2021 Index of Economic Freedom

Nepal

OVERALL SCORE50.7
WORLD RANK157
Rule of Law

Property Rights38.1

Judicial Effectiveness34.1

Government Integrity33.8

Government Size

Tax Burden83.2

Government Spending73.2

Fiscal Health61.8

Regulatory Efficiency

Business Freedom61.5

Labor Freedom53.6

Monetary Freedom71.6

Open Markets

Trade Freedom57.6

Investment Freedom10.0

Financial Freedom30.0

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Quick Facts
  • Population:
    • 28.6 million
  • GDP (PPP):
    • $94.4 billion
    • 7.1% growth
    • 5.2% 5-year compound annual growth
    • $3,558 per capita
  • Unemployment:
    • 1.4%
  • Inflation (CPI):
    • 4.6%
  • FDI Inflow:
    • $185.0 million

Nepal’s economic freedom score is 50.7, making its economy the 157th freest in the 2021 Index. Its overall score has decreased by 3.5 points, primarily because of a decline in fiscal health. Nepal is ranked 35th among 40 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

The Nepalese economy, which has been mostly unfree for a quarter of a century, is teetering on the brink of the repressed category. To increase economic freedom, the Communist government would have to undertake significant reforms to reduce government spending and strengthen property rights and judicial effectiveness. Political support for such broad reforms appears to be lacking.

IMPACT OF COVID-19: As of December 1, 2020, 1,529 deaths had been attributed to the pandemic in Nepal, and the economy was forecast to experience no growth for the year.

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Background

The Kingdom of Nepal, a small Hindu-majority nation wedged between India and China in the Himalayas, became a multiparty federal republic in 2008. In the years since then, Nepal has been characterized by nearly continuous political instability, and it remains one of the world’s poorest and least-developed countries. Khadga Prasad Oli of the Maoist-leaning Communist Party became the country’s 41st prime minister in 2018. Also in 2018, China and Nepal agreed to establish a rail link and signed a deal to increase Chinese investments in Nepal’s power grid. China’s growing footprint has become a source of contention with India, which traditionally has enjoyed an outsized influence on Nepal’s foreign and economic policies.

Rule of LawView Methodology

Property Rights 38.1 Create a Graph using this measurement

Judicial Effectiveness 34.1 Create a Graph using this measurement

Government Integrity 33.8 Create a Graph using this measurement

Lingering property disputes, some dating from the 1996–2006 Maoist insurgency, have undermined the enforcement of property rights. The judiciary is independent, but the courts, although generally reliable, are vulnerable to political pressure, bribery, and intimidation. The World Bank reports that corruption in Nepal is endemic, institutionalized, and driven from the top, especially in such areas as the awarding of licenses, government procurement, and revenue management.

Government SizeView Methodology

The top individual income and corporate tax rates are 25 percent. Other taxes include value-added and property taxes. The overall tax burden equals 20.7 percent of total domestic income. Government spending has amounted to 29.9 percent of total output (GDP) over the past three years, and budget deficits have averaged 4.8 percent of GDP. Public debt is equivalent to 30.1 percent of GDP.

Regulatory EfficiencyView Methodology

Employee registration for social security is now subject to an in-person follow-up requirement, but reduced fees for building permits and an improved online e-submissions platform make it easier to do business. Firing a worker is expensive. The government continues to provide subsidies to private-sector industries, primarily in the agricultural and export sectors.

Open MarketsView Methodology

Nepal has three preferential trade agreements in force. The trade-weighted average tariff rate is 13.7 percent, and nine nontariff measures are in effect. The statist approach to economic management and development has been a serious drag on trade and investment. The government has raised the minimum foreign investment threshold. The financial sector, dominated by banking, remains underdeveloped and vulnerable to state interference.

Country's Score Over Time

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Regional Ranking

RANK COUNTRY OVERALL CHANGE
1Singapore89.70.3
2New Zealand83.9-0.2
3Australia82.4-0.2
4Taiwan78.61.5
5Malaysia74.4-0.3
6Japan74.10.8
7South Korea740.0
8Kazakhstan71.11.5
9Thailand69.70.3
10Indonesia66.9-0.3
11Brunei Darussalam66.60.0
12Philippines64.1-0.4
13Kyrgyz Republic63.70.8
14Mongolia62.46.5
15Fiji62.2-1.2
16Samoa61.9-0.2
17Vietnam61.72.9
18Vanuatu60.5-0.2
19Papua New Guinea58.90.5
20China58.4-1.1
21Uzbekistan58.31.1
22Bhutan58.3-3.8
23Tonga57.5-1.3
24Cambodia57.30.0
25Bangladesh 56.50.1
26India56.50.0
27Solomon Islands56.53.6
28Sri Lanka55.7-1.7
29Tajikistan55.23.0
30Burma55.21.2
31Maldives55.2-1.3
32Laos53.9-1.6
33Afghanistan53-1.7
34Pakistan51.7-3.1
35Nepal50.7-3.5
36Micronesia50.4-1.6
37Turkmenistan47.40.9
38Timor-Leste44.7-1.2
39Kiribati44.4-0.8
40North Korea5.21.0
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