Nepal launched its tenth five-year economic development plan in 2002; its currency has been made convertible; and fourteen state enterprises have been privatized, seven liquidated and two dissolved. Foreign aid accounts for more than half of the development budget. The Government of Nepal has shown an increasing commitment to fiscal transparency, good governance, and accountability. Also in 2002, the government began to prioritize development projects and eliminate wasteful spending. In consultation with civil society and donors, the government cut 160 development projects that were driven by political patronage.

Agriculture remains Nepal's principal economic activity, employing over 76% of the population and providing 39% of GDP. Only about 25% of the total area is cultivable; another 33% is forested; most of the rest is mountainous. Rice and wheat are the main food crops. The lowland Terai region produces an agricultural surplus, part of which supplies the food-deficient hill areas. Because of Nepalís dependence on agriculture, the annual monsoon rain, or lack of it, strongly influences economic growth.

Nepalís exports increased 9.32% in FY 2004/05 compared to an increase of 7.78% in FY 2003/04. Imports grew by 7.08% in FY 2004/05 compared with 5.94% in FY 2003/04. The increase in exports is marginal due to the fact that there has been a significant drop in Nepal's main export, ready-made textile products. The trade deficit for FY 2003/04 was $1.0 billion, which widened to $1.18 billion in FY 2004/05. Real GDP growth during 1996-2002 averaged less than 5%. Real growth experienced a one-time jump in 1999, rising to 6%, before slipping back below 5%. In 2002, the GDP recorded a negative growth rate of 0.33%, largely because of the Maoist insurgency. GDP grew 3.1% in 2003 and 3.26% in 2004, and again slipped to 2.04% in 2005, according to Nepal Rastra Bank (Nepal's Central Bank).

Despite its growing trade deficit, Nepal traditionally has a balance of payments (BOP) surplus due to money sent home from Nepalis working abroad. In FY 2004/05, however, Nepal recorded a much lower balance of payments surplus of $80 million, as compared to $217.7 in FY 2003/04. The lower BOP surplus in FY 2004/05 is mainly attributable to the lower inflow of net government loans. The decline is primarily in the capital account, due primarily to a slow down in development activities funded by foreign grants and loans. Nepal receives substantial amounts of external assistance from India, the United Kingdom, the United States, Japan, Germany, and the Scandinavian countries. Several multilateral organizations--such as the World Bank, the Asian Development Bank, and the UN Development Program--also provide assistance. Such assistance has decreased substantially in FY 2004/05 after the royal takeover of February 1, 2005 and also because the ongoing Maoist conflict has seriously undermined development activities throughout most of Nepal. On April 23, 2004 Nepal became the 147th member of the World Trade Organization (WTO).

With eight of the world's ten highest mountain peaks--including Mt. Everest at 8,848 m (29,000 ft)--Nepal is a tourist destination for hikers and mountain climbers. Yet a worsening internal security situation and a global economic slowdown threaten the tourism industry. Figures from the Nepal Tourism Board showed a 12.8% increase in arrivals in 2004, but these are well below numbers during 1999, the peak tourism year. Recent tourist arrivals, during the Maoist cease-fire, show a recovery from the massive decline experienced during the first five months of 2005; however, 2005 annual arrivals fell 3.9% short of total arrivals in 2004. The fragile security situation, particularly after the Maoists ended their unilateral cease-fire on January 2, 2006, is expected to alter the trend of growth in tourist arrivals witnessed during recent months.

Swift rivers flowing south through the Himalayas have massive hydroelectric potential to service domestic needs and growing demand from India. Only about 1% of Nepal's hydroelectric potential is currently tapped. Several hydroelectric projects, at Kulekhani and Marsyangdi, were completed in the early to late 1980s. In the early 1990s, one large public-sector project, the Kali Gandaki A (144 megawatts--MW), and a number of private projects were planned; some have been completed. Kali Gandaki A started commercial operation in August 2002. The most significant privately financed hydroelectric projects currently in operation are the Khimti Khola (60 MW) and Bhote Koshi (36 MW) projects.

The environmental impact of Nepal's hydroelectric projects has been limited by the fact that most are "run-of-river," with only one storage project undertaken to date. The private-sector West Seti (750 MW) storage project is dedicated to electricity exports. An Australian company, which signed a power purchase agreement with the Indian Power Trading Corporation in September 2002, is promoting the project for implementation along build-own-transfer lines. Negotiations with India for a power purchase agreement have been underway for several years, but agreement on pricing and capital financing remains a problem. The Government of Nepal has taken up the issue of project financing for the West Seti project with the EXIM Bank of China. Currently, domestic demand for electricity is increasing at 8%-10% a year.

Population pressure on natural resources is increasing. Overpopulation is already straining the "carrying capacity" of the middle hill areas, particularly the Kathmandu Valley, resulting in the depletion of forest cover for crops, fuel and fodder, and contributing to erosion and flooding. Additionally, water supplies within the Kathmandu Valley are not considered safe for consumption, and disease outbreaks are not uncommon. Although steep mountain terrain makes exploitation difficult, mineral surveys have found small deposits of limestone, magnesite, zinc, copper, iron, mica, lead, and cobalt.

Progress has been achieved in education, health, and infrastructure. A countrywide primary education system is under development, and Tribhuvan University has several campuses. Although eradication efforts continue, malaria has been controlled in the fertile but previously uninhabitable Terai region in the south. Kathmandu is linked to India and nearby hill regions by an expanding highway network.