Market Overview

With a per capita income (Gross Domestic Product) of only $470, 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 32.12 percent of gross domestic product (GDP) and 70 percent of employment.

In the last three years real GDP growth averaged less than four percent per annum.  The GDP growth rate for FY 2007/08 was 4.7 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 FY 2007/08 (mid-July to mid-July), Nepal's overall balance of payments (BOP) recorded a surplus of USD 452.89 million.  However, the BOP surplus did not reflect import trade credit amounting to USD 220 million in 2007/08.  In FY 2005/2006, Nepal recorded a BOP surplus of $352 million, but it declined to $83 million in FY 2006/2007due to an increased trade deficit and payment of overdue oil import bills.  The gross foreign exchange reserves went up by 21.9 percent to US$ 3.1 billion in FY 2007/2008.  As of mid- December 2008, the gross convertible foreign exchange reserve of the banking sector stood a USD 3.05 billion, enough to finance merchandise imports of more than 10 months.

In FY 2007/08, Nepal's exports totaled USD 936.5 million and imports totaled USD 3.48 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 63.8 percent of Nepal’s total trade.  During FY 2007/08, exports to India dropped by 7.4 percent after rising 2.5 percent the previous year.  Exports to other countries, however, soared by 25.5 percent, after falling in the previous two years.  The decline in exports to India was due to drop in the exports of vegetable ghee, textiles, chemicals, rosin and readymade garments.  Exports to India were also affected by frequent transportation strikes and business and border closures, particularly in the Terai, as well as by labor union unrest.  These latter factors forced major export-oriented industries to shut down their operations for weeks and months at a time.

Conversely, exports to other countries rose due to increase in the exports of lentils, Nepali paper and paper products, herbs, wheat, noodles, ceramic products, electric wire and stationery.  Due to the 16.1 percent growth in imports and a meager 2.4 percent growth in exports, the trade gap in FY 2007/08 widened by 22.2 percent, compared to an increase of 19.2 percent the previous year.  The rise in the import of petroleum products was the major contributing factor in the rise of the total imports in 2007/08.

The U.S. is the second-largest market for Nepali exports.  Imports to Nepal from the U.S. are low compared to those from other countries.  In FY 2007/08, out of the total imports of USD 3.65 billion, only 1.55 percent came from the U.S.  However, exports to the U.S. constituted 7.9 percent of all exports in FY 2007/08, which totaled USD 902 million.  Nepal has had sixteen governments in the last 18 years.

After numerous delays, the historic Constituent Assembly election was finally held on April 10, 2008.  The Communist Party of Nepal (Maoist) emerged as the largest party, securing 229 seats, and its leader formed a six-party coalition government in August 2008.  The Maoists’ principal partners are the CPN-UML and the Madhesi People’s Rights Forum, the largest Terai-based party.  The new government suffers from the same problem that hampered the interim government before the CA election: a lack of unity.   Deep divisions exist not only between the coalition members but also within the individual parties themselves.  As a result, the violence that marked the lead up to the election continues, and in some cases it has increased.  Tensions between the ethnic communities in the Terai, the central government and the Maoists, which led to deadly clashes with security forces in the months before the election, remain high.  These communities are angered by their underrepresentation in the new government.  Numerous ethnic-based groups have been formed to demand greater recognition, many of which have vowed to use violence to obtain it. Widespread protests, demonstrations and strikes continue to plague the region.  Meanwhile, Maoists leaders have been unable – many people believe unwilling – to control the violent activities of its affiliated youth organization and trade unions, which continue to carry out  extortion, kidnappings and other forms of intimidation, including murders.  In an effort to counter the growing violence of the Maoist Young Communist League (YCL), the CPN-UML in 2008 created the Youth Force.  Violent confrontations between the Maoists’ youth wing and that of its largest coalition partner are common, and sometimes turn deadly.  The YCL, recently renamed the Young Communist Democratic League (YCDL), however, has not limited its use of violence to its political rivals.  It has also targeted the police, journalists and non-governmental organizations.

Market Challenges

Nepal is a landlocked state, which makes market access a serious challenge.  Surface transport into and out of Nepal is severely constrained.  There is only one reliable road route from India to the Kathmandu Valley, and parts of it are often closed by unrest and general strikes.  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 Kolkata, 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 Nepali market.

 

Foreign investors must deal with 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 direct investment in Nepal.  There are also frequent allegations of corruption by Nepali government officials in the distribution of permits and approvals, procurement of goods and services, and award of contracts. 

Market Opportunities

Nepal's overall potential as a market for U.S. exports is very modest. Sectors with the best sales potential 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 in construction are hydropower and civil aviation infrastructure.

 

Prospects in hydropower include the proposed 750 megawatt West Seti Project, which is being developed by an Australian consortium and three projects in the Karnali, Koshi and Gandaki river basins, the development of which Nepal’s Department of Electricity Development (DOED) has opened to foreign investment.  Nepal expects to add approximately 10,000 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 2008/09, Nepal Telecom (NT) plans to spend approximately USD 66.43 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 tenders from foreign investors. Twice in the past two years, the MOCTCA invited proposals from foreign companies to develop the airports on a Build-Own-Operate-Transfer (BOOT) basis, but due to the ongoing insurgency and an unstable political situation, investors stayed away. Business opportunities exist within the ongoing NT Telecommunication Development Project (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 local 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.html).