Kathmandu University School of Management

Case Review 3
Services Sector in Nepal – Status, Potential and
Challenges

Submitted to: Submitted by:

Mrs. Anupama Panta Sushant Shekhar Gupta
Faculty of Development Economics Section C
Roll number 18732
Synopsis

This case talks regarding the present conditions, faced challenges and the future potential of the
service sector in Nepal.

Identification of Core Issue

 What is the present condition of service sector in Nepal and does this sector holds the
potential to make Nepal a prosperous nation?
Facts on Core Issue

Servie sector has been the backbone of Nepalese economy for around two decades now.
According to the data of FY2019, the service sector accounted for 50.11 % of the real GDP
whereas the industrial and agricultural sector contributed 28.77% and 14.36% respectively.
Though the majority of the populaiton are employed in the primary sector, the service sector has
the most significant impact on the GDP. In Nepal service sector only employs 17% of the
working populaiton whereas in countries like USA, Canada, UK, Germany more than 80% of the
population is in the service industry. This shows we still have not used the full potential that
service industry carries. In our opinion, service sector is the only sector that can help Nepal be
prosperous and join itself in the rank of middle or high income countries. Let’s be honest,
looking at the current infrastructure and resources there is no way we can compete with China or
India or USA or any other country in case of agriculture or industrial products. Neither can we
go about mass production and provide cheap products like China and India do, nor can we
compete in quality with countries like Japan or South Korea. This leaves us with the only option
of service sector. To conclude, the present situation of service sector industries in Nepal is
satisfactory and talking about future potential, service sector holds more opportunities than our
agricultural or industrial sector.
Analysis

The service sector, also known as the tertiary sector, is concerned with production of services
instead of end products. Services sector is now the largest contributor of GDP and one of the key
drivers of growth in the global economy. In the good old days, countries with high agricultural
production and mining output were prosperous. Then the world approached the industrial era
where industrialized economies were developed and affluent. Finally, today we are seeing a shift
from the primary and secondary sector to a service based structure and looking at the overall
scenario, economies centered on the service sector are more advanced than countries dependent
on industrial or agricultural sector.

Figure 1. Contribution of Service Sector in Different Economies

In the above figure, we can see how developed economies like USA, UK, China, Japan etc are
highly dependent on the service sector. It has become the largest sector of the world marking
65% of the global GDP. It is the leading sector in 201 economies and 30 countries receive more
than 80 percent of their GDP from services sector. The two most important branches in the
service sector are the Information Technology sector and the Tourism Sector. This applies to
most of the service oriented economies and for the most part also holds true for our economy.

Information Technology (IT) Sector:

Nepal is not quite developed in the IT sector and most of the IT firms in Nepal are small
companies employing a handful of people. As mentioned in the case, 41 percent of IT firms have
only one to three staffs whereas merely 10 percent of the firms employ more than 10 staffs.
Further, according to the report of Computer Association Nepal (CAN) Federation, there are
more than 6000 IT companies, which are not registered. As most of the companies are
unregistered, the tax revenue for the government is hampered. Further, it makes it difficult to get
the data regarding the condition and problems of the Nepalese IT sector. Talking about existing
problems in IT sector, the major problem is the cost and quality of internet. The internet
connection, coverage and other infreastructure needed by the IT companies are lacking in our
nation. The case suggests to increase investment in the IT infrastructure development. As
infrastructures develop, more firms will enter the IT sector as well as in the presence of better
infrastructure the firms could develop and expand themselves. This would create a demand for
IT professional in the maket. This
shift in demand will increase the
wage rate among the IT
professionals. Now this increase in
demand will further eliminate
another problem i.e. brain drain. As
mentioned in the case, most of the
skilled individuals move to foreign
countries as other countries offer
higher wages for the same work.
This has been one of the major
hinderance in the growth of the IT

Figure 2 Increase in labor demand and wage rate

sector. Now if the salaries for IT professional in our nation increases, individuals would not be
motivated to stay in a foreign land away from family and friends.

Further, when the IT sector of a nation is developed, new and better technologies are created
within the nation which would help the
agricultural and industrial sector as
Figure 3 Shift in Production Possibility
well. The productivity of both the Curve
agricultural and industrial sector can
be increased with the introduction of
new technologies. The given figure
shows a shift in the Production
Possibility Cure (PPC), which occurs
when there is an advancement in
technology in a particular sector.
There is difference between moving
closer to our production capabilities
and increasing our overall production
capabilities. The given figure shows
the conditon where there is an increase in our production capabilities.
Tourism

Tourism is one of those sectors with carries unlimited potential in Nepal. If we look at the global
scenario, the income of individuals is increasing and people have become more attracted towards
travelling and living a happy life rather than constantly living in through work and stress. Work-
life balance has become a hot topic.
These scenarios have helped overall
tourism sector to flourish. The
contribution of tourism to the global
GDP has been increasing. The total
contribution of the travel and tourism
industry in 2019 accounted for 10.4
percent of the total GDP worldwide. If
we look at the growth rate of different
sectors, we can see that travel and
tourism marks one of the top spots. We
can also be a part of the growth,
Figure 4 Growth rate in different sectors (2018)
however, inadequate advertisement,
restriction on currency movement, slow
and complicated visa processing etc are some of the reasons blocking our way towards the
desired growth. Further the case states the lack of tourist spots to be another major problem. The
tourist spots in our country are the same they were ten or twenty years ago. Chandragiri Hill can
be an example of development of a new tourist spot. The nation needs more of such development
in order to attract second timers.

If we look at the present situation, it is obvious that the tourism sector would be most affected by
the corona virus pandemic. Even if everything gets back to normal soon, the tourism industry
would take at least few years to get on track again. Millions of people are now unemployed and
even if people have their jobs; their first priority would be health and financial security rather
than travel and leisure. The facts and solutions provided in the case would be valid if the corona
virus thing didn’t happened. Now there is huge question mark regarding how the tourism sector
would survive the aftermath of this pandemic. In our opinion, if everything gets back to normal,
we can revive pilgrimage tourism which shall be the focus of our government after the pandemic
is over. To be honest, even if the pandemic is over, tourism would be at last on the priority list of
the government. Thus the future of tourism sector remains questionable.
Solutions

1. Focus on strengthening the Nepalese rupees

Nepalese rupee is continuously losing its value when compared to foreign currencies. We
generally have the tendency to compare currencies with the US dollar. As of now, 1 USD
is equal to Rs. 120.50 whereas it was hovering around Rs. 105 just two years ago. We can
see how the Nepalese rupee has lost significant value and the government must try to
bring it in control. The appreciation of Nepalese rupees is important because the
depreciated value is negatively affecting the income generated from tourism. For an
example, let us assume that a tourist spends around Rs. 10,000 on average during his stay
in Nepal. Previously, when $1 was equal to Rs.105, he would spend around $95 during
his stay whereas now since $1 is equal to Rs. 120, he only has to spend around $83 for
his overall stay. We can see how there is a loss of $12 from a single tourist just because
of the depreciation of our currency. Now it isn’t necessary that a tourist would only spend
Rs. 10,000 during his/her whole stay. If they spend Rs. 1, 00,000 during their stay then
the difference of dollars lost would be $119. Further, when we multiply this loss to the
number of tourists’ visits in Nepal, the amount would be humongous. Thus the
government should focus on strengthening the Nepalese rupees.

The value of currency depends on the demand and supply of the currency in the foreign
exchange market. The government can stimulate the demand of our currency as a result
increasing its value. Among some of the measures, one of them is buying ones’ own
currency in the foreign exchange market thus creating demand. Buying own currency
means selling other countries’ currencies and can be only done to the extent we have
foreign countries’ currency. Another way to increase the demand of our currency could
be increasing the interest rates. If our banks or bonds provide more interest rates then
investors will start buying our country’s bonds or would start depositing money in our
banks. This phenomenon starts pushing the value of currency higher. And the most
effective way to appreciate ones currency is by increasing growth rates and making the
country an attractive place to invest.
So to conclude, the government should focus on uplifting our currencies’ value as it is
having a negative effect on the revenue generated by tourism.
2. Improving the in IT infrastructure:

The case has mentioned regarding the problems faced by IT firms due to the lack of
proper infrastructure. The government is even not able to provide a stable and reliable
internet connection, which has caused several difficulties for the IT firms. The case also
mentions the incident in which the IT Park in Banepa was closed due to the impediment
from lack of power supply and poor internet connectivity. Such situation must be
resolved by the government. The government must try to bring modern and scientific
technological infrastructure in the IT sector. Our future lies in the performance of the IT
sector, thus the development of this particular sector should be well thought of. Improved
technology will not only help the IT firms to improve the productivity and efficiency but
will also help the nation as a whole to shift its production function.

Output

PF1

O1

PF

Labor & Capital

L

Figure 2 Production Function

In the above figure we can see how with an improvement in technology and other infrastructure,
there is a shift in the production function of
the economy. With improved technology, we
can produce more output with the same level Figure 3 Long Run Average Cost
of labor and capital. As each individual firm Curve

increase their output, their overall cost would

decrease resulting in more profitability. In
the figure illustrated at your right hand side,
we can see how with the increase in output
the overall average cost decreases. It is
because when output increases, the fixed cost
is divided among more products resulting in
a lower average cost. This would further
attract new players in the IT sector ensuring
competitiveness and overall growth. Thus the
government should focus on developing the infrastructures required by the IT sector.

3. The stimulus package

The COVID-19 pandemic has affected every nation, every sector and every business
worldwide. Among the different sectors, the service sector would be most affected as
service sector booms only when individuals have stable income. Agricultural and
industrial sector, for the most part, would stabilize quickly as they are necessary for
human survival. On the other hand, most of the service sector output is not essentially
necessary for human survival. Banking, hotels, entertainment, restaurants etc makes
human life better but are not of primary importance. In such situation it becomes
important for the government to bring policies that would help stabilize the service sector
industries.

Huge investments have been made in the service sector which shall be protected.
Economies all around the world are focused on protecting the MSME’s (Micro, Small
and Medium Enterprises) which shall also be followed by Nepal. The service sector
consists of some big players however, the majority is small enterprises. These enterprises
need protection from the government in order to save themselves from bankruptcy.

The world economy is facing the greatest recession of all time and so is the Nepalese
economy. We are currently at
the lowest point of the business
cycle. The recovery from this
depression totally depends upon
the policies the government
brings. Initially, the major focus
of the government should be on
heath care and eventually the
policies must focus on the
protection and recovery of the
several MSME’s around the
nation. The policies must focus

Figure 4 Business Cycle

on boosting demand, providing replacement income and facilitating new investments in
the nation.

We don’t know much regarding what policies would be better for our nation and how
much of a stimulus our government can afford. These answers would be soon provided
by the Finance Ministry and also it would be interesting to see what the upcoming budget
holds for us. Ultimately these policies would define what tomorrow looks like in our
nation.
Managerial Implication

After reading this case we understood how dependent Nepal was on the service sector. This
dependency would cause a huge loss in the years to come as now the service sector around the
world has completely collapsed due to the corona virus pandemic. From the standpoint of
managerial implication it has taught us that we should not only depend on one source of revenue.
Most organizations only depend on sales for revenue generation which should be avoided. In our
opinion, the monetary holdings of an organization should be diversified to various areas so that
even when sales dry up, the investments keep bringing in revenue.
References

1. Nepal Economic Outlook 2018/19

2. https://data.worldbank.org/indicator/SL.IND.EMPL.ZS

3. http://statisticstimes.com/economy/countries-by-gdp-sector-composition.php
Honor Code

On my honor as a student, I pledge that I have neither given nor received aid on this assignment.

Sushant Shekhar Gupta