Nepal

Nepal

Nepal: Market Profile

Picture: Nepal factsheet
Picture: Nepal factsheet

1. Overview

After years of transition, Nepal is headed for political stability following local, provincial and federal elections in 2017. Although economic activity rebounded strongly in Nepal in 2017, the country still faces increasing domestic and external risks.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

June 2017 
Pushpa Kamal Dahal replaced as Prime Minister by the Congress leader Sher Bahadur Deuba under a rotation agreement reached the previous April and set to last until elections in February 2018.

February 2018
The new cycle of legislative elections came to an end with the February 7 indirect election of the National Assembly. The names of members elected under the Proportional Representation system to the seven provincial assemblies were announced on January 17 and to the House of Representatives on February 14, 2018.

May 2018
The main group of Nepal’s Maoist former rebels and the Communist UML party merged on May 17 to form Nepal's biggest left party. Officials said the two constituents of the ruling coalition had formed the Nepal Communist Party, which now heads the nation’s first majority government in 19 years.

Sources: BBC Country Profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Nepal real GDP and inflation
Graph: Nepal real GDP and inflation
Graph: Nepal GDP by sector (2017)
Graph: Nepal GDP by sector (2017)
Graph: Nepal unemployment rate
Graph: Nepal unemployment rate
Graph: Nepal current account balance
Graph: Nepal current account balance

e= estimate, f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: August 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Nepal merchandise trade
Graph: Nepal merchandise trade

Source: WTO
Date last reviewed: August 21, 2018

Graph: Nepal major export commodities (2017)
Graph: Nepal major export commodities (2017)
Graph: Nepal major export markets (2017)
Graph: Nepal major export markets (2017)
Graph: Nepal major import commodities (2017)
Graph: Nepal major import commodities (2017)
Graph: Nepal major import markets (2017)
Graph: Nepal major import markets (2017)

Sources: Trade Map, Fitch Solutions
Date last reviewed: September 18, 2018

4.2 Trade in Services

Graph: Nepal trade in services
Graph: Nepal trade in services

Source: WTO
Date last reviewed: August 21, 2018

5. Trade Policies

  • Nepal joined the WTO in April 2004 as its 147th member.

  • The World Bank 2018 Ease of Doing Business Report ranks Nepal 76th out of 190 countries in the trading across borders index.

  • In the latest World Economic Forum (WEF) Enabling Trade Index (2016) which measures institutions, policies and services to facilitate trade in countries, Nepal was ranked 108th out of 136 countries.

  • Nepal benefits from the Generalized System of Preferences (GSP), but it does not participate in the Global System of Trade Preferences (GSTP) among developing states.

  • Nepal's average tariff rate, at 10.9%, is the second highest in the South Asia region (out of eight countries), with weapons and automobiles being subject to the highest applied Most Favoured Nation (MFN) tariff. Cement faces an unbound tariff in order to develop the domestic industry, as Nepalese consumption of cement is mostly met by domestic production. Tariff escalation on certain products, including paper printing and publishing, textiles and leather, and chemicals, exists between first stage processing, semi-processed, and fully processed products. However, these tariffs aim to collect revenue rather than protect the processing or manufacturing industry.

  • Nepal does not allow the import of used items, the definition of which is often interpreted to include refurbished products (with the exception of refurbished aircrafts).

  • Import duty rates in Nepal vary from 0% to 80%. Live animals, fish, and most primary products are exempt from import duties if imported from India, while a duty of 10% is applied on imports of these items from countries other than India.

  • Infrastructure of standardisation and conformity assessment in Nepal is not sufficient as the country lacks an accreditation system and testing facilities. This makes it difficult for Nepalese exporters to compete in global markets due to, for example, exports of food, plant products, animal products, and agricultural products requiring sanitary and phytosanitary certificates issued by the Ministry of Agriculture and Cooperatives.

Sources: WTO – Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

In June 2018, Nepal and China signed memorandums of understanding (MoUs) on various projects that fall under the framework of the Belt and Road initiative, as well as on matters pertaining to trade and economic cooperation at an event held at the Nepali Embassy in Beijing.

6.2 Multinational Trade Agreements

Active

  • The South Asian Preferential Trade Agreement (SAPTA): This agreement was originally signed in 1993; however, the scope of SAPTA was limited, therefore, it was expanded to the South Asian Free Trade Agreement (SAFTA), which is a plurilateral Free Trade Agreement between Nepal, Bhutan, Afghanistan, Bangladesh, India, Maldives, Pakistan and Sri Lanka. The agreement covers trade in goods and entered into force in January 2006; Afghanistan later joined in August 2011.

  • Nepal-India Partial Scope Agreement: The bilateral Partial Scope Agreement between Nepal and India covers trade in goods and entered into force in October 2009. India is Nepal's largest import source, and as of 2017, Nepal imported 65.7% of its total imports from India, of which minerals, mineral fuels, mineral oils and products of their distillation, as well as bituminous substances, made up the highest percentage.

Under Negotiation

The Bay of Bengal Initiative on Multi-Sectoral Technical and Economic Cooperation (BIMSTEC): A plurilateral Free Trade Agreement that is currently under negotiation. The agreement will focus on the trading of goods between Nepal, Bhutan, Myanmar, Sri Lanka, Bangladesh, India and Thailand. The bloc will bring together 1.5 billion people, or 21% of the world's population, and will have a combined GDP of over USD2.85 trillion.

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Nepal FDI stock
Graph: Nepal FDI stock
Graph: Nepal FDI flow
Graph: Nepal FDI flow

Source: UNCTAD
Date last reviewed: August 21, 2018

7.2 Foreign Direct Investment Policy

  1. Invest Nepal is the country's information source and agency that is tasked with investment promotion and business facilitation. The entity aims to serve as a single reference point for sector-specific information for both foreign and local investors.

  2. In February 2015, the government of Nepal issued the Foreign Investment and One-Window Policy 2015, which replaced the Foreign Investment Policy of 1992. The new policy outlines priority sectors for foreign investment, which include hydropower, transportation infrastructure, agro-based and herbal processing industries, tourism, and mines and manufacturing industries. The Foreign Investment and One Window Policy also establishes currency repatriation guidelines, outlines visa regulations and arbitration guidelines, allows full foreign ownership in most sectors, and creates a ‘one window committee’ for foreign investors.

  3. The Foreign Investment and One Window Policy opened the retail sector to foreign investment for the first time; however, there are some conditions. Foreign multi-brand retail stores (such as Walmart or Tesco) are now permitted, provided the investor has operations in more than two countries and invests more than USD5 million in fixed capital. The policy also states that foreign investors will be treated the same as local investors, and industries run by foreign investors cannot be nationalised. The new policy is also aimed at simplifying visa policies for investors, family members, and assisting foreign investors with land acquisition, industrial security, and repatriation of investment and profits.

  4. Foreign and domestic private entities are allowed to establish and own business enterprises and engage in various forms of profit-generating activities. However, the Foreign Investment and Technology Transfer Act (FITTA) of 1992 restricts certain sectors from foreign investment, including small-scale and ‘traditional’ industries (such as handicrafts, wood carvings, and artwork), real estate, certain types of primary agriculture and agribusiness, and weapons production. The Foreign Investment Policy of 2015 lowered the number of restricted sectors, but these changes will not be implemented until Parliament approves the draft Foreign Investment bill. Approval and registration requirements vary depending on the sector in which a foreign entity intends to invest in.

  5. Other than the restricted sectors mentioned above, 100% foreign investment is allowed in most sectors. Some limits on foreign ownership are imposed for certain services sectors, such as banking and financial institutions, where foreign investment is only permitted through joint venture, with a minimum of 20% and a maximum of 85% foreign ownership. Branch operations of a foreign bank are only permitted in the wholesale banking sector, not in the retail banking sector. The minimum capital requirement is USD20 million to operate a branch office of a foreign bank in Nepal, and an additional USD5 million is required for each new branch office. Restrictions on branch operations of foreign banks in the retail banking sector and requirements for mandatory domestic joint venture partnerships have discouraged many international banks from entering Nepal’s banking sector.

  6. The Nepal Stock Exchange does not allow foreign investors to own or trade any publicly traded companies on the exchange. Stock trading is only permitted to citizens of Nepal.

Sources: WTO – Trade Policy Review, the International Trade Administration (ITA), US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
The government of Nepal is developing the country’s first Special Economic Zone (SEZ) in Bhairahawa in southern Nepal, near the border with India. The government eventually plans to have up to 15 SEZs throughout Nepal.In August 2016, Nepal’s Parliament approved the SEZ Act, which provides numerous incentives for investors in SEZs, including exemptions on customs duties for raw materials, streamlined registration processes and guaranteed access to electricity. The act also bans labour strikes in SEZs.


General incentivesBusinesses that invest in exporting industries are given investment incentives, as are those who invest into certain ‘priority’ industries, such as tourism, civil aviation, and hydropower.

There is no discrimination against foreign investors with respect to export/import policies or non-tariff barriers.

The government of Nepal offers tax incentives to encourage industries to locate outside the Kathmandu Valley.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

  • Value Added Tax: 13%
  • Corporate Income Tax: Varies, 20% - 30%

Source: PFK International

8.1 Important Updates to Taxation Information

Resident natural persons are taxed on all income from worldwide sources. Non-resident persons are taxed on Nepal-sourced income only.

8.2 Business Taxes

Type of TaxTax Rate and Base
Resident company: Corporate Tax rates– 20% flat rate for manufacturing industries

– 25% flat rate for other commercial businesses

– 30% flat rate for financial institutions and tobacco businesses
Non-resident company: Corporate Tax rates– 5% for income derived from transporting passengers, mail or cargo by sea or air that is embarked in Nepal

– 25% for all other businesses
Branch Profit Tax25%
Excise duty– Varies from 0%-40%

– Exports exempt from excise duty
Customs dutyVaries from 0%-80% on the transaction value
Dividends5%
Social security contributions1% imposed on the first bracket of taxable income of salary earners
VAT– 13% (GST – standard rate)

– 0% for certain specified goods

– 0% for exports of both G&S
Payment of service fee– 1.5% withholding tax on service payments to VAT registered person

– 15% payment to non-resident or non-VAT registered person
Insurance premium1.5% paid to non-resident insurance companies (wtihholding tax)
Rent10% (withholding tax)

Source: PwC Tax Summaries 2018
Date last reviewed: September 18, 2018

9. Foreign Worker Requirements

9.1 Localisation Requirements

There are no formal localisation policies in Nepal, but many foreign businesses and foreign workers have complained about the difficult process for obtaining work visas. The government of Nepal generally limits the number of expatriate employees permitted to work at a company.

9.2 Visa/Travel Restrictions

Citizens of India do not need a visa to enter Nepal and are granted Freedom of Movement. Most other passports are granted visa on arrival given that a fee is paid.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Not rated
Not rated
Standard & Poor'sNot ratedNot rated
Fitch RatingsNot ratedNot rated

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
100/189107/190105/190
Ease of Paying Taxes Index
124/189142/190146/190
Logistics Performance Index
124/160N/A114/160
Corruption Perception Index
131/176122/180N/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank110/202
Short-Term Economic Risk Score44.651.552.9
Long-Term Economic Risk Score45.946.150.1
Political Risk Index Rank159/202
Short-Term Political Risk Score43.142.744.0
Long-Term Political Risk Score49.549.549.5
Operational Risk Index Rank144/201
Operational Risk Score37.237.438.2

Source: Fitch Solutions
Date last reviewed: August 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK

Nepal saw a broad-based recovery in 2017 as economic activity picked up, inflation moderated, government revenue and spending rose and remittances grew. That said, growth is expected to be below potential in 2018 in light of the worst flooding in decades. Slow recovery of exports, increase in lending rates, and a dynamic political environment will continue to pose challenges.

OPERATIONAL RISK

Nepal is transitioning into a federal democratic state, where it completed its first local elections in 20 years, which took place in three phases. Provincial and parliamentary elections were completed in December 2017. That said, significant adjustments need to be made to the government structure. Businesses in Nepal are challenged by risks of extreme weather conditions, such as the flooding in mid-August 2017, the third major shock in three years, which caused severe disruption and damage to existing supply chains, especially through the southern plains.

Source: Fitch Solutions
Date last reviewed: September 21, 2018

10.5 Fitch Solutions Political & Economic Risk Indices 

Graph: Nepal short term political risk index
Graph: Nepal short term political risk index
Graph: Nepal long term political risk index
Graph: Nepal long term political risk index
Graph: Nepal short term economic risk index
Graph: Nepal short term economic risk index
Graph: Nepal long term economic risk index
Graph: Nepal long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: August 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Nepal Score38.240.935.435.541.1
South Asia Average41.843.738.944.040.5
South Asia Position (out of 8)6
6675
Asia Average48.950.647.747.150.1
Asia Position (out of 35)2729262524
Global Average49.749.850.049.349.9
Global Position (out of 201)144155154148126

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Nepal vs global and regional averages
Graph: Nepal vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
Bhutan51.744.548.551.262.5
India50.144.651.061.942.8
Sri Lanka49.445.046.357.748.4
Maldives48.650.343.440.959.9
Bangladesh38.650.129.838.935.5
Nepal38.240.935.435.541.1
Pakistan34.936.936.844.321.4
Afghanistan22.737.320.121.112.3
Regional Averages41.843.738.944.040.5
Emerging Markets Averages46.848.047.545.846.1
Global Markets Averages49.749.850.049.349.9

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: August 21, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Nepal

Graph: Major export commodities to Nepal (2017)
Graph: Major export commodities to Nepal (2017)
Graph: Major import commodities from Nepal (2017)
Graph: Major import commodities from Nepal (2017)
Graph: Merchandise exports to Nepal
Graph: Merchandise exports to Nepal
Graph: Merchandise imports from Nepal
Graph: Merchandise imports from Nepal

Official Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: September 12, 2018


2017
Growth rate (%)
Number of Nepalese residents visiting Hong Kong4,867-26.9
Number of Nepalese residing in Hong Kong9,479
1.6

Sources: UN, Hong Kong Tourism Board


2017Growth rate (%)
Number of Asia Pacific residents visiting Hong Kong54,482,538
3.5
Number of South Asians residing in Hong Kong36,680
1.5

Sources: Hong Kong Tourism Board, UN, Fitch Solutions
Date last reviewed: September 21, 2018

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Nepalese companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

Source: Hong Kong Census and Statistics Department

11.3 Chamber of Commerce (or Related Organisations) in Hong Kong

Nepal Chamber of Commerce (Hong Kong)
Address: 1/F, 125 Shanghai Street, Yau Ma Tei, Kowloon, Hong Kong
Email: info@nepalchamber.hk
Tel: (852) 3488 1938
Fax: (852) 3488 1938

Sources: Directory of Hong Kong Trade and Industrial Organisations, Hong Kong Trade and Industry Department

Consulate General of Nepal (Hong Kong)
Address: Unit 715, Concordia Plaza, 1 Science Museum Road, Tsim Sha Tsui (East), Kowloon, Hong Kong
Website: https://hkg.nepalconsulate.gov.np
Email: cgnhk@biznetvigator.com
Tel: (852) 2369 7813
Fax: (852) 2824 2970

11.4 Visa Requirements for Hong Kong Residents

HKSAR passport holders receive a visa-on-arrival in Nepal for which the duration of stay is to be determined by the authorities upon arrival.

Sources: Immigration Department, Nepal government sources