Nepal launched its 10th 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 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 71% of the population and providing 32.12% 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 Nepal's dependence on agriculture, the magnitude of the annual monsoon rain strongly influences economic growth.

In FY 2007/2008 Nepal's exports increased by 2.4%, compared to a decrease of 1.4% in FY 2006/2007. Imports grew by 16.1% in FY 2007/2008 as compared to 12% in FY 2006/2007. Exports constrained by political turmoil and a poor investment climate in the last fiscal year grew marginally owing to improvement in the political situation. The trade deficit for FY 2006/2007 was $1.9 billion, which widened to $2.5 billion in FY 2007/2008. Real GDP growth during 1996-2002 averaged less than 5%. According to the revised estimates of the Central Bureau of Statistics, GDP grew 4.68% in FY 2003/2004 and slipped to 3.12% in FY 2004/2005, but again increased marginally to 3.72% in 2005/2006 and slipped to 3.19% in FY 2006/2007.

Despite its growing trade deficit, Nepal traditionally has a balance of payments (BOP) surplus due to remittances from Nepalese working abroad. In FY 2007/2008, Nepal recorded a balance of payments surplus of $452.9 million (0.4% of GDP), as compared to $83.58 million in FY 2006/2007 (0.01% of GDP). Significant rise in workers' remittances and grants assistance contributed to a record level of BOP surplus in FY 2007/2008, however, the BOP surplus covered import trade credit amounting to $232 million in 2007/08, reflecting a rather fragile base. In the previous year, import trade credit was at a lower level of $ 25.95 million. Nepal receives substantial amounts of external assistance from India, the United Kingdom, the United States, Japan, Germany, and the Scandinavian countries. Several multilateral organizations--including the World Bank, the Asian Development Bank, and the UN Development Program--also provide significant assistance. 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. However, the decade-long insurgency and a global economic slowdown threatened the tourism industry. But 2007 witnessed a renewed wave of tourism. Figures from the Department of Immigration showed a 37.2% increase in arrivals in 2007, which surpassed the numbers of tourist arrivals during 1999, the peak tourism year prior to 2006. Since the political parties and Maoists brokered a comprehensive peace agreement in November 2006, renewed tourist arrivals have given relief to the tourism-based hotel, trekking, mountaineering, and aviation industries.

Swift rivers flowing south through the Himalayas have massive hydroelectric potential to service domestic power 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 planned private-sector West Seti (750 MW) storage project is dedicated to electricity exports. An Australian company signed a power purchase agreement with the Indian Power Trading Corporation in September 2002 and has the lead on the project. 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. Starting in December 2006, the Department of Electricity Development obtained proposals from 14 foreign companies for survey licenses of three projects--600 MW Budhi Gandaki, 402 MW Arun III, and 300 MW Upper Karnali. The Ministry of Water Resources, after delaying the evaluation process for more than a year, finally awarded the 300 MW Upper Karnali to Indian private sector developer GMR Energy Ltd. In March 2008, the 402 MW Arun III was awarded to India's state-owned Sutlej Jal Vidyut Nigam (SJVN). The Department of Electricity Development had invited fresh global tenders for the 600 MW Budhi Gandi project in December 2007, but it failed to attract investors. 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.