The Scale Of Nepal’s Informal Economy

Nepal’s informal economy is not a peripheral phenomenon. It is, by most credible measures, the dominant mode of economic organisation for the majority of its working population. The International Labour Organization (ILO) estimated that approximately 85–90% of Nepal’s total employment is informal — encompassing agricultural labourers, street vendors, domestic workers, construction workers, small traders, and the self-employed who operate entirely outside formal registration, taxation, and social protection frameworks. The World Bank estimates the informal sector contributes between 35–45% of GDP when non-agricultural informal activity is fully accounted for, though by definition precise measurement remains methodologically challenging.

These are not simply the statistics of underdevelopment. They are the arithmetic of a state that has historically failed to extend legal, institutional, and economic inclusion to a substantial portion of its own citizens — and the sukumbasi phenomenon is the most spatially visible expression of that failure.

Who Are The Sukumbasi — And How Did They Get There?

The term sukumbasi — literally meaning “one who lives under a tree” in Nepali — refers to landless squatters who occupy public land, riverbanks, forest fringes, and government-owned property, predominantly in urban and peri-urban areas. They are not a homogeneous group. The sukumbasi population of Kathmandu Valley, the Terai corridor, and Nepal’s secondary cities includes displaced earthquake survivors, generations of Dalit and Janajati communities who were historically denied land rights under feudal land tenure systems, internal migrants from hill districts who arrived in cities without the capital to enter the formal housing market, and bonded labourers — kamaiyas and haliyas — freed by legal reform but never resettled with viable land or livelihoods.

The National Land Commission of Nepal estimated in its 2020 report that over 900,000 households — approximately 4.5 million people — were either fully landless or held land insufficient to sustain household food security. The Kathmandu Post has documented recurrent cycles of informal settlement formation along the Bagmati, Bishnumati, and Manohara river corridors in the Valley, where tens of thousands of households live in structures with no legal tenure, no formal address, and no access to municipal services.

The Economic Consequences Of Informality

The economic costs of operating outside formal systems are borne almost entirely by the informal workers and settlers themselves — a fact that inverts the popular perception of informality as a form of tax evasion or free-riding. Without legal land tenure, sukumbasi households cannot use their dwellings as collateral to access formal credit. Without formal employment contracts, informal workers cannot accumulate contributory pension entitlements or access labour dispute mechanisms. Without a registered business address, informal traders cannot bid for government contracts, open corporate bank accounts, or access the working capital financing that formal SMEs routinely utilise.

The IMF Working Paper on South Asian Informality (2023) characterises this as a “dual exclusion” — informal workers are excluded from both the productivity gains of the formal economy and the protective institutions of the state, leaving them permanently vulnerable to the shocks — illness, flood, eviction, price spikes — that formal sector participants can partially absorb through insurance, credit, and legal recourse.

At the macroeconomic level, informality represents a structural constraint on Nepal’s fiscal capacity. A tax base that excludes 85–90% of the workforce is a chronically narrow one. The Nepal Rastra Bank (NRB) and Ministry of Finance have both acknowledged the revenue implications: Nepal’s tax-to-GDP ratio has persistently hovered around 18–20%, significantly below the regional average and well below the 25–30% threshold that development economists associate with adequate public service delivery capacity. The infrastructure deficit, the underfunded health system, the chronically under-resourced education sector — all of these are partly a fiscal consequence of an economy where most economic activity occurs outside the tax net.

The Sukumbasi And The Politics of Eviction

Nepal’s response to informal settlements has oscillated between forced eviction and political accommodation, with neither approach producing durable resolution. Periodic demolition drives along Kathmandu’s riverbanks — most recently documented by the Kathmandu Post and Republica — displace families without providing alternative shelter, effectively relocating poverty rather than addressing its structural causes. The demolished settlements typically re-form within months, often in more marginal and flood-prone locations, as the underlying conditions — landlessness, urban wage dependency, and unaffordable formal housing — remain entirely unchanged.

Political accommodation, conversely, has at times created perverse incentives. Electoral mobilisation of sukumbasi communities by political parties in exchange for settlement tolerance has entrenched informal occupation of ecologically sensitive land — riverbanks, forest edges, and drainage corridors — with significant downstream consequences for urban flood management and biodiversity, as noted in ICIMOD research on Kathmandu Valley urbanisation.

Toward Formalisation: Structural Solutions

Addressing Nepal’s informal economy and the sukumbasi crisis requires policy interventions that treat informality as a symptom of structural exclusion rather than a behavioural or legal failure on the part of informal actors.

Land reform remains the foundational imperative. The National Land Commission’s mandate to identify, register, and resettle landless households has proceeded at a pace that bears no relationship to the scale of the problem. Accelerated titling of occupied public land — where environmental and safety conditions permit — combined with the development of affordable urban housing stock through public-private partnership frameworks recommended by the Asian Development Bank, represents the most direct pathway to converting informal settlers into legally recognised urban residents with access to credit, services, and institutional protection.

On broader economic formalisation, the ILO’s Transition to Formality framework recommends a combination of simplified business registration processes, contributory social protection schemes accessible to informal workers, and graduated taxation that makes formality financially worthwhile rather than punitive. Nepal’s current business registration and tax compliance burden — which the World Bank Doing Business Index historically ranked as among the more burdensome in South Asia — actively discourages formalisation among micro and small enterprises that might otherwise be willing to enter the formal system.

Finally, social protection extension — contributory pension access, health insurance, and maternity benefits for informal workers — would reduce the risk penalty of formalisation for workers who currently rely on informal networks and family support systems precisely because the state offers them nothing. The Social Security Fund (SSF) established under Nepal’s 2017 Labour Act represents a step in this direction, but coverage remains limited and awareness among informal workers is low, per ILO Nepal country assessments.

(Sources: ILO — Nepal Employment and Informality Data, ILO Transition to Formality Framework, ILO Nepal Country Assessments, IMF Working Paper on South Asian Informality, 2023 World Bank World Bank Doing Business Index, National Land Commission of Nepal, 2020 Nepal Rastra Bank (NRB) Ministry of Finance, Nepal Asian Development Bank, ICIMOD — Kathmandu Valley Urbanisation Research, Social Security Fund (SSF), Nepal Labour Act 2017, The Kathmandu Post, Republica)