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Nepal is among the poorest and least developed countries in the world with more than 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 40% 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 two years. Apart from agricultural land and forests, exploitable natural resources are mica, hydropower, and tourism. Agricultural production is growing by about 5% on average as compared with annual population growth of 2.5%.

Since May 1991, the government has been moving forward with economic reforms particularly those that encourage trade and foreign investment, e.g., by eliminating business licenses and registration requirements in order to simplify investment procedures. The government has also been cutting expenditures by reducing subsidies, privatising 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 where there has recently been foreign investment interest. Prospects for foreign trade or investment in other areas 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.

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