Nepal: Market Profile
After years of transition, Nepal is headed for political stability following local, provincial and federal elections in 2017. Although economic activity rebounded strongly in 2017, the country still faces increasing domestic and external risks.
Sources: World Bank, BMI Research
2. Major Economic/Political Events and Upcoming Elections
Parliament passed a landmark constitution, which defined Nepal as a secular country.
KP Prasad became the first prime minister to be elected under the new constitution.
Parliament elected former Maoist party leader Pushpa Kamal Dahal aka Prachanda as prime minister for the second time.
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.
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.
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.
Source: BBC country profile – Timeline
3. Major Economic Indicators
e= estimate, f = forecast
Sources: IMF, World Bank
4. External Trade
4.1 Merchandise Trade
Sources: WTO, Trade Map, BMI Research
4.2 Trade in Services
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.
Sources: WTO – Trade Policy Review, BMI Research
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
- The South Asian Preferential Trade Agreement (SAPTA): 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.
- 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.
Sources: WTO Regional Trade Agreements database
7. Investment Policy
7.1 Foreign Direct Investment
7.2 Foreign Direct Investment Policy
- 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.
- 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.
- 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 Wal-Mart or Tesco) are now permitted, provided that 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.
- 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.
- 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.
- 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
7.3 Free Trade Zones and Investment Incentives
|Free Trade Zone/Incentive Programme||Main Incentives Available|
|Special Economic Zone (SEZ) in Bhairahawa, southern 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 incentives||Businesses 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, BMI Research
8. Taxation – 2018
- Value Added Tax: 13%
- Corporate Income Tax: 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 Tax||Tax Rate and Base|
|Corporate Tax Rate||Resident companies: |
- 20% flat rate for manufacturing industries
- 25% flat rate for other commercial businesses
- 30% flat rate for financial institutions and tobacco businesses
- 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 Tax||25%|
|Excise Duty||Varies from 0%-40%|
Exports exempt from excise duty
|Customs Duty||Varies from 0%-80% on the transaction value|
|Social Security Contributions (all employers)||1% 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
|Wtihholding Tax||Payment of Service fee: |
- 1.5% withholding tax on service payments to VAT registered person
- 15% payment to nonresident or non VAT registered person
- 1.5% paid to non-resident insurance companies
9. Foreign Worker Requirements
9.1 Localisation Requirements
There are no formal localisation policies in Nepal. 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.
10.1 Sovereign Credit Ratings
|Rating (Outlook)||Rating Date|
|Moody's||Not rated||Not rated|
|Standard & Poor's||Not rated||Not rated|
|Fitch||Not rated||Not rated|
Sources: Moody's, Standard & Poor's, Fitch Ratings
10.2 Competitiveness and Efficiency Indicators
|Ease of Doing Business Index ||100/189||107/190||105/190|
|Ease of Paying Taxes Index||124/189||142/190||146/190|
|Logistics Performance Index ||124/160||N/A||N/A|
|Corruption Perception Index||131/176||122/180||N/A|
|IMD World Competitiveness||N/A||N/A||N/A|
Sources: World Bank, IMD, Transparency International
10.3 BMI Risk Indices
|Economic Risk Index Rank||110/202|
|Short-Term Economic Risk Score||44.6||51.5||52.9|
|Long-Term Economic Risk Score||45.9||46.1||50.1|
|Political Risk Index Rank||160/202|
|Short-Term Political Risk Score||43.1||42.7||44|
|Long-Term Political Risk Score||49.5||49.5||49.5|
|Operational Risk Index Rank||143/201|
|Operational Risk Score||37.2||37.4||37.9|
Source: BMI Research
10.4 BMI Risk Summary
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.
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. 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.
100 = Lowest risk, 0 = Highest risk
Source: BMI Research Economic and Political Risk Indices
10.5 BMI Operational Risk Index
|Operational Risk||Labour Market Risk||Trade and Investment Risk||Logistics Risk||Crime and Security Risk|
|South Asia Average||41.6||43.7||38.9||44.0||39.7|
|South Asia Position (out of 8)||5||6||6||7||5|
|Asia Position (out of 35)||26||29||26||25||25|
|Global Position (out of 201)||143||155||154||148||130|
100 = Lowest risk, 0 = Highest risk
Source: BMI Operational Risk Index
|Country||Operational Risk Index||Labour Market Risk Index||Trade and Investment Risk Index||Logistics Risk Index||Crime and Secruity Risk Index|
|Emerging Markets Averages||46.8||48.0||47.5||45.8||46.1|
|Global Markets Averages||49.8||49.8||50.0||49.3||49.9|
Higher score = Lower risk
Source: BMI Operational Risk Index
11. Hong Kong Connection
11.1 Hong Kong’s Trade with Nepal
|2017||Growth rate (%)|
|Number of Nepalese residents visiting Hong Kong||4,867||-26.9|
|Number of Nepalese residing in Hong Kong||9,479||1.6|
Sources: Hong Kong Immigration Department, Hong Kong Tourism Board
|2017||Growth rate (%)|
|Number of Asia Pacific residents visiting Hong Kong||54,482,538||3.5|
|Number of South Asians residing in Hong Kong||36,680||1.6|
11.2 Commercial Presence in Hong Kong
|2016||Growth rate (%)|
|Number of Nepalese companies in Hong Kong||N/A||N/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
Commercial And Economic Section In Hong Kong
Address: 1/F, 125 Shanghai Street, Yau Ma Tei, Kowloon, Hong Kong
Honorary Consul: Dasu Ram Parajuli (Chairman)
Tel: (852) 3488 1938
Fax: (852) 3488 1938
Source: Directory of Hong Kong Trade and Industrial Organisations, Hong Kong Trade and Industry Department
Nepalese Consulate In Hong Kong
Address: Unit 715, Seapower Tower (North Tower) Concordia Plaza, 1 Science Museum Road, Tsim Sha Tsui East, Hong Kong
Hours of Business: 09:30 a.m. - 12:30 p.m.
Honorary Consul: Binod Kumar Upadhyay
Tel: (852) 2369 7813
Fax: (852) 2324 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 competent authorities upon arrival.
Source: Visa on Demand