Nepal - Market OverviewNepal - Market Overview

Nepal is a low-income, developing nation with an estimated GDP of $28.8 billion and per capita annual income of $973 in fiscal year (FY) 2017/18 (Note: Nepal’s fiscal year runs from July 16 to July 15).  Nepal’s estimated population is 29.6 million (male 14.4 million, and female 15.2 million). The median age in Nepal is 24 and more than half of the population is under the age of 25, indicating a young nation whose ratio of working-to-non-working population will remain high in the years to come. 

Nepal was beset with political turmoil through 1996 – 2017, due to an armed Maoist insurgency until 2006 followed by a decade-long peace process, which finally culminated in the promulgation of a new republican constitution in 2015. Elections were held in 2017 and a new majority government took over in 2018.  Due to years of political instability, Nepal’s economic growth lagged behind most of its neighboring countries, averaging 4% from 2007-17, compared to India – 7.4%, Bangladesh – 6.2%, and Sri Lanka – 5.9%. Economic growth rebounded with the onset of political ‘normalcy,’ standing at 6.3% in FY 2017/18 and estimated at 6.2% for FY 2018/19. This is a clear improvement over the past, but it still falls short of the government’s own target of 8% annual growth, and begs the question if Nepal is indeed performing at its best possible level and at a level that can withstand forthcoming risks. In summary, Nepal is an economy in recovery that is currently performing well, but from a low base and likely sub-optimally, and with growing risks on the horizon.

 Structurally, Nepal’s economy is still highly dependent on agriculture, but the services sector is the largest contributor to national GDP.  Agriculture accounts for 28.2 percent of GDP and 65.7 percent of employment. The industrial sector—whose largest sub-sectors consist of manufacturing, construction, and trade—contributes 14.2 percent of GDP. The Services sector—whose largest sub-sectors include real estate, transport, communications, and education—contributes the largest 57.6 percent of GDP.

The structure of the Nepali economy is slowly shifting away from agriculture with significant migration from rural to urban areas and overseas.   An estimated four to six million Nepalis work abroad, primarily in the Gulf countries, Malaysia, and India.  Nepal received $7.22 billion in remittances in FY 2017/18, equivalent to 25.1 percent of GDP.  Nepalis working in India also contribute significantly to remittances, but the exact amount is unknown, as many Nepalis take cash back from their jobs in India, rather than remitting the money through formal channels.  Officials at the Nepal Rastra (Central) Bank also believe many migrant workers use informal channels to send money back to Nepal so the total amount of remittances is likely higher than $7.22 billion. As such, a significant chunk of Nepal’s wealth is generated abroad through the export of labor (as opposed to the export of goods and services produced within the Nepali economy).

Political instability, widespread corruption, a landlocked location, challenging topography, poor infrastructure, a poorly trained and educated workforce, and a weak policy and regulatory environment have been some of the key impediments to economic growth. Political stability attained in 2018, a major turnaround in itself, has brought modest improvements to some of the other constraints above, but at a less-than-hoped-for rate. Following the recent political transition, an economic turnaround is next on the agenda. But a year-and-a-half into the new government’s tenure, a clear vision, strategy and effective roadmap remain elusive. Government messaging has prioritized infrastructure development, creation of job opportunities at home, and finalization of business enabling legislation, but the impact on the ground has been modest. The government is focused on attracting foreign investors to Nepal and organized an international Investment Summit in March 2019 towards this purpose. While this was a well-intentioned initiative, it was held pre-maturely, without first addressing process challenges faced regularly by already-present international firms or completing the necessary reforms to attract investment of the volume required to fill Nepal’s domestic resource gap.

India accounted for 65 percent ($8.2 billion) of Nepal’s total trade in FY 2017/18, China for 12 percent ($1.56 billion), and the rest of the world for the remaining 23 percent ($2.93 billion). Compared to 5 years ago (FY 2012/13) when disaggregated records began, China’s share of total trade with Nepal has grown from 10 to 12 percent, shaving off a percentage point each from India’s and the rest of the world’s shares.

Nepal imports far more than it exports. The imports-to-exports ratio in FY 2017/18 was 15.2 (up from 13.6 the previous year) i.e. Nepal imported $15.2 for every dollar exported, resulting in a trade deficit of $11.1 billion (up from $8.6 billion the previous year), which amounts to a staggering 39% of GDP. In FY 2017/18, Nepal exported $782.2 million worth of goods, mainly woolen carpets, spices (cardamom), polyester yarn, textiles, juices, jute goods, readymade garments and other apparel items.  Nepal’s annual imports were about $11.9 billion, mainly from India, China, and France in FY 18.  The main imports are petroleum products (petrol, diesel, LPG), gold, rice, telecommunications equipment, construction equipment and cement clinkers.

U.S.-Nepal bilateral trade is estimated at $154.1 million in 2018, roughly 1.2 percent of Nepal’s total trade with the world, according to data from the Office of the United States International Trade Commission.  This is a slight reduction from the previous year when total bilateral trade was about $168 million. This decline is largely due to the reduction in U.S. exports of aircraft, engines and parts, a category that varies from year to year. Other than aircraft machinery and parts, major U.S. exports to Nepal have traditionally been medical and surgical instruments, ICT products, electrical machinery and equipment, and miscellaneous grains, seeds or nuts (mainly soybeans).

In FY 2017/18, as in previous years, the United States was the second-largest export market for Nepal, accounting for 11.3 percent of total exports (India was the largest, accounting for 57.5 percent).  Until 2016/17, the U.S. was one of the very few countries that Nepal had a trade surplus with. Key Nepali exports to the U.S. were carpets, handicrafts and antiques, animal feed (dog or cat food), textiles, and apparel (shawls, scarves, other knit material, and felt products). In December 2016, the United States established a new stand-alone trade preference program for Nepal, as mandated by the Trade Facilitation and Trade Enforcement Act of 2015.  Designed to help support Nepal’s economic recovery following the 2015 earthquakes, this program gives duty-free access to the United States for some products made in Nepal, including certain kinds of carpets, headgear, shawls, scarves, handbags, and suitcases.  More information on this program can be found here: https://np.usembassy.gov/business/nepal-trade-preference-program/.

Nepal traditionally runs a large trade deficit, which until recently was balanced by sufficient inflows of workers’ remittances, mainly from the Gulf and Malaysia, to maintain a surplus or balance of the current account. The increase in the trade deficit has outpaced remittance inflows since FY 2016/17 when the current account entered a deficit of $95.4 million. In FY 2017/18 this deficit ballooned to $2.3 billion. The capital and financial accounts have traditionally been in surplus, keeping the overall balance of payments in surplus including in FY 2016/17. However, the massive current account deficit contributed to an overall balance of payments deficit of $118.6 million in FY 2017/18 as per the Nepal Rastra Bank’s data.

As of January 2019, the gross foreign exchange reserve of the country stood at US$ 8.18 billion, which is sufficient to finance imports for 8 months (this figure was 11 months about a year earlier). This rapid decrease in the foreign exchange reserves, driven by the increasing trade deficit, is concerning.  If not managed properly, it could land Nepal in a difficult balance of payments situation in 2-3 years’ time.  The GON’s position is that import of intermediate goods, to feed growing industries dormant during the political transition, is partly responsible for the rising trade deficit.  Insofar as these investments will produce their payoff in the coming years, the deficit will slowly re-balance.  A good deal of hope is also placed on a number of hydropower plants coming online in the next couple of years, which will reduce the imports of power and fuel from India, again reducing the trade deficit.  Whether or not the GON’s hopes pan out,  the next 2-3 years will require careful economic management on its part to prevent Nepal from sliding into an economic crisis following its long period of political turmoil.

The Nepali rupee is pegged to the Indian currency (INR. 1 = NPR. 1.6), so the Nepali currency fluctuates against the USD in line with the INR.

Historically, Nepal has attracted little Foreign Direct Investment (FDI) relative to comparable countries.  As per World Bank data, FDI as a percent of GDP for the last 5 years (2013 – 17) stood at 0.41% for Nepal compared to 1.59% for South Asia and 2.99% for Low Income Countries (LICs) worldwide. This trend is changing and Nepal is beginning to attract more FDI in recent years.  Annual FDI inflows into Nepal grew markedly, increasing from $127 million in FY 2016/17 to $169 million in FY 2017/18 as per the IMF. Government sources reveal that FDI commitments during FY 2018/19 are above $500 million.   While all this pledged amount may not materialize into actual investment, it is indicative of growing interest among investors, especially Chinese and Indian, about business prospects in Nepal in the coming years.  A Nepal Rastra (Central) Bank report showed that the total stock of Foreign Direct Investment (FDI) in Nepal as of July 2016 was $1.3 billion, of which the U.S.’s share was 1.7% and the 10th largest.  Government sources show U.S. investment in Nepal during FY 16/17 was $3.45 million.

Nepal’s ranking in the World Bank’s Ease of Doing Business rankings fell from 105 in 2017 to 110 in 2018, turning it to the fourth ranked country in South Asia from the third spot last year.  The main reason for the slippage was the additional burdens imposed on businesses in paying social security related taxes, which has become more cumbersome following the adoption of the Labor Act of 2017. Other weak areas for Nepal are ‘dealing with construction permits’ and ‘starting a business’. Overall, Nepal is an easier place to do business in compared to neighbors Pakistan and Bangladesh, but worse than India and Sri Lanka according to this World Bank indicator.

 Nonetheless, while doing business in Nepal is not without challenges (as further described below), Nepal is a growing market with a young population and rising middle-class. Visitors to the country, tourists and business-people alike, are often impressed not only by the natural beauty of the country but also by the warm, friendly and welcoming nature of the local people. Nepal’s recovering economic prospects, coupled with its location between two of the largest and fastest growing economies of the world, should make Nepal a more attractive country to do business in in the coming years.  This is a good time to explore opportunities in the Nepali market.