Informal Economy: How It Helps Nepal Survive But Also Holds Us Back

• Nischal Adhikari
• Rakshya Poudel

One evening, while I was walking along a familiar road, there was an elderly woman sitting by the roadside, selling charred corn over a small fire. The smoked corn mixed with the surrounding dust goes unnoticed by pedestrians and passing vehicles. As I walked by, she looked up and softly said, “Babu, euta makai kindeuna.” That single sentence was not merely a sales call; it was also a request shaped by necessity rather than choice. I ended up buying three cobs of corn, not just for myself, but for my family members as well. As she handed me those charred corn with trembling hands and gratitude in her voice. Her eyes revealed exhaustion she felt from continuing to work in her older days despite having worked her entire life. I realized that this roadside business was not about business and was more about dignity, survival, and the absence of any other alternatives. That moment stayed with me. It was a simple transaction, yet it reflected a much larger reality of Nepal’s economy.

Understanding Nepal’s Informal Economy
Informal economy includes all the economic activities that produce legal goods and services but are not regulated or protected by the state, often due to limited access to formal systems, lack of awareness or high compliance costs. According to Visual Capitalist, Nepal is ranked third in the world for the size of its shadow economy, with unregistered and untaxed activities accounting for more than 51 percent of GDP far above the global average i.e 11.8%. Additionally, there is estimation that around 85 percent of the nation’s labour force participate in informal economy, especially in agriculture making the informal economy a vital source of livelihood for majority of Nepalese workers. In Nepal, this includes street vending, daily wage labour, domestic work, subsistence farming, home based production and other unregistered services etc. For millions of peoples, informal work is not a choice but a forceful necessity, trying to filling the gap created by limited formal employment opportunities.

The existence of informal economy (51% of GDP) in Nepal reflects deeper structural and institutional challenges i.e Complex registration procedure, limited access to finance, low levels of financial literacy, absence of targeted government subsidies or incentives, and weak enforcement capacity discourage small enterprises and workers from entering the formal sector. As a result, informality in Nepal is not merely an economic condition, but a systemic outcome of how markets, institutions, and opportunities are structured.

A Lifeline for Livelihoods, a Barrier to Progress
For millions of people, the informal economy is not just an concept discussed in reports or policy reforms, it is the everyday struggle to survive which determines whether a family can afford food, pay rent, or send children to school. Informal economy provides immediate income to unskilled or poor people where formal opportunities remain limited. Informal sector plays a crucial role in preventing unemployment from becoming a visible crisis, absorbing workers who are excluded from formal jobs due to various reasons i.e lack of skills, education, age, or social connection. During periods of economic/political instability or the COVID-19 crisis, informal sector becomes the only option of survival for many households. In this sense, the informal economy acts as a social safety net when formal sector fails to deliver.

However, survival comes with a steep cost because income is irregular, working conditions are unsafe, there is no protection against illness, accidents or sudden loss of work. A single unexpected event can prevent months of earning and make their life extremely hard keeping the workers at the edge of poverty and vulnerable for the days to come. At the macroeconomic view, informal economy limits the Nation’s progress because businesses operate outside the tax system and a significant portion of potential public revenue remains out of reach. This loss of tax revenue reduces the government’s capacity to invest in essential public services such as education, health care, infrastructure, and social protection which create a situation in which the economy continues to depend on low-value activities, while the state struggles to finance the investments needed for higher productivity, inclusive growth, and long-term economic stability.

Therefore, informal economy plays a dual role, on one hand it keeps households afloat and prevent extreme hardship and on the other hand it reinforces economic insecurity that slows country's long-term growth. As long as survival remains the primary function of economic activity, progress will always remain sluggish, uneven and fragile.

From Informality to Inclusion
Nepal’s informal economy requires continuous and deliberate modification to integrate it into the formal system so that it can be properly regulated and monitored by the concerned body. The government should prioritize simplifying business registration and licensing, lowering compliance cost and providing targeted incentives to the parties involved. Since informality is largely shaped by policy design, institutional capacity, and incentive structures, the primary responsibility for change lies with the government. So a gradual and inclusive formalization strategy must therefore be driven by reforms which reduces the barriers and enhance the benefits of entering the formal system. Initiatives like social security for informal workers on dec24, 2025 carried out by ILO with collaboration of SSF and the Ministry of Labour, Employment and Social Security to bring informal workers under the shadow of social security system which can ensure the protection and improve their wellbeing. Initiatives like this national campaign are very crucial so that social security moves beyond legal promises and becomes a lived reality for every worker who keeps Nepal’s economy running.

While the state must led this transition, workers and enterprises also has a crucial role to play. As formalization takes place it will enhance access to finance, legal protection and social security benefits the individuals and businesses should gradually embrace inclusion, recognizing that eliminating informality benefits both the government and citizens through higher productivity, more revenue, greater stability, dignity and more opportunities.

Conclusion
Informal economy is the backbone of daily economic survival for the majority of the workforce which fills the gaps left by the formal sector by providing jobs, income and resilience during the periods of uncertainty. Yet, its overwhelming dominance is also a clear sign of structural weakness of our economy trapped in subsistence rather than progress. The real task is not to eliminate informality but to transform it and integrate into the formal system. Reshaping informality into inclusion requires intended action that creates trust, eliminate barriers and make formality rewarding rather than burdensome. When informal workers are brought into systems of protection, finance, and opportunity, livelihoods are secured and national capacity is strengthened. Nepal’s economic future depends on this shift from survival-driven informality to a system grounded in dignity, security, and shared growth.