Is The Caste System Holding Nepal Back?

Yes, is the answer to your question. Not so long ago, a leading headline in the London Telegraph put it this way:
"As long as Nepal is crippled by caste, it shall remain an economic untouchable"
The source which does not mince its words goes on to say that "Nepal's rigid caste system is holding the country back, preventing it from taking part in the economic revolution of its neighbors."
Things in Nepal change mighty slowly. Changes in the laws took place back in 1964 in an attempt to end generations' old discriminatory laws made on the grounds of caste, but that's on paper. Officially, the caste system doesn't exist. In practice, however, peoples' attitudes and views on caste remain little changed.
Footnotes:
a.  I'll pass on unsolved problem of people in Terai region. No comment there.
b.  In terms of numbers nationwide, it is generally acknowledged that there are 4 major groups, as many as 36 different castes. 103 district groups and with locals who speak 92 different languages in Nepal.

Nepal isn't in India. It's a separate country and talking about caste or discriminating based on caste is a criminal offense with jail time in Nepal.

In Parliament there are many lower caste politicians and the president is a woman. It's actually mandated that a certain percent of politicians are lower caste.

People do not defecate in the streets in Nepal. Once in a while I see a man aiming at at tree, but as discretely as possible, not pulling his pants down to shit in the street. What would you do if you had to go and there were no toilets around? Pee yourself?

There is one village that I know of where it is not customary to use a toilet. The rest of the Nepali think that is disgusting.

/!\ I AM A STUPID SPAMMER /!\s are more and more common and times are changing very quickly. I see young people hanging with other castes as friends and even the untouchable people are doing better. In India often the people from higher castes will lie on applications to say they are low caste so they can get the job.

I've lived in Nepal for 7 years and I've seldom if ever seen issues with caste.

One issue I've personally experienced: When I moved into my first flat here in Nepal I had a young helper from the 'music' caste. This is traditionally an untouchable caste. The landlord was an older Newar (upper caste) man and had a problem with my helper. I could see the prejudice, but he never prohibited me from having him in the home or anything. If he would have, I'm sure my helper would have had him arrested.

How do they know who's upper and who's lower caste? First, by their appearance. For example, the music caste people are a bit on the dark side as far as skin color goes, but they are also a bit shorter than average and have really lovely facial characteristics. They can also know by the family name. I think it's really ironic that the family name, Nepali, is a lower caste name. I have no clue how that happened.

I think the infrastructure is a bigger hindrance in progress than castes.

Note: I'm a foreigner and do not mean any harm in talking about this subject. If anyone is offended by this post please send me a PM and I'll delete or edit it. Better yet, please correct anything in error here. It's not a subject that is openly discussed in Nepal, especially to tourists.

The issue with caste is not the overt discrimination. The issue with caste is the discrimination based on lower expectations (as Obama pointed out.) People of lower caste simply don't think they deserve the same rewards for the same work as people of higher caste.

If a business permit is needed, a person of lower caste believes he should be required to wait longer, pay more, or be denied more often. So, why try?

The higher castes get a lot more of the earthquake relief money. After all, all castes agree that the china hutch and its china that were destroyed when it tipped over of the higher caste member needs replaced before the broken toilet of the lower caste. After all, all agree that the higher caste suffered more humiliation among his peers.

Open defecation is not a problem in Nepal. That was just an example of how caste threatens health in India.

Infrastructure is not a problem in Nepal. After all, the higher castes can afford to fly cheaply to Pokhara. Why does it matter that lower castes have to ride on slow buses on terrible roads? The slow, terrible roads actually reinforce how superior the higher caste people are. So, why fix it? The lower caste people don't believe they deserve better.

I am amazed how passive the people in Nepal are. I have to constantly remind the Nepalis that I am not angry at them if I ask about something that isn't working. At first, I thought it was maybe the Hindu/Buddhist religions. But, Southeast Asia has the same religions. The people there are super polite, just like Nepalis. But, they expect their hard work to result in progress. In Nepal, the response is, "What did I do wrong." In Thailand, etc. the response is, "Bummer, O.K., let me see what I can do to fix that."

Thais, etc. work hard to get ahead.

Nepalis work hard because they feel they are inferior to Nepalis of higher caste and are obligated to work hard and not get ahead.

Caste is reinforced and taught at school. One of my clerks just had her end of year tests (11th grade.) One test dealt solely on caste.

What you say about how passive the nepalis are is absolutely true. I've had occasion to work with them for many years. In offices, for example, it is not uncommon to see staff just sitting there at their desk doing nothing or doodling. Nine times out of ten, they wait for instructions. They are simply not used to taking initiative all on their own, and that's for not lack of trying to impart knowledge to them, give them instructions, etc. Over time, I think I tried just about every method!