With a per capita income (Gross National Product) of only $383, Nepal is one of the world’s poorest countries. Limited natural resources, a landlocked location, difficult topography, poor infrastructure, a weak human capital base and a long history of public intervention in the economy are some of the impediments to economic growth. Agriculture accounts for approximately 32.6 percent of gross domestic product (GDP) and 71 percent of employment. In the last five years real GDP growth averaged less than four percent per annum.
The GDP growth rate for FY 2006/07 was 2.5 percent. Nepal traditionally runs large trade and current account deficits, which are offset by equally large service, transfer and capital account surpluses. Based on the balance of payments statistics for Nepal’s FY 2006/07 from mid-July to mid-July), Nepal’s overall balance of payments recorded a surplus of USD 83 million. In FY 2005/2006, Nepal had recorded a balance of payments surplus of $352 million, which declined to $83 million in FY 2006/2007due to an increased trade deficit and settlement of pending dues on account of oil imports. The gross foreign exchange reserves went up by 14.3 percent to US$ 2.55 billion in mid-July 2007. The current level of reserves is sufficient for financing merchandise imports of 10.3 months. In FY 2006/07, Nepal’s exports totaled USD 868 million and imports totaled USD 2.7 billion.
Carpets and garments constituted the vast majority of Nepal’s officially recorded exports and are mostly exported to Germany and the United States. India accounts for 63 percent of Nepal’s total trade. During FY 2006/07, exports to India recorded a growth of only 2.8 percent and exports to third countries, which have been trending downward the last three years, declined further by 3.1 percent in FY 2006/07. The decline in exports to third countries is primarily due to the decline in exports of readymade garments and jewelry. The decreasing trend of growth in exports to India is the result of frequent politically motivated transportation strikes and business and border closures, particularly in the Terai, as well as labor union excesses, often prompted by the Maoists, that forced major export oriented industries to shut down their operations for weeks and months together.
Due to the 10.3 percent import growth and below 1percent growth in exports, the trade gap in FY 2006/07 widened by 15.3 percent compared to an increase of 25 percent in FY 2005/06. The U.S. is the second-largest market for Nepalese exports. Imports to Nepal from the U.S. are low compared to those from other countries. In FY 2006/07, out of total imports of USD 2.7 billion, only 1 percent came from the U.S. However, exports to the U.S. constitute 10.4 percent of Nepal’s total exports in FY 2006/07. Exports from Nepal in FY 2006/07 totaled to USD 868 million. Nepal has had fifteen governments in the last 17 years.
The People’s Movement in April 2006 forced King Gyanendra to reinstate the House of Representatives, dissolved in May 2002, and relinquish the power he seized on February 1, 2005. The Seven-Party Alliance (SPA) formed a government under the leadership of Girija Prasad Koirala in April 2006. The reinstated Parliament and the government limited the powers of the King. After months of intense negotiations with the Communist Party of Nepal (Maoist), which had conducted a violent insurgency in Nepal since February 1996, the Government of Nepal and the Maoists signed a comprehensive peace agreement on November 21, 2006. Under the peace agreement, the Maoists vowed to shun violence and respect the democratic process. After promulgation of a new interim constitution and formation of an interim parliament, including representatives of the Maoists, in January 2007, and formation of an interim government with Maoist ministers in April 2007, the country was focused on a Constituent Assembly election. However, it proved impossible for the the SPA, later Six-Party Alliance, to reach a lasting agreement with the Maoists on the necessary electoral framework for the election to be held. As a result dates for the CA election were deferred from June to November 2007 and then to April 2008. The continued Maoist use of terror and extortion negatively affect the market environment as did terror and violence by extremists groups in the Terai.
Nepal is a landlocked state, which makes market access a challenge. Surface transport into and out of Nepal is severely constrained. There is only one reliable road route from India to the Kathmandu. During periods of unrest or general strikes or shutdowns this route can also be closed. Unrest in Terai in the last couple of years has seriously disrupted movement of goods in and out of Nepal. The only practical seaport for entry of goods bound for Nepal is Calcutta (Kolkata) in India, about 650 miles from the Nepal-India border.
Although the Government of Nepal (GON) is open to foreign direct investment, implementation of its policies is often distorted by bureaucratic delays and inefficiency. Foreign investors constantly complain about complex and opaque government procedures and a working-level attitude that is more hostile than accommodating. A foreign company must either be registered in Nepal as a foreign investor under the Foreign Investment and Technology Transfer Act of 1992, or have a permit to import and export commodities and services. High customs tariffs imposed on most manufactured products increase the price of U.S. products in the Nepalese market.
Foreign investors in Nepal face a non-transparent legal system. Firms complain that basic legal procedures are neither quick nor routine. The bureaucracy is generally reluctant to accept legal precedents. As a consequence, businesses are often forced to re-litigate issues that had been previously settled. Furthermore, legislation banning foreign investment in financial, legal, and accounting services has made it difficult for investors to find help cutting through regulatory red tape. U.S. firms and other foreign investors have identified pervasive corruption as an obstacle to maintaining and expanding their direct investment in Nepal. There are also frequent allegations of corruption by Nepalese government officials in the distribution of permits and approvals, procurement of goods and services, and award of contracts.
Nepal’s overall potential as a market for U.S. exports is modest. Best prospect sectors for U.S. product sales include telecommunications equipment, computers and peripherals, hydropower equipment, and aircraft parts. U.S. computers and peripheral equipment and telecommunications equipment are highly competitive in the local market. Best prospect sectors for U.S. investment are hydropower and civil aviation infrastructure construction. Prospects in hydropower include the 750 megawatt West Seti Project, which is being developed by an Australian consortium, and three projects at the Karnali, Koshi and Gandaki river basin sites, which Nepal’s Department of Electricity Development (DOED) has opened for development through foreign investment. Nepal expects to add approximately 2,537 megawatts to its generating capacity over the next decade.
A number of major projects are under way that hold potential for U.S. business. In FY 2007/08, the first year of the interim Three-Year Development Plan, Nepal Telecom (NT) plans to spend approximately USD 94.7 million on expansion of telecom services in Nepal. In the civil aviation sector, the Ministry of Culture, Tourism, and Civil Aviation (MOCTCA) plans to build a number of airports and invite global tenders from interested foreign investors. MOCTCA had invited proposals twice from foreign companies in last two years to develop the airports on Build-Own-Operate-Transfer (BOOT) basis but due to the ongoing insurgency and a hostile political situation in the past, foreign investors stayed away. Business opportunities exist within the ongoing NT Telecommunication Development Project (FY 2007-08 to FY 2009-10) for equipment sales.
Market Entry Strategy
Relationship-building in Nepal is essential to conducting business. For large-scale business ventures, investors or suppliers are encouraged to visit. To access the Nepali market, foreign companies generally should use local representatives and agents. Supplying government projects offers opportunities for large volume sales, but requires an authorized local representative or agent. The U.S. Embassy’s Political/Economic Section handles commercial matters and provides agent/distributor services for U.S. companies to assist in selecting a reliable partner. It works closely with the Senior Commercial Officer in New Delhi, who is responsible for India, Nepal and Bangladesh. Requests for these paid services are normally routed through U. S. Export Assistance Centers, available through the U.S. Department of Commerce (http://www.buyusa.gov/home/us.html1).