The United Nations (UN) classifies Nepal as one of the least developed counties in the world. The country’s gross domestic product (GDP) was $5 billion in 1999, with an estimated per capita GDP of $210. Several factors have contributed to Nepal’s underdevelopment, including its landlocked geography, rugged terrain, lack of natural resources, and poor infrastructure. China, India, Japan, the United States, and several European nations have made large investments in Nepal’s economy through foreign aid since 1952. Still, the country’s economic growth has been slow. Nepal’s economy is characterized by heavy dependence on foreign aid, a narrow range of exports, increasing economic disparity between the mountain areas and the more developed Tarai region, excessive governmental control and regulation, and inefficient public enterprises and administration. In addition, the economy has not kept pace with the country’s high population growth. In particular, the slow growth of agriculture has resulted in food shortages and malnutrition for some of Nepal’s people.

Landlocked, lacking substantial resources for economic development, and hampered by an inadequate transportation network, Nepal is one of the least developed nations in the world. The economy is heavily dependent on imports of basic materials and on foreign markets for its forest and agricultural products. Nepal imports essential commodities, such as fuel, construction materials, fertilizers, metals, and most consumer goods, and exports such products as rice, jute, timber, and textiles. The political and administrative system of Nepal has not made those changes in trade, investment, and related economic policies that would expedite economic development and attract foreign capital. The government's development programs, which are funded by foreign aid, also have failed to respond directly to the needs of rural people.

Nepal is among the poorest and least developed countries in the world with nearly half of its population living below the poverty line. Agriculture is the mainstay of the economy, providing a livelihood for over 80% of the population and accounting for 41% of GDP. Industrial activity mainly involves the processing of agricultural produce including jute, sugarcane, tobacco, and grain. Production of textiles and carpets has expanded recently and accounted for about 80% of foreign exchange earnings in the past three years. Agricultural production is growing by about 5% on average as compared with annual population growth of 2.3%. Since May 1991, the government has been moving forward with economic reforms, particularly those that encourage trade and foreign investment, e.g., by reducing business licenses and registration requirements in order to simplify investment procedures. The government has also been cutting expenditures by reducing subsidies, privatizing state industries, and laying off civil servants. More recently, however, political instability - five different governments over the past few years - has hampered Kathmandu's ability to forge consensus to implement key economic reforms. Nepal has considerable scope for accelerating economic growth by exploiting its potential in hydropower and tourism, areas of recent foreign investment interest. Prospects for foreign trade or investment in other sectors will remain poor, however, because of the small size of the economy, its technological backwardness, its remoteness, its landlocked geographic location, and its susceptibility to natural disaster. The international community's role of funding more than 60% of Nepal's development budget and more than 28% of total budgetary expenditures will likely continue as a major ingredient of growth.