming into Nepal than going out.