#BusineeInNepal

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Business Environment in Nepal

Nepal is a landlocked country on the southern slope of the Himalayas. The geographical position of the country plays a significant role for its development as a business hub as it lies in between the world’s two giant economy - India and China.

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Economic Indicators of Nepal

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Why Nepal

Nepal is strategically located between two large and rapidly growing economies China and India, with easy access to markets of more than 2.6 billion people. Nepal has large pool of capable workers (out of total population of 28.98 million, 61% are of working age i.e.15-65 years). Nepal has relatively low cost of labor. Nepal is ranked 2nd after Bhutan among south Asian countries in the “Ease of Doing Business Report 2016” by the World Bank Group. Foreign investors are allowed 100% ownership of a company in a majority of sectors. Repatriation of capital and profits are allowed by law. Various bilateral investment protection and double tax avoidance arrangements are in place. Nepal has signed Bilateral Investment Promotion and Protection Agreement (BIPPA) with India, Finland, Germany, Mauritius, UK, and France. Similarly, Nepal has signed Double Taxation Avoidance Agreement with Austria, China, India, Korea, Mauritius, Norway, Pakistan, Qatar, Sri Lanka and Thailand. Compared to other countries in South Asia, Nepal offers the lowest tax burden in the region. Some of the reasons for comparatively high ROI in Nepal include: -

a.       Huge investment potential in tourism, hydro-power, agriculture, and mine and mineral sectors; - Abundance of natural resources; - Maximum income tax rate of 25% and value added tax (VAT) of 13%; -

b.      Income tax concession on profits from exports and interest income on foreign loans;

c.       Withholding tax rate of 15% on royalties and technical & management fees; and

d.      Customs, excise duties, and VAT levied on raw materials and auxiliary raw materials of export oriented industries is reimbursed to the exporter on the basis of the amount of exports within 60 days of application.

Nepal has open boarder access to India. Nepal has duty free access to China for around 8,000 products. Nepal has duty free access to US market for 66 types of garment items for 10 years starting from 2016.

Socio-Political and Economic Environment

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After the devastating earthquake in 2015, followed by a trade blockade with major investor India and political unrest, Foreign Direct Investments (FDI’s) commitments in Nepal dropped to an almost all time low. Now, two years later, due to increased stability, reforms and initiatives such as the Nepal Investment Summit last March, 2017 FDIs in Nepal are on the rise again. One of Nepal’s great strategic economic advantages is its close proximity to some of the largest and fastest growing economies in the world. Looking just at the three major Indian provinces that border Nepal, the combined population – and potential market – adds up to almost 400 million. Despite being close to huge potential markets, Nepal has not been able to take advantage of it, resulting in disappointing economic growth rates compared to other South Asian countries. For landlocked countries such as Nepal, cross-border trade is important. In order to increase Nepal’s trade between neighboring countries India and China, numerous steps have been taken to improve its connectivity. Both India and Nepal have several joint road projects along the border. Last year, the Nepal Government has prioritized construction, expansion and blacktopping of four road sections that link Nepal with the Chinese border. And more recently, Nepal has signed an agreement with China to build an $8 billion cross-border rail link. In addition to the investments in infrastructure, Nepal government has also started a new and long due round of policy reforms. Among these reforms are a new labor law, the Industrial Enterprise Act, the Special Economic Zone Act, the Agribusiness Promotion Bill and most importantly for foreign investors – the Foreign Investment Bill and amended Companies Act. All these changes will hopefully help Nepal live up with its potential and its ambitious aim to graduate from Least Developed Country status by 2022. For those who’ve been waiting to see how the wind would blow after the earthquake, now is the time to look ahead towards the bright future and jump on the bandwagon to do business in Nepal!

 Potential Areas/Sectors for Investment in Nepal

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a.       Energy

Nepal is rich in water resources with multiple sources of water, including glaciers, snowmelt from the Himalayas, rainfall and groundwater. Nepal’s theoretical capacity of hydropower is around 80,000 MW, out of which 43,000 MW is estimated to be economically feasible. However, installed capacity is only 750 MW of electricity, despite the fact that peak domestic demand (suppressed) is well over 1,000 MW. Demand for electricity is increasing at 7–9% per year. Nepal is targeting graduating from least developed country (LDC) status to developing country status by 2022 and aims to become a middle income country by 2030. To meet its growth aspirations, Nepal will need to add 6,000+ MW (which requires investment of approximately USD 10 billion). Consequently, a lot of industries and infrastructure projects are in the pipe- line opening up huge opportunities. In addition to energy development, investment opportunities lie in the up gradation and expansion of distribution systems (for which investment of approximately USD 2 billion is required) and transmission systems (for which investment of approximately USD 4.45 billion is required). The Power Trade Agreement (PTA) signed with India has opened up a large market for exporting electricity to India. The SAARC Framework agreement on Energy Cooperation signed during the 18th SAARC Summit in 2014 will pave the way for the eventual formation of a regional energy market.

b.      Tourism:

With the world’s highest mountain range, the Himalayas, and 8 of the 10 highest peaks in world, Nepal has long been popular among mountaineers, trekkers and adventure seekers. It also offers beautiful lakes, steep rivers and gorges, unique wildlife, historic monuments, impressive fine arts, significant religious sites and exotic cultures attracting a wide array of travelers for a variety of reasons. Nepal is also a destination for religious tourism and pilgrimages. Lumbini, the birthplace of Lord Buddha, and Pashupatinath and other Hindu pilgrimage sites are the main attractions for people following Buddhism and Hinduism. There are opportunities in developing tourism infrastructure (hotels, restaurants, roads, airports, etc). There is also great potential for expanding the market for meetings, international conferences and events (MICE). Plans to upgrade the current international airport are underway, which will increase the tourist traffic significantly. The expansion of existing tourism products and introduction of new and innovative products has potential to attract different types of tourists and extend their average length of stay.

c.       Infrastructure

Only about 19% of roads in Nepal are all weather roads and 2 out of the 75 districts are still not connected by roads. Hence, there are many opportunities to expand the road network, for which the government is seeking to form public-private partnerships. Nepal’s main highways require expansion to accommodate the increase in traffic, which is another area for public-private partnerships. In order to cater to the needs of the growing population, the development of mass public transportation systems – bus-rapid transport (BRT), railways, monorails, airports has been prioritized. To finance these projects, the government is looking at public - private partnerships. Eight north-south corridors (roads) linking China and India through Nepal, a cross-border railway line connecting Kathmandu with China, five cross-border railway lines, ultimately connecting Kathmandu with India, a railway line along the East-West Highway, and cable cars in the hilly regions are planned.

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d.      Agriculture

Nepal’s geography, topography, water resources and ample supply of labor give Nepal a comparative advantage in agricultural production. Nepal’s economy is largely dependent on agriculture, which accounted for about 32% of GDP and absorbs about two- thirds of the labor market. Only 25% of the total land area is cultivable land; another 33% comprised of forest land and the rest is mountains. The lowlands of the terai region produce an agricultural surplus, which caters to the needs of the food-deficient in hill areas. The Agriculture Development Strategy 2014 recommends spending NPR 502 billion in 10 years. Nepal Government is currently focusing on the modernization, diversification, commercialization and marketing of the agriculture sector. Towards this, the government plans to make available agricultural inputs, such as irrigation, electricity, transportation and agro-credit. The Nepal Trade Integration Strategy 2010 focuses on the development of cardamom, ginger, honey, lentils, tea, noodles and medicinal herbs/essentials oil as priority export products. The Trade Policy 2015 reemphasizes the need to develop these products. Good opportunities exist in agriculture production; processing, packaging and branding. Also nontimber forest products, cardamom, ginger, aquaculture, vegetables, floriculture, tea, coffee and honey offer many opportunities. There are good opportunities in input markets (such as for seeds, nurseries, fertilizers, agricultural infra- structure and technology, and agriculture financing) and, due to favorable climatic conditions, the focus on high value organic crops is increasing.

e.      Information and Communication Technology

Nepal’s ICT sector is one of the fastest emerging sectors in the country, with huge potential for growth in the coming years. All the services related to the ICT sector are open to foreign direct investment, except for media. For telecommunications, 80% foreign ownership is allowed. The Government of Nepal has identified IT and business process outsourcing (BPO) in the Nepal Trade Integration Strategy 2010 as one of the five priority potential export service sectors. The Trade Policy 2015 also reemphasizes the importance of developing this sector. As there are only two major telecommunications companies (NTC and Ncell) dominating the sector, there is room for new firms to enter the market. Foreign BPO companies can tap into the young English-speaking population and benefit from the cost advantages offered by the low wages and low establishment and operating costs. The time zone in Nepal is also favorable for companies looking to outsource from America or Europe. There are unmet needs for the use of ICTs in governmental agencies and the private sector.

f.        Health and Education

Opportunities exist in developing education infrastructure, including upgrading and building educational institutions and even education cities (medical, IT, engineering, management etc.), for which the government is seeking to engage in private-public partnerships. Every year, thousands of students go abroad for further studies spending large sums of money. With more and better education institutions within country, this could be avoided. The government is also looking to develop health infrastructure, including modernization and increasing the capacity of health facilities and mobilizing privately-run hospitals by means of public private partnerships. In terms of pharmaceuticals, there are persistent shortages of quality medicines in the market presenting opportunities for manufacturers of pharmaceutical goods.

g.       Financial Sector

Although the financial sector of Nepal is growing at a rapid pace, still 60% of Nepal’s population has no bank accounts and only 61% are served by formal financial institutions. Also, banking services are heavily concentrated in urban areas whereas 56% of the adults use banking products as compared to 36% in rural areas. Thus financial sector of Nepal still has a large untapped market for banking and financial services. Similarly, Nepal’s Insurance market has also huge potential as the penetration rate is only 1.31% in 2011.

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h.      Mines and Minerals

Nepal has an abundance of minerals used in industry and construction, including limestone (most abundant), coal, talc, red clay, granite and marble, gold, and precious and semi-precious stones (tourmaline, aqua- marine, ruby and sapphire). Recent studies have shown that Nepal may have 2.5 billion metric tons of cement grade limestone. Nepal has an estimated 5 billion metric tons of dolomite and 180 million metric tons of high grade magnetite. In recent times, the western part of Nepal has witnessed gas and oil seepage, confirming the presence of oil and natural gas in Nepal. About 10 petroleum and natural gas exploration sites have been identified so far. Nepal has more than 20 million metric tons of ore reserves in more than 80 locations. Copper occurs in Nepal in more than 107 locations.

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