Digital Payment Index for Nepal

Use of digital payment index   

1.Introduction

During the post-Covid years, digital payments have significantly increased around the world. Bolstered by the development in the digital payment infrastructure, the innovation in the payment instruments and the increase in financial awareness, especially in the developing countries, the digital payment is expanding at an unprecedented speed. It is led by large emerging economies such as China and India. The PWC organization has predicted that the number of cashless payment transactions worldwide will double in 2025 and triple in 2030 compared to 2020. In order to measure the overall progress of the payment system, various countries have created digital payment indices. The Reserve Bank of India has been publishing such an index based on March 2018, and such index has reached 465 in September 2024. Similarly, in Serbia, the index was started to be published based on the year 2016, and the index has reached 180 in 2021. In this article, an attempt has been made to discuss the calculation and applicability of digital payment index in the context of Nepal. 

2. Drivers of digital payment development  

The development and expansion of digital payment is determined by four components:

a) the tendency of the general public to use technology and the infrastructure available for it,

b) the demand-side and supply-side infrastructure of digital payment,

c) the use of digital payment instruments and

d) the experience of the general public related to the quality of payment transactions.

The level of efficiency, effectiveness and progress of the digital payment system is measured based on the progress made in these four aspects. Such measurement is done by digital payment index. 

An important prerequisite for the expansion of digital payments is public access to basic technology. This includes availability and use of mobile and internet services, use of smartphones etc. How many people use mobile phones in any country, what is the condition of internet access and how many people use smartphones determine the potential expansion of digital payments. Similarly, access to deposit accounts of the public and digital identity details also act as enablers of digital payments. In the case of Nepal, the progress made in such infrastructure can be measured by indicators such as mobile density, internet density, smartphone density. The access to bank accounts and the distribution rate of national identity cards in the form of digital identity cards can also be taken as a prerequisite indicator of digital payments.  

The second important basis for the expansion of digital payments is the demand-side and supply-side infrastructure required for digital payment transactions. The supply side infrastructure includes the infrastructure available from the organization issuing the digital payment instruments (such as: the number of payment system operators and payment service providers, the number of payment service provider agents, the number of ATM machines, the number of POS machines, the number of merchant QR codes, etc.). Similarly, from the demand side, indicators such as mobile banking account number, internet banking account number, wallet account number etc. are included under such infrastructure. In the case of Nepal, since data of all these indicators are available, these indicators can be included in the calculation of digital payment index. 

 
Third, the use of payment instruments is the most important aspect for measuring the overall trend of digital payments. It can be measured by the number of payment transactions and payment amount through various digital payment methods. For example, the number of transactions completed through mobile banking, wallet and QR and the trend of transaction amount can be included in it. As the use of digital payment increases, it can also include an indicator that informs whether there has been a decrease in the currency notes in circulation in the country and whether there has been a decrease in the tendency of people to withdraw cash from ATMs. In the case of Nepal, the statistics of such indicators are published monthly by the Nepal Rastra Bank, so the number of digital payment transactions completed through various means and the transaction amount can be included when calculating the digital payment index.  

Another important aspect of the expansion of digital payments is the public's trust in the digital payment system, i.e. what is the consumer's experience when using digital payment methods. This indicator is determined by the overall quality of the digital payment system. Quality can be estimated based on various indicators. The first part under this is the quality of the technical aspect. For example, the quality of the technical aspect of the digital payment system can be estimated from aspects such as how long the transaction has not been successful due to technical problems in the payment system in a certain period of time, i.e. what is the technical failure rate, what is the rate of fraud or financial crime in the digital payment system, how long has the payment system been down in a certain period of time, etc. This affects the public's trust in digital payments. 

Another important aspect is the level of awareness of digital financial services among the general public. It can be measured by the digital financial awareness program conducted by various concerned organizations and the population benefited from the program, digital financial literacy related materials and the number of people who read, listen, and watch these materials and other indicators. The increase in financial literacy can also be estimated from the number of people viewing websites related to digital financial literacy. It also helps to promote the safe use of digital payments and increase the digital payment transactions. The third part of measuring the quality of the financial payment system includes an indicator of how many complaints have been received from the general public regarding digital payment transactions and the rate at which those complaints are addressed. The increase in the receipt of complaints related to digital transactions can be defined as the increase in financial awareness, while the resolution rate of complaints can be taken as the increase/decrease in the quality of digital payment services.    

3. Progress in digital Payments and Calculation of Indicators 

In the context of Nepal, in the post-Covid period, there has been a significant increase in digital payment infrastructure, public access to payment instruments and the use of payment instruments. For example, compared to July 2022, the number of wallet accounts increased by 2.76 times in January 2025, and the number of mobile banking accounts increased by 1.81 times to 256 million and 263 million, respectively. In the FY 2021/22, 450 million digital payment transactions were completed, in 2023/24, the transaction was tripled, i.e. about 1.35 billion. During that period, the number of mobile banking transactions has reached to 3.76 times, wallet transactions to 2.36 times and QR transactions to 30.33 times.   

The overall progress in digital payment related infrastructure development, equipment availability and usage can be measured through the digital payment index. In the case of Nepal, it seems that the index has almost doubled in the last two years, based on the 39 different indicators for which data is available. The index calculated considering the FY 2021/22 as the base year includes all the four aspects of digital payment, while for calculating the average index, according to the international practice, the use of payment instruments and the infrastructure of the payment system are considered the most weighted. The details of index calculation are presented in the accompanying chart. Analyzing on the basis of this index, it is seen that more than 50 percent contribution to the achievements in Nepal's digital payment system is the use of payment service equipment, while about one third of the contribution is the expansion of the payment service infrastructure.  

4. conclusion 

As progress is made in various aspects of the digital payment system, the digital payment index can be used to evaluate the policy arrangements adopted by the country. Various countries have started calculating such an index to measure the expansion of digital payments. Even in Nepal, if such an index is created including all the indicators related to the payment system, it will prove to be helpful in measuring the progress in the expansion of the payment system and in creating the necessary policies for the modernization of the payment system. 

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Nepali version of the article is available here. 

Knowledge-based Economy: Context of Nepal

The world economy has witnessed dynamic growth trajectory from Agricultural revolution and industrial revolution to the present stage. In the distant past, agricultural revolution shaped the world growth trajectory for a long period of time. In the eighteenth century, the industrial revolution appeared as the prime driver of growth. However, with the globalization and rapid growth in the use of information technology since the 1980s, a distinct discourse has taken place in which human skill, creativity and innovations, not the endowment of natural resources and physical assets, are assumed to determine the long run growth trajectory of the economies.  It has been named Knowledge-based economy or K-economy. 

The concept of K-economy has been supported by the recent growth theories including the neoclassical growth theory by Robert Solow, the Innovation Theory by Schumpeter and the New Growth Theories. These theories advocate for the investment in human knowledge as the driver of long-term growth and focus on the technological advancement created by human capabilities, creativity and innovations.

In the present context, the sources and pattern of the world growth has been redefined by the knowledge-based economy. The economies which have adapted to the new growth drivers have been successful in achieving high and sustained growth through higher total factor productivity. Empirical studies also show that there is a strong positive correlation between knowledge accumulation and per capita income. One of the most cited examples in this context is that of China, Korea and Mexico. During the period from 1990 to 2018, China was able to achieve a consistent positive total factor productivity growth of 3.9 percent while that of South Korea was 0.83 percent and for Mexico, such growth was negative by 0.43 percent. As a consequence, GDP become 38-fold in China during the period, 6-fold in South Korea but it became only 4-fold in Mexico. And, per capita GDP became 31-fold in China, 5-fold in Korea and only 3fold in Mexico. Likewise, a study done by the World Bank shows that about two-thirds of the difference in per capita income in Ghana and South Korea during 1960 to 2005 was due to the difference in knowledge accumulation or growth in total factor productivity.

One another important aspect in the K-economy is which sector has the long-term potential of being the growth driver of the economy. Though Agriculture sector is still considered a potential driver of the economy in Nepal, it is the services sector that can lead growth in the medium to long term, given the limited expansion potential in the agriculture sector. In case of the high-income countries too, services sector has been the primary driver of growth during the later stages. At present, the average share of the services sector in GDP in high income countries is 70 percent while such share is increasing in the emerging market economies. During the last five decades, while Agriculture sector in Nepal has grown by 3 percent on average, the growth of the services sector has been around 5 percent. As a consequence, the share of Agriculture has declined from 72 percent in 1975 to 24 percent now whereas the share of the services sector has increased to 62 percent. If we decompose the annual growth contribution by sector, we see that the more-than-half is contributed by the services sector. During the last three years, the contribution of the services sector to growth stood at 63 percent while that of agriculture at 19 percent and industry at 18 percent.

In the financial sector, use of information technology has increased rapidly which has played a crucial role in laying the foundation of a digital economy. And there is more potential in this sector for further growth. These facts show that services sector has the potential to lead our growth trajectory. 

During the recent years, services export has also been increased in Nepal in line with the expansion of the services sector. During the last 25 years, while the merchandize exports has increased to 2.6-fold, services export has increased to 8.5-fold and reached Rs. 252 billion in the previous fiscal year. In terms of volume, service sector exports has been higher that merchandize exports during the last decade with the exception of two years during the COVID crisis. 

Nepal has introduced a number of initiatives to exploit the opportunities from the knowledge economy. One of the goals of the sixteenth plan is human capital formation and its full utilization. The government of Nepal has implemented Digital Nepal Framework to utilize the potentials from the growth in ICT sector. Similarly, the current budget of the government has declared the coming decade as Information Technology Decade and aims for an ICT export of Rs. 3 trillion during the decade. Significant progress has been achieved in digital payment infrastructure as well as payment systems. Access to information and technology has significantly improved. However, we still lag behind in terms of the indicators of knowledge economy compared to many other countries. The Knowledge Economy Index published by the World Bank has indicated the areas of improvement for us. In particular, there is a need for improvement in access to quality education, reliable ICT infrastructure, and sufficient R&D expenditure by the government as well as private sector, among others.    

To harness the potential of the knowledge economy, we need to concentrate our efforts in the following four areas: 

1. Development of policy, institutional and regulatory framework that promote human capital and creativity 

2.   Reliable and quality ICT infrastructure 

3.  Sufficient R&D investment from government as well as private sector to encourage innovations and creativity and 

4.  Sufficient investment in quality education for human capital formation

Many countries have come forward with their own roadmaps, projects and commissions to work on these four pillars of knowledge-based economy. For example: the e-Korea Vision (2002) in South Korea, India Vision (2020) in India, the e-Japan Strategy (2001) in Japan. We have also opportunities to draw lessons from the experiences of South Korea, Singapore, Finland, China, Malaysia, Thailand and others. If we can work on these strategic pillars in an integrated manner and implement our plans as well as policies effectively, we can achieve high and sustained growth supported by higher factor productivity and at the same time we can strengthen our external sector through higher service exports. 

To conclude, Knowledge economy is not just an abstract concept; it holds a solid promise for our bright future. It not only provides us opportunities but also in a sense it is mandatory. 

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Published on Feb 18, 2025. 

Author email: siddhabhatta@gmail.com