In July 2002, Nepal completed its ninth economic planning period, and embarked on its tenth (2002/03 to 2007/08). It has not been a triumphant progression. Buffeted by a sagging world economy, the aftermath of the 11 September 2001 terrorist attacks on the United States, and an increasingly violent Maoist rebellion, Nepal reported its lowest growth rate—0.8% of GDP—in over a decade, and a 23.4% plunge in development spending, a serious stumble in the moderate, but steady progress it had been making in the 1990s.
Planned economic development began in 1953 with construction of roads and airfields and of irrigation projects to bring more acreage under cultivation. In 1956, these projects were integrated into the first five-year plan (1956–61) to assist existing industries, revive and expand cottage industries, encourage private investment, and foster technological training. With the second plan (1962–1965), the government introduced land reform with programs to set ceilings on land holdings, to protect tenancy to redistribute land to the landless, and to initiate a compulsory saving plan. Though declared a success at the time, land holdings have remained seriously skewed in distribution mainly because large land holders were able parcel out land to relatives, and because the poor have been forced to sell their redistributed land to pay debts. The third economic plan (1965–1970), was the first to be administered under the panchayat system, the system overthrown in the economic reforms of the early 1990s. The fourth (1970–75) and fifth (1975–80) five-year plans continued to emphasize infrastructural development, primarily in transportation, communications, electricity, irrigation, and personnel. The sixth development plan (1980–85) allocated nearly one-third of its total expenditure to agriculture and irrigation. However, money targeted for development projects was used for other purposes.
The objectives of the seventh plan (1986–90) were to increase production, create opportunities for employment, and fulfill basic needs. Of the total expenditure, 65% was to be used for investment, allocated as follows: agriculture, irrigation, and forestry, 30.6%; industry, mining, and electricity, 26%; transportation and communications, 17.7%; social services, 25.2%; and other sectors, 0.5%. Foreign aid was expected to fund about 70% of these projects.
With the establishment of multi-party government in 1991, a comprehensive set of reforms affecting all sectors of the economy was initiated under the eighth five-year plan (1992–1997). Nepal's public enterprises (PEs) were slated for privatization, government monopolies in hydroelectric power, telecommunications, and transportation were opened to private investment, customs were streamlined, and the country declared open for foreign investment. The ninth plan (1997–2002) emphasized investments in agriculture and hydroelectric power, liberalization and privatization of the economy, and a thorough reform of the tax system and banking practices. Under the tenth plan, to run until 2007/08, priorities have shifted to security and poverty reduction, but with a renewed emphasis on privatization and the effort to encourage private investment.
Nepal has considerable development potential. Its vast hydroelectric power resources are estimated at 83,000 MW, of which less that 1% has been brought on line. The legal framework for the full-scale private development of the hydroelectric sector, with private exports to India, is in place. Other promising growth sectors are air transportation and telecommunications, both open to private investment, and tourism. There is growth potential in both malefactors and agricultural products for export. Although there have been many slips in the implementation of the government's economic liberalization program, it has maintained a stable, non-inflationary currency regime, and, until the eruption of problems in 2001, a record of unspectacular but steady 5% annual growth rates in GDP. The government also claims improvement in the reduction of poverty, from 42% of the population in 1997 to 38% in 2003.
Nevertheless, the challenges to Nepal's economic development are formidable. These include limited natural resources, difficult topography, poor infrastructure, landlocked location, weak human capital (with both low levels of education and health), poor public management, and a long history of political interference in the economy. Nepal's economy is characterized by a high vulnerability to shocks, natural and man-made. Its growth has been arrested since 2001, and with a per capita income below $300 in nominal terms, it remains one of the world's poorest countries. It remains to be seen whether its economic reform programs will be swept away, or prove to be built solidly enough to weather the passing storms.