Rethinking Corruption in Nepal: From Embedded Necessity to Regulated Asset for Growth

KATHMANDU: The first tremors of the earthquake that would shatter Nepal’s political landscape were not seismic, but digital. On September 4, 2025, the government, led by Prime Minister KP Sharma Oli, abruptly banned major social media applications, including Facebook, Instagram, WhatsApp, and X. The official justification was a clampdown on “fake news”. But for a generation that came of age online, the move was a transparent and intolerable act of censorship, seen as a desperate attempt to draw a curtain over the rampant corruption that had come to define the nation’s leadership.

What followed was not silence, but a roar. The online anger spilled onto the streets, transforming into a formidable physical protest. On September 8 and 9, the major cities across the country, was flooded with thousands of young Nepalis. These were the members of Gen Z, now in their early twenties, educated but jobless, and profoundly fed up with a system that offered them no future. Armed with smartphones, they broadcast their outrage to the world, creating a powerful, decentralized movement against the endemic corruption of political parties, leaders, and bureaucrats who had siphoned billions while ordinary families struggled to survive.

The state’s response was brutal. Clashes between protesters and police resulted in at least 22 deaths and hundreds of injuries. But the violence failed to quell the uprising; instead, it sealed the government’s fate. On September 12, Prime Minister Oli resigned, leaving a power vacuum filled by a fragile interim government, backed by the army and led by former Chief Justice Sushila Karki, who now holds the distinction of being Nepal’s first female Prime Minister.
As the political dust begins to settle, the economic devastation is coming into sharp focus.

The unrest caused billions in damages, shuttered factories, and left thousands jobless. The national economy, once projected to grow at a modest 4.5%, is now expected to stagnate, with growth potentially falling below a catastrophic 1% for the year.

This crisis, born from a youth movement against graft, has forced Nepal to confront a devastating reality. But according to a growing number of financial analysts, it has also created a once-in-a-generation opportunity. They argue for a radical rethinking of corruption itself—not merely as a moral failing to be punished, but as a distorted, unregulated feature of the economy that, if managed and formalized, could be transformed into a powerful engine for national prosperity. It’s a system, they argue, woven into the very fabric of how Nepalis buy, sell, and survive.

Corruption’s Grip on Nepal: The Unseen Fuel of Economic Flow

To understand this unconventional perspective, one must first look beyond the official ledgers and into Nepal’s vast and dominant shadow economy. According to financial experts like CA Anup Nepal, Vice President of Association of Chartered Accountants of Nepal (ACAN), corruption in Nepal is not just a series of isolated criminal acts but is deeply enmeshed in daily commerce. For countless small businesses, a “facilitation fee” to a bureaucrat is not a crime but a necessary operational cost to bypass a system so mired in red tape that it would otherwise be impossible to function. Without these unofficial shortcuts, many projects stall, markets choke, and bureaucracy becomes a form of torture.

This informal system has become the de facto engine of the economy. While the formal, or “white,” economy is praised for its transparency and ability to generate tax revenue for public services, its reach in Nepal is critically limited. The International Monetary Fund (IMF) estimated in 2025 that Nepal’s formal sector accounts for a mere 18% of GDP in government revenue. The rest of the country’s economic activity churns in the shadows, driven by a massive informal trade sector and remittances from abroad, which the World Bank notes amount to a staggering 28% of the nation’s GDP.

The central problem, as analysts point out, is not the existence of these economic flows, but their nature. Because they are unregulated, secretive, and based on personal connections, they are inherently unpredictable and unfair, disproportionately benefiting a powerful elite while leaving the broader population behind. The challenge, therefore, is not to eradicate this activity overnight but to bring it into the light—to regulate these flows with clear rules and oversight, thereby turning them from a source of systemic drain into a powerful national resource.

Nepal in a Global Mirror

An economy’s “shadow” or informal sector consists of all economic activity that is unrecorded, unregulated, and untaxed. While every country has one, its size is a critical indicator of institutional health and regulatory efficiency. In Nepal, this hidden economy is not a fringe element but the dominant force.

A comparison with the world’s five largest economies and South Asian neighbour’s illustrates Nepal’s unique position. While its shadow economy is small in absolute dollar terms, as a percentage of its total GDP, it is one of the largest in the world.

Sources: Ernst & Young Global Shadow Economy Report 2025; IMF World Economic Outlook, April 2025
The data reveals a stark contrast. In developed nations like the United States (5.0%) and Germany (8.0%), the shadow economy is marginal, reflecting strong institutions and high levels of compliance. Even in a rapidly growing economy like China, the informal sector is kept to around 20%, allowing the state to capture sufficient revenue to fuel its 4.8% growth.

Nepal’s 50-55% figure places in an unenviable position as one of the world’s most informal economies, indicating that the majority of economic life—from street vendors to family farms—operates outside the state’s purview.
While this provides a vital social safety net, it severely limits the government’s ability to raise revenue and invest in public goods. India’s success, with a world-leading 6.6% growth rate, is partly attributed to its efforts to formalize its large shadow economy through initiatives like digital payments, offering a potential model for Nepal to follow.
A large shadow economy is almost invariably linked to high levels of perceived corruption. Transparency International’s Corruption Perceptions Index (CPI) scores countries on a scale of 0 (highly corrupt) to 100 (very clean). Nepal’s 2024 score of 34 places it 107th out of 180 countries, a poor standing that aligns with its economic structure.

This regional data underscores that corruption is a shared challenge. The low scores across the board have been a catalyst for public anger, with Nepal’s September uprising mirroring similar youth-led protests against graft and cronyism that have recently rocked Bangladesh (2024), Pakistan (2024), and Sri Lanka (2022), leading to the ousting of their respective leaders. The pattern is clear: a new generation is no longer willing to tolerate opaque governance.

The High Cost of Unchecked Corruption

While some analysts argue that informal payments can act as “grease” to move the wheels of a sclerotic bureaucracy—pointing to developed economies like Italy (~20% shadow economy) that still thrive—the evidence against unchecked, systemic corruption is overwhelming.

Historical and economic studies confirm its corrosive effects. Research by the IMF has long suggested that each point drop in a country’s CPI score can reduce annual GDP growth by as much as 0.5%. In “Why Nations Fail,” Daron Acemoglu and James Robinson describe corruption as an “extractive” force that creates a vicious cycle of poverty and weak institutions. This is not theoretical; in the 1990s, corruption in Nigeria siphoned an estimated $5 billion, leading to zero growth and soaring poverty. Argentina’s 2001 economic collapse, fueled by graft, saw its GDP plummet by 11% and unemployment spike to 25%.

In Nepal, these costs are evident across society:

• Economic Stagnation: FDI is a mere $150 million, while potential growth of over 6% is unrealized.
• Severe Inequality: The top 10% of the population holds over 50% of the nation’s wealth.
• Political Instability: The country has seen six different governments in the last decade, eroding investor confidence and long-term planning.
• Human Capital Flight: Over 500,000 youths leave for foreign employment annually.

A Ray of Hope: Lessons from Regional Recoveries 

Despite the grim statistics, the recent experiences of Nepal’s neighbors offer a powerful message of hope. They demonstrate that a determined push for reform following a crisis can yield rapid and positive results.

• Bangladesh: After protests in 2024, the government engaged in dialogue with youth leaders, launched anti-corruption probes, and supported small businesses. The result: inflation has been brought under control, exports are up 13%, and growth is projected at 5.7% for 2025.

• Pakistan: Facing severe inflation and instability, the government adhered to an IMF program, pursued privatization, and promoted digital finance. This stabilized the economy, boosting FDI to $2 billion and reining in inflation.

• Sri Lanka: After its 2022 economic collapse, a new administration implemented painful but necessary debt restructuring and transparency measures. The economy has responded dramatically, swinging from a -7.3% contraction to +5.0% growth in just two years.

The lesson for Nepal is clear: crisis can be a catalyst. By adopting a similar multi-pronged approach—combining immediate actions to build trust with a long-term vision for structural change inspired by models like Singapore—Nepal can turn this moment of turmoil into a genuine opportunity for renewal.

Charting the Shift: A Clear Roadmap for Nepal

The interim government under Sushila Karki has a narrow window to enact bold reforms that can fundamentally alter Nepal’s economic trajectory. Financial experts have outlined a detailed, time-bound roadmap that moves beyond rhetoric and focuses on pragmatic, structural changes.

Phase 1: Building the Regulatory and Transparency Foundation

This first phase is critical for establishing a new framework of accountability and formalizing the key channels of the shadow economy.

1) Professionalize the Service Economy:Given Nepal’s mountainous terrain which limits heavy industry, the service sector is the most practical engine for creating jobs and economic growth. A large portion of this vital sector, however, operates informally, especially intermediary services handled by brokers and agents.

A powerful first step towards reform is to professionalize these services through a robust licensing system. This single move would create a cascade of benefits: it would bring much-needed transparency to transactions, provide essential consumer protection, generate significant new tax revenue, and cultivate a skilled professional class, leading to better employment opportunities.

The success of a service-led economy is evident in countries with similar populations or geography, like Bhutan, Costa Rica, and New Zealand, which have leveraged their service sectors to achieve economic stability and higher national incomes. Although Nepal’s service sector already makes up a large part of its GDP, the country’s low per capita income reveals a critical gap. Formalizing key industries like IT, tourism, finance, and property services is the key to capturing this untapped value and powering the national economy.

-This chart visually confirms that Nepal’s service sector, contributing around 60% to the economy, is already its largest component. It stands strong even when compared to larger developing economies.

The key difference lies in formalization. Countries like Bhutan and Costa Rica made services official by licensing brokers (e.g., for land, loans, or travel), creating jobs and raising incomes. Nepal can do this too—licensing property agents, financial planners, and tax helpers could create 200,000 jobs and grow our economy 5% by 2028.

a) Establish a National Property Exchange and License Property Brokers: All real estate transactions would be registered on a central, digital exchange, ensuring transparency in pricing and ownership, and preventing the rampant under-declaration of property values that facilitates tax evasion.

b) Regulate Tax Agents: The government should amend tax laws to require every income-earning individual to file a tax return. To facilitate this, it must create a regulated profession of licensed tax agents who can assist the public, turning a compliance burden into a service industry.

c) Issue and Regulate Broker and Agent Licenses: Formalizing the services of mortgage brokerage, financial advisory, education and migration consultancy will bring transparency to the credit and investment markets, protecting citizens from predatory practices and integrating these financial flows into the formal economy.financial services such as etc.

This focus on the service sector is crucial. A comparison with other nations highlights the immense potential. While Nepal’s service sector contributes significantly to its GDP, its per capita income lags dramatically, indicating a lack of formalization and value capture.

2. Integrate All Major Financial Transactions into the Tax System: Alongside licensing, the government must close legal loopholes that allow high-value transactions to escape taxation. This includes mandating the reporting and taxation of capital gains from the disposal of unlisted shares, a common vehicle for the wealthy to transfer assets without tax incidence and capturing interest income from bonds and treasury bills at the source.

3. Restore Trust Through Forensic Accountability: To signal a definitive break from the past, the interim government must immediately commission an independent investigation into the wealth accumulation of high-level bureaucrats and politicians over the last four decades. The Institute of Chartered Accountants of Nepal (ICAN) has professionals with Forensic Accounting and Fraud Detection (FAFD) certifications who are uniquely skilled for this task. This initiative would not be a mere witch hunt, but a systematic effort to identify the mechanisms of corruption and ensure that the rule of law, as enshrined in the constitution, is applied equally to all citizens.

Phase 2: Driving Digitalization and Inclusion

With the regulatory framework in place, the next two years must focus on leveraging technology and expanding formal systems to the entire population.

4. Execute a Full-Scale Digital Transformation: The protests, as one analyst noted, “turned to ashes our old system”. This provides a mandate to build a new, fully digital infrastructure for governance. This means digitalizing all possible government and professional services: online business registration, AI-assisted tax filing, e-permits, and a centralized digital land registry. This rapid adoption of technology will drastically reduce the cost of doing business, speed up service delivery, and, most importantly, eliminate the human interaction points that are breeding grounds for corruption.

5. Drive Nationwide Financial Inclusion: The government, in partnership with financial institutions, must launch a campaign to bring all citizens into the formal banking system. This involves expanding access to digital payment systems and empowering micro-finance and cooperative banks to serve rural and informal sector workers. Reducing the economy’s reliance on cash is fundamental to increasing transparency.

Phase 3: Institutionalizing Integrity and Sustaining Growth

The long-term vision is to embed these reforms into the country’s permanent institutional fabric.
6. Build and Empower Independent Anti-Corruption Institutions: Nepal must establish a truly independent anti-corruption body with the constitutional authority and resources to investigate and prosecute graft at the highest levels, free from political influence.Example: Singapore’s CPIB; Hong Kong’s ICAC.

7. Enact Comprehensive Civil Service Reform: To address the root causes of petty corruption, the government must undertake a deep reform of the civil service, including raising salaries to competitive levels to reduce the temptation for bribes and implementing a strictly merit-based system for promotion.

A Brighter Dawn for Nepal

The fury of September 2025 was not an endpoint but a catalyst. It revealed a generation of young Nepalis who refuse to accept a future defined by systemic decay and who demand a stake in their own country. The interim government, and whichever administration follows, now stands before a historic opportunity: to heed this call and turn this moment of profound crisis into one of lasting, structural reform.

The path forward is not about simply punishing a few corrupt individuals; it is about re-engineering the very operating system of the Nepali state and economy. Success hinges on embracing the core principles that have guided other nations from crisis to prosperity. It requires the unwavering commitment to transparency seen in Estonia’s post-Soviet digital revolution and the focus on building strong, independent institutions that underpinned South Korea’s economic miracle following its democratic transition. The experiences of neighbors like Bangladesh and Sri Lanka further prove that even in the face of immense challenges, smart, targeted reforms in digitalization and financial inclusion can yield powerful results.

Regulating corruption, in this context, is not an act of surrender but a pragmatic strategy of co-option. It means systematically bringing the vast, energetic flows of the shadow economy into a regulated, transparent, and taxable framework. If even half of Nepal’s $22 billion shadow economy could be formalized, the resulting increase in tax revenue would be transformative, providing the funds to invest in the schools, infrastructure, and healthcare that the country so desperately needs.

This is the only path to achieving genuine equality. A formalized system, governed by rules instead of connections, is inherently more equitable. It fosters meritocracy, reduces the vast gap between the elite and the masses, and rebuilds the sacred trust between citizens and the state.

Nepal’s inherent strengths—its vast remittance base, its resilient and motivated young population, and its high-potential service economy—are undeniable. The September uprising has provided the political capital to harness these strengths in a new way. By championing a bold agenda of licensing, digitalization, and forensic accountability, Nepal’s new leadership can transform the corrosive burden of corruption into a regulated, documented, and productive tool for national development. The road is long and fraught with challenges, but for the first time in decades, a brighter, more equitable dawn for Nepal feels within reach.

(The author is a chartered accountant in practice)