Nepal's Informal Economy in Numbers: Size, GDP Share & Employment

Nepal's informal economy is large by any measure, but the exact figure depends on whether you are measuring output (its share of Gross Domestic Product, or GDP) or jobs (how many people work informally). The two are related but distinct, and mixing them up is the single most common error in reporting on this topic. This page keeps them separate and dates every figure.

On the output side, a study titled 'Size of Informal Economy in Nepal', prepared by the Central Department of Economics at Tribhuvan University in collaboration with Nepal Rastra Bank (NRB, the central bank) and released on 26 January 2024, estimated the informal economy at 38.6 percent of GDP for fiscal year 2020/21 (roughly Rs 1.44 trillion). Over the eleven years from 2010/11 to 2020/21, the study put the average share at about 42.66 percent, with the share broadly declining over the decade.

On the jobs side, the Nepal Labour Force Survey 2017/18 (NLFS III), conducted by the Central Bureau of Statistics (CBS, now the National Statistics Office) with International Labour Organization (ILO) support, found that about 62.2 percent of employed people work in the informal sector, versus 37.8 percent in the formal sector. Using the broader 'informal employment' concept, which also counts unprotected jobs held inside formal enterprises, the share rises to roughly 84.6 percent of all workers.

There is no single official 'informal economy share of GDP' for Nepal, because the informal economy is by definition unrecorded and must be estimated indirectly. Different institutions use different methods and reference years, which is why published figures range from roughly 31 percent to the low 40s. Readers should treat all of these as indicative estimates, not exact national-accounts entries.

The Tribhuvan University-NRB study (January 2024) is the most Nepal-specific recent source. Using a national-accounts approach, it reported 38.6 percent of GDP for 2020/21 and a 2010/11-2020/21 average of about 42.66 percent. Its year-by-year series shows a downward trend, from around 49.1 percent in 2010/11 to the high-30s by the end of the decade, consistent with gradual (if slow) formalisation.

International modelling gives a somewhat lower band. World Economics, using a Multiple Indicators Multiple Causes (MIMIC) style estimate, places Nepal's informal (shadow) economy at roughly 31 percent of GDP in recent years. The gap between the two sets of numbers reflects methodology and definitions rather than a factual contradiction: national-accounts adjustments and MIMIC models are simply measuring the phenomenon in different ways.

Employment figures come mainly from the Nepal Labour Force Survey 2017/18 (NLFS III), the third such survey after NLFS I (1998/99) and NLFS II (2008), conducted by the Central Bureau of Statistics. It remains the authoritative national reference for the structure of employment, and its findings underpin most policy statements and media coverage on informality in Nepal.

The survey reports two headline shares that are easy to confuse. 'Employment in the informal sector', an enterprise-based concept, covers about 62.2 percent of employed people, with 37.8 percent in the formal sector. 'Informal employment', a broader job-based concept from the ILO framework, covers about 84.6 percent of workers because it also counts informal jobs (no written contract, no social security, no employer-paid benefits) that exist inside otherwise formal enterprises.

Informality is heavily concentrated outside protected wage work. According to the survey, roughly eight in every ten workers in non-agricultural jobs were in informal employment - a share widely cited as around 80 percent. Agriculture is almost entirely informal, so once farming is included the overall informality of Nepal's workforce is very high. Social protection coverage is correspondingly thin, with only a small share of employees covered by contributory schemes at the time of the survey.

The 'formal' economy is the part of economic activity that is registered, regulated and recorded: firms with company registration, businesses that keep accounts and pay tax, and jobs that come with written contracts, social security and legal protection. It is what the government can see, tax and regulate directly.

The 'informal' economy is legal economic activity that operates outside this framework - not counted as crime, but simply not registered or not fully captured by official systems. It ranges from a street vendor and a small unregistered workshop to a household farm and a day labourer paid in cash without a contract. The informal economy is distinct from the illegal or 'black' economy: informal work is lawful work that happens to be unregistered or unprotected.

Statisticians further separate the 'informal sector' (defined by the enterprise: small, unincorporated, unregistered household businesses) from 'informal employment' (defined by the job: any job lacking legal and social protection, wherever it is held). A worker can be in informal employment inside a formal company - for example, a contractor with no written agreement or benefits - which is exactly why Nepal's informal-employment share (~84.6%) is higher than its informal-sector share (~62.2%).

Because informal activity is by design unrecorded, no country can count it directly; it has to be inferred. For the GDP share, statisticians and researchers use methods such as national-accounts adjustments (estimating unrecorded output sector by sector) and indirect models like MIMIC, which infer the size of the shadow economy from observable causes and indicators such as tax burden, regulation and cash use. Each method embeds assumptions, so results legitimately differ.

For employment, the picture is more solid because it rests on a household survey. The NLFS 2017/18 asks about job characteristics - contract status, social-security coverage, the registration of the employing unit - and classifies each job using ILO international standards. This is why the labour figures are dated to a specific survey year and are more directly comparable across countries than the GDP-share estimates.

The practical takeaway for readers is to always pair a number with its concept, its year and its source. '38.6 percent of GDP' is a 2020/21 output estimate; '62.2 percent' is a 2017/18 informal-sector jobs share; '84.6 percent' is a 2017/18 informal-employment share. These are not competing claims about the same thing - they describe different facets of informality measured at different times.

A large informal economy shapes Nepal's public finances, worker welfare and growth prospects. When most output and jobs sit outside the registered system, the tax base is narrower, so the government collects less revenue relative to the true size of the economy and leans more heavily on indirect taxes, customs and, historically, remittance-fuelled consumption. Formalising even part of this activity is a recurring theme in national budgets and revenue strategy.

For workers, informality usually means no written contract, no contributory pension or medical insurance, weaker occupational-safety protection and limited access to formal credit. That leaves informal workers - who are the large majority of Nepal's labour force - especially exposed to shocks such as illness, price spikes or downturns. It also complicates the roll-out of the Social Security Fund and other protection schemes.

Recognising this, the Ministry of Labour, Employment and Social Security (MoLESS), with ILO support, has been preparing a National Strategy on Formalisation aimed at gradually bringing informal enterprises and workers into the registered economy. Progress is likely to be incremental: the downward trend in the informal-economy GDP share over 2010/11-2020/21 suggests formalisation is happening, but slowly.