Nepal: World Bank's warning on low human capital index, need to invest more in people

Faltering economic growth and limited employment opportunities with unemployment rates seen to be in double digits are some of the reasons behind the protests in Nepal by Gen Z that have taken to the streets against corruption, nepotism, economic inequality and a social media ban that eventually led to the resignation of Nepal Prime Minister KP Sharma Oli on Tuesday.

As per World Bank data, the unemployment rate in Nepal has remained consistently above 10% for several years now and was at 10.7% in 2024.

A recent World Bank report revealed that Nepal’s Human Capital Index (HCI) score stands at 0.51, meaning a child born today is expected to reach only 51% of their full productivity potential by age 18.

“Limited access to quality education, healthcare, and nutrition means that half of a child’s productivity potential will never be unrealised,” it said.  When factoring in employment rates this potential dropped even further to just 18% in the Utilization-Adjusted Human Capital Index (UHCI).

“This stark finding indicates Nepal is significantly under-investing in its human capital and failing to fully utilise the talent it has, leading to a substantial loss of potential across the country,” said the World Bank’s Nepal Human Capital Review released in August this year.

The report noted that Nepal’s low HCI and UHCI are the result of several structural challenges, including: low and poorly managed social public spending, which makes it difficult for local governments to effectively deliver essential education and health services; limited access to capital by microenterprises and small and medium-sized enterprises, which are needed to create jobs and drive economic growth; and fragmented social protection programs, which hinders their ability to support human capital accumulation and utilization effectively.

“To address these issues, Nepal needs to invest more—and more effectively—in its people and their futures,” it underlined.

The economy too has been faltering and Nepal is currently under the International Monetary Fund’s Extended Credit Facility Arrangement under a 38-month arrangement from June 2022 under which it is to receive a total of $395.9 million to help it mitigate the Covid-19 pandemic’s impact on health and economic activity, protect vulnerable groups, preserve macroeconomic and financial stability, and support sustained growth and poverty reduction.

It reached a staff-level agreement and completed the sixth review under the ECF in June this year, paving the way for another $ 42.7 million, taking the total funding till date to $ 331.8 million.

At the time, the IMF had noted that the Nepal economy is seen to grow by above 4% in FY25, which is still below potential and economic growth is likely to strengthen further in the current fiscal. “However, the outlook is subject to important downside risks, including under-execution of capital projects, an increase in financial sector vulnerabilities, elevated global trade tensions and uncertainty, and potential disruptions to domestic policy continuity and reform implementation,” it had noted.