Dr. Neelam Dhungana Timsina

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Economic Inequalities and Socioeconomic Vulnerability in Nepal
October 17, 2024

Adam Smith, widely regarded as the father of modern economics, famously stated in The Wealth of Nations: “Wherever there is great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many.” This observation remains true in today’s world as it did in Smith’s time. As economies grow and develop, the benefits of prosperity are not always equitably shared, often leading to a widening gap between the wealthy and the impoverished. In Nepal, this pattern is particularly evident, where economic development has come with significant social and economic disparities.

Nepal faces the challenge of managing economic inequality while striving for sustainable development. While poverty rates have declined over the past decades, the distribution of wealth remains skewed, with a substantial proportion of the population struggling to meet basic needs. The concentration of wealth among a small segment of society exacerbates social vulnerabilities and threatens the nation’s social cohesion. Addressing these disparities is not only a matter of economic policy but also of social justice. Therefore, it is crucial for Nepal to strive towards containing these inequalities to an acceptable level, ensuring that economic progress translates into broad-based and inclusive development.

Existing Issues

Gini Coefficient – Slow but Steady Improvement

The Gini Coefficient (based on consumption) for Nepal have slowly improved over time. The household surveys conducted on 1995/96 (First), 2003/04 (Second), 2009/10 (Third) and 2022/23 (Fourth) have measured Gini Coefficients to be 0.32, 0.41, 0.33, 0.30 respectively. Similarly, Wealth Gini Coefficeint have declined to 0.24 (in 2022/23) from 0.31 (in 2018/19). In terms of consumption and wealth, the inequality gap has slowly and steadily shrinked. (Source: Economic Survey 2023/24 and 16th plan).

Rising Income Inequality – A Growing Concern

However, the Gini Coefficeint based on income inequality have increased over time. In 2010/11, Nepal had one of the highest income Gini Coefficients in the world at 0.49 and it increased to 0.58 in 2019/20. This shows growing income inequality in Nepal. (Source: Oxfam Report: Fighting Inequality in Nepal, 2019)

Palma Ratio – Highlighting Income and Wealth Gaps

The Palma Ratio, which measures the income share of the richest 10 percent compared to the poorest 40 percent, further illustrates the depth of inequality in Nepal. Currently, the richest 10 percent of Nepalis earn more than three times the income of the poorest 40 percent. When it comes to wealth, the richest 10 percent hold more than 26 times the wealth of the poorest 40 percent. These statistics paint a grim picture of income and wealth concentration in the hands of a few. (source: Oxfam Report: Fighting Inequality in Nepal, 2019)

Provincial Disparities – A Matter of Urgency

Nepal adopted the federal structure in 2015 to make development inclusive, equal and participatory. But still, the status of inequalities within the seven provinces of Nepal remains at an alarming level. The following facts depicts the inequality existing among them on several economic dimensions.

S.N. Indicators

 

Koshi Madesh Bagmati Gandaki Lumbini Karnali Sudurpaschim
1. Economic Growth (percent) 3.5 3.8 4.0 4.6 4.1 3.4 3.4
2. Per Capita GDP (USD) 1336 892 2484 1557 1159 1066 1111
3. Poverty (percent) 17.2 22.5 12.6 11.9 24.4 26.7 34.2
4. Company Registrations (in 1000s approximate) 24.2 22 234 18.4 22.7 4.2 6.8

(Source: Economic survey, 2023-24)

In 2023-24, Gandaki province has achieved growth as high as 4.6 percent followed by 4 percent of Bagmati. However, Karnali and Sudurpaschim province are low achievers with an equal 3.4 percent growth for the same year. Similarly, other economic metrices like per capita income and poverty also reflects wide disparity existing within provisions.

Gender Inequality – A Persistent Issue

Gender based inequality is another dimension of inequality that has plagued Nepalese society since centuries. Article 38 of the constitution has guaranteed the rights of women and mentions that women shall have the right to participate in all bodies of the state and they shall have the right to obtain special opportunity in education, health, employment and social security on the basis of positive discrimination. However, the patriarchal society still bounds women within household chores, mostly in rural Nepal. Thus, the female labor force participation rate stands at 28.68 percent only.

Women’s Participation in the Financial Sector

Further, in the case of commercial banks in Nepal, only 38.7 percent of all the employee are female, such share in officer level is 32.3 percent and management level is just 22.6 percent. In case of the Board of Directors, the share of female in commercial banks is too low, that is approximately 14 percent and in case of top management, female representation is rare, with just 9 percent. (Source: Supervisory Information System, NRB)

Financial Literacy – Empowering Rural Populations

Inadequacy of financial literacy and financial access contributes to the economic vulnerablity of rural people. Recently, we have encountered a large number of cases where poor and marginalized people fall pray to loan sharks and financial frauds. The financial literacy of Nepal stands at 57.9 percent, with Bagmati Province having the highest (64.5 percent) and Madesh Province having the lowest score (52 percent). Further, digital financial literacy is the need of the hour. Development in Information technology has necessitated understanding and adoption of digital financial services. Digital financial services such as mobile banking, internet banking are more reliable, cost effective, accessible and less time consuming. But, digital way of doing things are increasing complexities and creating more vulnerable environment too for financial consumers. Despite the central bank issuing notice to avoid transactions in cryptocurrencies and such digital speculative assets, digital gambling and digital financial frauds, the number of cases doing so have risen yearly.

Status of Financial Inclusion

There are a total of 6,479 branches of A, B, and C class BFIs in Nepal, with 55.89 million deposit accounts but only 1.9 million loan accounts. BFIs are present in 752, out of total 753 local level governments.  49 percent of men have active savings account in BFI’s whereas 53 percent women have an active savings account. However, there is an unequal level of inclusion among different provinces, based on active bank accounts.

Province Active Male accounts (percent) Active Female Accounts

(percent)

Koshi 54 44
Madesh 46 31
Bagmati 118 82
Gandaki 74 75
Lumbini 58 52
Karnali 48 42
Sudurpaschim 50 42

(Source: NRB Financial Inclusion Portal)

Karnali, Sudurpaschim and Madesh province are financially less inclusive than that of other provinces. This shows that there are rooms for improvement in deepening the financial inclusion in Nepal.

The Downside of Remittance Dependency

Remittance has played a crucial role in alleviating poverty and reducing socio-economic vulnerability by providing a stable source of income for many families in Nepal and enabling families to afford basic needs such as healthcare, education, and housing. Additionally, remittances stimulate local economies through increased spending and investment, fostering small-scale entrepreneurship and job creation. In  2023/24, Nepal received Rs. 1445 billion remittance, which amounts to 25 percent of the GDP.

However, we have been grossly ignoring the vulnerability due to excessive dependence on the remittance. Excessive dependence on remittances have negatively impacted our national economy by stunting domestic job creation , unavailablity of labor force and productivity. Additionally, heavy reliance on remittances have made our economy more vulnerable to global economic shifts and changes in immigration policies of host countries (mostly gulf).

Climatic Impacts on Inequality

By hitting the poor people hardest, climate change risks increasing existing economic inequalities. Climate change increases inequality in Nepal by disproportionately affecting its vulnerable populations, particularly in rural and mountainous regions. As Nepal experiences more extreme weather events like floods, landslides, and glacial melt, communities living in fragile ecosystems face greater risks due to limited infrastructures and resources. Farmers, who depend upon climate sensitive agriculture, suffers from irregular monsoons and draughts, leading to crop failures and loss of income. This exacerbates existing social and economic inequalities, making climate change a major driver of disparity in Nepal.

Efforts Undertaken by Government

Nepal’s Constitution, in Part 4, Article 50, states that the economic objective of the State is to achieve sustainable development by eliminating economic inequalities and creating an exploitation-free society. While this commitment is enshrined in law, the challenge lies in translating these principles into actionable policies that benefit all citizens.

Accordingly, 16th Plan released by the National Planning Commission have dedicated chapter 10 to Poverty Reduction and Inequality Alleviation for Building Equitable Society. The current status and the expected quantitative goals of the 16th plan to reduce the inequality in Nepal is shown in the figure below:

S.N. Indexes of Inequality Status of                  2022/23 Target for        2028/29
1 Human Development Index 0.601 0.650
2 Gender Development Index 0.885 0.967
3 Gini Coefficient (based on consumption) 0.30 0.28

(Source: 16th Plan, National Planning Commission)

Further, the Government of Nepal (GoN) has introduced several initiatives aimed at reducing inequalities. For example, gender-based budgeting was introduced in 2007/08, and the Gender Equality Policy was endorsed in 2020. The Civil Service Amendment Act 2014 reserves 45 percent of positions for women and marginalized communities. These policies, alongside the transformative programs outlined in the 16th Plan, are critical steps in addressing inequality. The 16th plan has envisioned some transformative programs such as distributing government subsidy cards to poor and marginalized, providing basic goods at subsidized rates, improvised social security programs etc.

Next, the GoN has been currently utilizing progressive taxation (and transfers) system to reduce income inequality. Under this system, net income is divided into different bands which are subjected to progressive rates. The income tax rate increases from 1 percent upto 36 percent based on the increment in the level of income. This system ensures sufficient redistribution of income from rich individuals to the needy ones.

In line with international standards, the GoN has also recognized social protection as a right in the 2015 constitution. There are more than 70 social security programs in Nepal. By February 2024, the number of citizens benefiting from social security allowances has reached a total of 3.8 million. Of these recipients, 1.62 million are senior citizens over the age of 70. Additionally, the social security program includes 158,261 Dalits over 60 years, 198,270 single female senior citizens over 60 years, 576,553 single women, 66,452 persons with complete disabilities, 142,185 persons with severe disabilities, and 761,093 children from designated areas.

In addition, the GoN’s 2024/25 budget emphasizes reducing socioeconomic vulnerability through targeted initiatives. Declaring 2024/25 as the ‘Year of Investment in Women,’ it aims to combat violence and discrimination against women while fostering a more equitable environment. To address climate risks, the budget outlines climate adaptation and mitigation programs. Additionally, it aims to direct remittance inflows toward productive sectors by establishing a sovereign wealth fund for infrastructural development. Efforts to enhance financial inclusion include opening a bank branch in Saipal rural municipality and encouraging banks and financial institutions to collaborate with local governments for social banking, which seeks to generate social benefits alongside economic returns.

Nepal Rastra Banks Role in Curbing Inequality

In reducing the existing inequality and socio-economic vulnerabilities in Nepal, the coordination of fiscal policy and monetary policy is crucial. The Government of Nepal have been playing a leading role through its fiscal policies while central bank, through its monetary policy and other regulatory policies, is complementing the governments policies.

Concessional Loans – Supporting the Vulnerable

Nepal Rastra Bank (NRB) have been providing different types of concessional loan facility with interest subsidies to promote commercial agriculture, youth employment, women entrepreneurship, marginalized ethnic groups and such. The outstanding concessional loans amounts to Rs. 126.8 billion in 2023/24. Out of that, Rs. 38.29 billion loan have been mobilized for supporting entrepreneurial ventures owned by 71,886 womens. This is a key part of our strategy to address economic vulnerabilities and promote inclusive growth.

Regulatory Provisions

Nepal Rastra Bank plays a crucial role in complementing government efforts to promote economic equality. NRB mandates that banks allocate at least 5 percent of their total loans to the deprived sector. Additionally, NRB encourages banks to support priority sectors such as agriculture and small and medium-sized enterprises (SMEs). The interest rates on SME loans has been capped at Base Rate plus Two Percent. These efforts aim to make credit more accessible to underserved communities.

Monetary Policy (2024/25) Provisions

  • The limit of the Regulatory Retail Portfolio (RPP), which is extended to agriculture, small, cottage, and medium enterprises, have been increased from the current Rs. 20 million to Rs. 25 million.
  • The Monetary Policy of 2024/25 have addressed governance issues surfaced in some of the cooperatives and microfinance institutions by prioritizing the formulation of financial consumer protection related provisions.
  • NRB aims to revise the existing interest rate and cost related provisions of microfinance institutions and provide credit rescheduling facility to genuinely vulnerable customers.
  • There will be a contemporary review of the regulatory provisions regarding the interest rates and service fees on the credit, provided by microfinance institutions.
  • The provision of not allowing to add more than 2 percent premium at the base rate for the loan up to Rs. 20 million, extended to the micro, cottage, small, and medium enterprises, will be reviewed by adding additional sectors related to the domestic production, such as agriculture-supporting industries, agricultural tool production, information technology, and tourism.
  • Necessary facilitation will be made to the policies adopted by GoN to provide loans for studying practical education such as vocational education.

Promoting Financial Inclusion and Financial Literacy

NRB has a explicit focus on financial inclusion agenda: there  is a dedicated Financial Inclusion and Consumer Protection Division. NRB issued a Financial Literacy Framework in 2022 and also developed Nepal Financial Inclusion Action Plan with the overarching objective of expanding access to formal financial services and affordable financing for all by 2030. NRB produces informative videos, podcast series, e-books, audio-songs, financial literacy digital banners in different languages and awareness campaigns to make financial consumers aware of the services. Recently, Financial Inclusion Policy, 2024 has been formulated to ensure financial stability, financial deepening and enhancing finacial literacy.

The Way Forwards

Reducing inequality and socioeconomic vulnerability in Nepal requires a comprehensive, multi-dimensional approach that addresses structural and systemic challenges. Promoting inclusive economic growth is vital, with a focus on agriculture modernization, investment in agro-tech, and better market access for small farmers to boost productivity and rural incomes. Supporting small and medium enterprises (SMEs) through easier credit access, technical assistance, and market linkages can foster entrepreneurship. Additionally, sustainable tourism development, with an emphasis on eco-friendly practices, can generate employment while conserving natural resources and benefiting local communities.

Moreover, improving skill development and education is another crucial strategy. Ensuring equitable access to quality education, particularly for children from marginalized communities, and providing scholarships for girls, Dalits, and indigenous groups is essential. Expanding technical and vocational training can help bridge the skill gaps, while increased investment in digital literacy programs can reduce the digital divide. Strengthening social protection and welfare programs is also important, including bolstering social safety nets for vulnerable groups and implementing targeted poverty alleviation initiatives for marginalized and geographically isolated regions.

Empowering women is key to reducing socioeconomic disparities, with measures to promote women’s economic participation through access to microfinance and entrepreneurial support, ending gender-based violence, and ensuring legal and psychological assistance for victims. Encouraging women’s involvement in decision-making at all levels is also critical. In governance, decentralizing power to local bodies can enhance decision-making and local governance, while anti-corruption measures should focus on transparency, accountability, and participation to ensure resources reach those in need. Empowering civil society to advocate for marginalized communities further strengthens inclusive governance.

Further, environmental justice is integral to addressing socioeconomic vulnerability, requiring climate-resilient development to protect rural and indigenous communities from climate change impacts. The sustainable use of natural resources, including forests, water, and minerals, can help ensure that local communities benefit equitably. Safe migration policies and better support for Nepali workers abroad can enhance the benefits of labor migration, while encouraging the reinvestment of remittances in productive areas such as education, health, and small businesses to reduce long-term economic vulnerability.

Last but not the least, taxation and fiscal policy reform is necessary to address inequality. According to 2023/24 data, government revenue is primarily derived from value-added tax (VAT) at 28.7 percent, followed by income tax (26.2 percent), customs (18.6 percent), excise (13.5 percent), and non-tax revenue (10.6 percent). While income taxes are progressive, VAT and excise are regressive, disproportionately affecting low-income households who spend a larger share of their income on taxed goods. Thus, Nepal should aim to increase revenue from income tax rather than VAT and excise to reduce the tax burden on low-income families and promote a fairer fiscal system.

Conclusion

In conclusion, addressing economic inequalities and socioeconomic vulnerability in Nepal demands a holistic approach that tackles the root causes of disparity while promoting inclusive growth and sustainable development. Strategic interventions in agriculture, education, women’s empowerment, governance, and environmental protection are essential for creating a more equitable society. Effective fiscal policies and social safety nets can further alleviate the burden on marginalized groups, ensuring that economic progress benefits all. By adopting these multidimensional strategies, Nepal can pave the way toward a future where growth is inclusive, opportunities are accessible, and resilience is strengthened across communities.