New Source of Growth: Modern Tradeable Services

It is hard to ignore the quiet frustration in the capital air. The recent strikes, marked by clashes, traffic paralysis, and tragically, the loss of lives, is sorrowfully unsettling. Yet, even amidst this turbulence, we cannot pause the work of rebuilding, tracing the quiet signals beyond the noise, and highlighting the spaces where hope still lives. Because progress, even when fragile, must be made visible. 

Let’s start with the bigger questions.

For most of human history, economic growth remained stagnant, with annual expansion hovering around zero percent (in one decimal place). That changed in 1820, when the First Industrial Revolution (IR) triggered a wave of mechanized production leading to sustained income growth. Since then, each industrial revolution has reshaped economies:

So, historically, yes—more output meant more energy, materials, and labor. Yet, the Fourth Industrial Revolution challenges this link, offering a path where growth is beginning to be decoupled from carbon emissions.

Does Nepal have to follow the typical development model?

Many economies have relied on industrialization—starting with labor-intensive manufacturing, moving up the value chain, and eventually transitioning to a service-led economy.

But Nepal’s geographic constraints, lack of industrial infrastructure, and growing digital capabilities suggest that it may not need to follow the traditional manufacturing-led growth trajectory. Instead, Nepal could leapfrog directly into a knowledge- and service-driven economy, leveraging digital transformation, fintech, and eco-tourism to drive growth without excessive resource consumption.

Why Digital Growth Matters for Nepal?

 📊 A Growing Contributor to GDP and Foreign Exchange Reserves

In just three years, Nepal’s digital economy has made a quiet leap from the margins to the mainstream. In 2022, the contribution of IT companies and freelancers combined accounted for 1.4% of Nepal’s GDP—up from just 1.0% in 2020. But the real story lies in foreign exchange: digital service exports brought in a striking 5.5% of total forex earnings, nearly doubling since 2020.

Freelancers alone contributed 3.4% of total forex in 2022—outpacing several traditional export sectors. Meanwhile, IT companies saw their forex contribution grow nearly threefold (from 0.8% to 2.2%) over the same period.

💻 A Scalable, Talent-Driven Growth Engine

The IT sector is one of the few industries in Nepal with the potential to stem brain drain by offering global opportunities at home. Believed to be a gross under-estimate at the time of the survey, there are over 66,500 freelancers and 106 IT export companies already delivering digital services worldwide. The foundation is set.

Meanwhile, the country's 137% mobile phone penetration and rising mobile broadband access (46%) offer scalable channels to connect talent with markets—despite low fixed broadband adoption. With the right digital infrastructure and support systems, Nepal can position itself as a hub for remote-first innovation, keeping its skilled youth engaged, employed, and empowered.

🌐 Reducing trade dependency on neighbors

Nepal’s economy has long leaned on its neighbors—India and China—for merchandise trade and transit. But this dependence comes with risk: geopolitical tensions, border delays, and fragile supply chains regularly disrupt the flow of traditional exports like textiles, agricultural goods, and even electricity. Geography, in many ways, has dictated Nepal’s economic fate.

But digital exports break that boundary.

Whether it’s a line of code, a machine learning model, or a fintech solution, IT services don’t need a highway or a seaport—they travel at the speed of the internet. This makes Nepal’s digital economy not just a growth sector, but a geostrategic advantage. By investing in cloud-powered, borderless exports, Nepal can diversify its trade portfolio, reduce external vulnerabilities, and reimagine its role in the global economy—not as a landlocked nation, but a digitally connected one.

 🌍 Window of Opportunity in a Booming Global Market

The global digital economy is growing at an exponential pace. Worldwide IT spending is projected to reach USD 5.04 trillion by 2024, growing at 8.6% annually. Countries like India, Bangladesh, and Vietnam have successfully leveraged IT exports to accelerate economic growth. By investing in digital infrastructure, upskilling the workforce, and fostering innovation, Nepal can position itself as a rising player in the global digital marketplace.

How Nepal Can Accelerate Digital Growth?

Strengthening Digital Infrastructure: Closing the Connectivity Gap

Let’s look at where we rank, globally:

• Expand Fiber Optic & 5G Infrastructure: Nepal ranks 120th in global broadband speed. Expanding high-speed broadband to rural areas could unlock remote work and digital entrepreneurship. 5G adoption is imperative.

• Enhance Cybersecurity & Data Protection: Nepal is ranked 109^th in the National Cyber Security Index , 140^th in the ICT Development Index and 115^th in Networked Readiness Index. These rankings reflect weak cyber defense mechanisms and limited digital infrastructure and accessibility. Strengthening cybersecurity policies, expanding ICT access, and integrating digital solutions into key sectors are essential to improving Nepal’s digital readiness.

• Establish IT Parks & Special Economic Zones (SEZs): Bangladesh’s Hi-Tech Park initiative has created 40,000+ IT jobs and attracted over USD 600 million in foreign investment. Nepal could implement a similar Digital SEZ strategy to attract global IT firms.

Investing in Human Capital: Retaining Nepal’s IT Talent

Tackling Brain Drain: Nepalese companies must scale up investments, enhance salary competitiveness, and create an innovation-driven ecosystem to retain and utilize local talent effectively.

Up-skilling Workforce for High-Demand IT Sectors: AI-driven automation is reshaping jobs globally, with rising demand for AI specialists, data analysts, and cybersecurity experts across South Asia. Yet, skill gaps remain. To stay competitive, companies must invest in upskilling, and Nepal must expand digital training programs to meet global IT demands and retain its talent.

 Leveraging Remote Work & Digital Entrepreneurship: With 66,500+ freelancers, Nepal ranks among South Asia’s leading gig economies. Yet, payment restrictions continue to block international earnings. Integrating platforms like PayPal and Stripe could boost remittance inflows and formalize IT exports. Paired with tax incentives and startup support, Nepal has the potential to become a regional hub for remote work and digital entrepreneurship.

Policy & Regulatory Reforms: Making Nepal IT-Ready

📌 Simplify Startup Rules:
Nepal ranks 94th in the World Bank’s Ease of Doing Business index, signaling hurdles for startups. A streamlined Startup Act, inspired by India’s model, could ease registration, taxation, and help attract VC funding into Nepal’s emerging tech space.

💸 Enable Global Payments:
Integrating PayPal, Stripe, and other global gateways would formalize earnings, boost forex inflows, and empower the gig economy.

🌐 Boost FDI in IT:
IT now accounts for 6.7% of Nepal’s total FDI stock (a 55% jump from 2022). With $515M in IT exports, it’s Nepal’s top export sector. Clearer rules, stronger infrastructure, and pro-innovation policy can position Nepal as a serious digital investment destination.

Nepal’s Digital Momentum Is Picking Up

Nepal is making quiet but meaningful strides toward a digital economy. The High-Level Economic Reform Commission, chaired by Rameshwor Prasad Khanal, has recognized the growing role of youth-led, tech-based services and remote work.

A small but impactful policy—allowing access to prepaid cards up to $500—has already helped many freelancers cover essential costs and tap into global markets.

With smoother forex access and better digital payments, this sector could become a major source of jobs and foreign exchange. The shift is real—and just getting started.

Acknowledgment

The data and insights presented in this newsletter are drawn from a study conducted by the Institute for Integrated Development Studies (IIDS), which I chair. The study revealed the significant, yet largely untapped potential of Nepal’s IT sector, and was undertaken with the goal of informing policy, investment, and public dialogue around digital transformation.

• This newsletter is prepared by The Office of Swarnim Wagle, MP.