Nepal: Selected Issues and Statistical Appendix
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International Monetary Fund
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Publication Date:
07 Feb 2006
eISBN:
9781451830033
Language:
English
Keywords:
ISCR; CR; remittance; Cabinet change; Nepal; cabinet; Nepal-India Preferential Trading Agreement; trade integration; market share; share of export; market access; Tariffs; Foreign direct investment; South Asia
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This Selected Issues paper examines the effect of political instability on economic growth in Nepal. It uses publicly available data on political economy variables for 167 countries worldwide from 1970–2004 to estimate the impact of political instability on growth. The findings reveal that Nepal has witnessed higher political instability compared with other countries in the region. The paper also presents the salient features of political instability and growth for Nepal and other South Asian countries, and the econometric estimates of growth regressions to measure the effect of political instability on economic growth.

Abstract

This Selected Issues paper examines the effect of political instability on economic growth in Nepal. It uses publicly available data on political economy variables for 167 countries worldwide from 1970–2004 to estimate the impact of political instability on growth. The findings reveal that Nepal has witnessed higher political instability compared with other countries in the region. The paper also presents the salient features of political instability and growth for Nepal and other South Asian countries, and the econometric estimates of growth regressions to measure the effect of political instability on economic growth.

III. Meeting the Challenges of Globalization1

A. Introduction

1. Globalization has considerable potential to raise living standards in Nepal even as it poses challenges that need to be managed. Masson (2001) and Berg and Krueger (2003) provide a succinct account of the benefits of openness and globalization. With the trade liberalization of the 1990s and labor migration of the past decade, Nepal is becoming increasingly integrated into the global economy. Nepal’s Tenth Plan/Poverty Reduction Strategy Paper (2002–2007) seeks to build on these developments through further reforms to bind the country to the global economic community. Looking forward, the recent accession to the World Trade Organization, further access to dynamic regional markets, mainly China and India, and participation in regional trading agreements offer Nepal considerable opportunities for trade and investment. Similarly, financial integration could help access foreign savings and allow residents to diversify risk. In particular, entry of foreign financial institutions could facilitate knowledge and technology transfers and lead to increased competition and greater efficiency of domestic markets. Nevertheless, globalization also poses challenges for Nepal as for other countries. It may increase exposure to external shocks; raise income, trade, and financial market volatility; lead to losses of revenues; and impose adjustment costs from greater competition in previously protected sectors.

2. This chapter is organized as follows. Section B assesses Nepal’s trade integration. Section C discusses FDI and financial market integration. Section D provides an overview of Nepal’s commitments to global and regional trading arrangements. Section E considers policies to reap benefits from globalization and steps to mitigate risks.

B. Trade Integration

3. Nepal is one of the most open and trade dependent economies in South Asia. In the 1990s, a series of market oriented reforms opened up the economy to trade in goods and services, technology and investment. These included a reduction of import duties and elimination of most quantitative restrictions and licensing requirements. The unweighted average tariff fell from about 40 percent in 1990 toward its current level of around 14 percent. Nepal also moved to full convertibility for current account transactions when it accepted Article VIII obligations of the IMF’s Articles of Agreement in May 1994. These reforms have contributed to a rise in the trade to GDP ratio to close to 50 percent.

uA03fig06

Nepal: Total Trade

(In percent of GDP; 5 year moving-average)

Citation: IMF Staff Country Reports 2006, 045; 10.5089/9781451830033.002.A003

Source: World Bank, World Development Indicators.

4. Nepal is closely integrated with India. Transit and preferential trading treaties have existed between the two countries since 1950. A long porous border permits free movement of labor. The Nepalese rupee is pegged to the Indian rupee. These factors and the proximity emphasized by gravity models of trade, as well as historical and cultural links explain the dominant role of trade with the Indian economy. Over the past decade, this integration has increased as the Indian economy has expanded and Nepal’s exports to third country markets have stalled. Trade with India averaged about 28 percent of Nepal’s total trade in the first half of the 1990s but doubled to 56 percent since the beginning of this millennium.2 India accounts for approximately 40 percent of total foreign investment in Nepal, with a significant share of Nepal’s exports related to these investments. Approximately one half of all remittances are from India, including pension payments to ex-servicemen in the Indian army.

uA03fig07

Nepal: Share of Exports

(In percent of Nepal exports)

Citation: IMF Staff Country Reports 2006, 045; 10.5089/9781451830033.002.A003

Source: Nepalese authorities; and IMF staff estimates.

5. However, trade remains highly concentrated and Nepal’s share of exports in world markets is still very low. Manufactured goods account for close to 50 percent of total merchandize exports. Nonetheless, Nepal remains dependent on a few exports and markets, making it vulnerable to external demand and policy shocks. Three exports—garments, pashmina, and carpets—account for 23 percent of total merchandize exports and about 90 percent of exports outside India. Dependence on a small group of markets has been increasing with the United States, Indian, and German markets accounting for 90 percent of its exports. Imports are more diversified, but India still accounts for over half of the total. Moreover, despite doubling over the 1990s, Nepal’s share of world exports is less than 0.01 percent.

uA03fig08

Nepal: Share in Global Exports

(In percentage of global exports)

Citation: IMF Staff Country Reports 2006, 045; 10.5089/9781451830033.002.A003

Source: IMF DOTS.

6. Exports are subject to high volatility. Recent data suggest three conclusions (see also IMF, 2002). First, exports are the least correlated with overall changes in U.S. imports. Second, Nepal’s market share is more correlated with its export performance than other developing economies, suggesting there are competing substitutes for its exports. Third, Nepalese exports are more volatile than other South Asian economies.

Nepal: Volatility of Exports in 1990–2004

article image
Source: U.S. Office of Textiles and Apparel (OTEXA), see http://otexa.ita.doc.gov/ctrynam$.htm.

7. The end of the Agreement on Textiles and Clothing has been a significant shock for Nepal. The phasing out of quota-based trade in textiles from the beginning of 2005 has adversely affected garment exports which were concentrated in the U.S. market. In 2005/06, these exports are likely to be only one third of their level in 1999/2000. Production has switched to the more competitive economies of China and India. Similarly, the carpet industry, which is another mainstay of the manufacturing sector, has lost over half its market in recent years due to declining demand, price controls, long order cycles, and greater competition.

8. A stronger focus is required on Nepal’s comparative advantage to increase exports. Nepal’s comparative advantage lies in labor and resource intensive industries, such as hydropower, tourism, carpets, some yarns and textiles, paper products, and agroprocessing (vegetables, spices and herbs, tea, honey, flowers, and leather goods). There may also be opportunities in educational and health services, information technology, and financial services such as those being outsourced to India. Finally, Nepal could serve as a transit point between its growing neighbors, with opportunities for diversification of Nepal’s trade, transit fees, and development of transport related services. Interest in transit economy aspects has been prompted by China’s plans to complete a rail link to Tibet by 2006 and India’s request for overland transit facilities. At present border trade volumes are limited by geographical factors. Even though Nepal has committed to construct and upgrade seven additional North-South highways, a careful cost-benefit analysis compared with alternative modes of transportation is required.

9. In particular, Nepal has enormous potential in hydropower that could be harnessed to meet domestic and regional energy demands. Although its estimated generation potential is 43,000 MW, Nepal currently generates around one percent of this and trades negligible amounts. The challenge is to develop new capacity to meet growing domestic and export demand, including through foreign investment.

  • On the supply side, transmission links into the Indian grid could be established. The best approach may be to focus on smaller projects rather than mega-hydro projects given the limited prospects of commercial absorption of these projects and problems with securing private financing (HMGN, 2004).

  • A priority is to reform the state owned power utility, Nepal Electricity Authority (NEA), by unbundling generation, transmission and distribution, reducing government intervention, improving financial performance and establishing an independent and effective regulatory body. Part of the solution involves lowering costs by reducing large system losses, including through greater private sector participation in distribution.3

  • On the demand side, South Asia—India in particular—has a large energy deficit. The establishment of the Power Trading Corporation in India is an encouraging development, and ratification of the Power Trade Agreement and reactivation of the Power Exchange Committee between India and Nepal would be helpful. Moreover, private sectors participation in power development and trading arrangements is required.

  • At a regional level, there is need for trans-regional energy infrastructure and resolution of water-sharing issues.

10. Tourism also offers opportunities. Exploiting this potential would require better security conditions and an improved institutional framework. Tourism arrivals and earnings appear highly sensitive to the conflict; indeed, following the intensification of the conflict arrivals have dropped by about 25 percent on average since their peak in 1999 and foreign exchange earnings have fallen by about 2 percent of GDP. Per capita tourist receipts are the lowest in the region, and growth in this sector has been low by regional standards. The recent removal of travel agencies and trekking from the negative list for FDI is encouraging. There is a need to diversify trekking activity from the traditional central areas to poorer districts in the east and west and to introduce new tourism products. This will require investments in travel infrastructure and ecotourism training. Moreover, the limited capacity and poor financial condition of the state-owned Royal Nepal Airlines have to be addressed. Other priorities include improving the Nepal Tourism Board’s marketing activities and the funding for such promotion, and improving service standards and codes of practice under the Ministry of Tourism as the industry regulator.

C. Financial Integration

11. Nepal’s international financial integration is limited. Nepal is also atypical in that trade and financial integration typically have not gone hand in hand (IMF, 2002a). Measured by the ratio of gross foreign assets and liabilities to GDP (FDI and portfolio flows), integration has increased but remains well below that of other countries in the region.4 Nepal maintains restrictions on capital account transactions.5 Only specified borrowers may borrow or invest in international capital markets, and residents are prohibited from outward FDI. Net foreign direct investment in Nepal is negligible, reflecting poor infrastructure, rigid labor markets, and a weak business climate. These flows are typically higher in countries with stronger policy environments and governance. Higher FDI can offer significant benefits to Nepal. These benefits include a relatively less volatile source of finance, “greenfield” investments in subsidiaries which could offer transfer of technology with possible spillovers to domestic firms and serve as conduits for export market access, higher wages and training opportunities for labor, and greater market competition. Nepal needs to undertake a range of reforms, improvements in governance and institutions, and investments in education and infrastructure to attract and retain FDI.

uA03fig09

Gross Foreign Assets and Liabilities

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 045; 10.5089/9781451830033.002.A003

Source: IMF, International Financial Statistics.
uA03fig10

Nepal: Foreign Direct Investment

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 045; 10.5089/9781451830033.002.A003

Source: IMF, World Economic Outlook.

12. Nepal had made liberal commitments on trade in financial services as part of its WTO accession.6 Fulfilling these commitments would require establishing a level playing field for market participants, strong legal rights for creditors and shareholders, sufficient disclosure standards and high quality information, well-governed institutional investors, and supporting private and public institutions (Claessens et. al., 2000). In that regard, Nepal needs to revise its Banking and Financial Institutions Ordinance so it can meet the Basle Core Principles for Effective Banking Supervision and the Basel II Capital Accord. Higher capital requirements would lead to a smaller number of bigger and stronger banks capable of facing external competition from 2010. Likewise, central bank reforms must be accelerated to ensure effective supervision of more complex financial services transactions.

D. Global and Regional Trading Arrangements

13. As part of its WTO accession in April 2004, Nepal has made extensive commitments in trade liberalization. In return for the rights associated with WTO membership, such as non-discrimination by other WTO members and use of the WTO’s dispute settlement procedure, Nepal has made far-reaching commitments on the rules and regulations governing its trade regime and market access. On the trade regime, Nepal has agreed to ensure all its laws relating to trade are in conformity with WTO obligations. Nontariff barriers and other duties and charges are to be eliminated and there would be full implementation of the Agreement on Customs Valuation, Agreement on Technical Barriers to Trade, Agreement on Sanitary and Phyto-Sanitary Measures, Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs), and the Agreement on Rules of Origin. On goods market access, Nepal has bound almost all its tariff rates, with most bindings at or above current applied rates. Nepal accepted an average tariff binding of 42 percent in agricultural products and around 24 percent in industrial goods, whereas the majority of the import items fall in the customs duty range of 10 percent to 20 percent. Of about 160 services sub-sectors, Nepal has made commitments in 70 sub-sectors of which half are in the area of financial and telecommunications services.

14. Nepal is party to bilateral and regional preferential trading agreements. The net benefits from regional integration under SAFTA for Nepal depend on scale economies from access to a larger market offsetting any trade diversion and loss of customs revenues. Given that it already has significantly higher intraregional trade by virtue of ties with India, particularly important for Nepal would be whether and how the PTA with India is integrated into SAFTA. The impact on tariff free market access to the Indian market as well as a reduction in nontariff barriers will be crucial. However, as trade gains might be limited by similar production structures and factor endowments, appropriate focus would be required on trade facilitation (border controls, transit agreements, lowering trade related costs through better customs procedures and harmonizing standards). The benefits of SAFTA will also depend on restrictiveness of safeguard measures i.e., the need for transparent rules of origin and broad product coverage through limited sensitive lists, mechanisms to compensate revenue losses, better infrastructure and regional connectivity, and extending SAFTA to cover services.7

Main Bilateral and Regional Trading Agreements

Nepal-India Preferential Trading Agreement (PTA): This was renewed most recently in 2002. It allows for (i) exemption of primary products from import duties and quantitative restrictions on a reciprocal basis; (ii) duty free access for some Nepalese manufactures to India largely without quantitative restrictions, except for some sensitive items; and (iii) preferential access for Indian manufacturing exports without quantitative restrictions. The 2002 treaty introduced more stringent rules of origin, tariff rate quotas, and safeguard clauses. India imposes a countervailing duty to make the prices of Nepalese exports comparable to Indian counterparts.

SAFTA: Members include Nepal, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Members are committed to a ten-year phase out of tariffs beginning 2006, with least developed countries such as Nepal having a more back loaded reduction schedule. Nepal will face a maximum tariff of 5 percent in Non-Least Developed Members by 2009 and in Least Developed Members by 2015. Nepal is committed to tariffs no greater than 5 percent by 2015. The SAFTA agreement does not incorporate trade in services, cross border investment or movement of labor and no timeframe has been set for eliminating nontariff barriers and other duties and charges. The SAFTA agreement mentions addressing trade facilitation issues, it does not specify mechanisms. However, a number of technical issues were recently resolved prior to the agreement coming into force from January 1, 2006. In particular, agreement was recently reached on safeguard measures—sensitive lists and rule of origin—as well as a revenue compensation mechanism.

BIMSTEC: Nepal is also signatory to the free trade agreement of the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation, with six countries (Bangladesh, Bhutan, India, Myanmar, Sri Lanka and Thailand). The agreement aims for broad economic integration in goods, services and investment, with a trade accord to be launched from July 2006 and that for services and investment promotion in 2007.

E. Policies to Benefit from Global Integration and Manage Risks

15. Nepal can gain from global integration by raising competitiveness, maintaining macroeconomic stability and strengthening institutions. While wage costs are low in Nepal, productivity is also low, resulting in high unit labor costs (HMGN, 2004).8 Key factors constraining productivity include labor market rigidities, the lack of technology transfer mechanisms such as firm training and FDI, high infrastructure and transactions costs (transport and electricity), an unpredictable business climate, and low human capital levels.9 Strengthening investment in human capital—education and health—is a central element in Nepal’s poverty reduction strategy. Such investments are key for raising productivity. Macroeconomic stability—particularly low and stable inflation and a prudent fiscal position—has been a key achievement during the 1990s and in recent years.

16. Significant investments in infrastructure—particularly transport and power—are required to reduce costs and raise competitiveness. Historically, along with technological change and falling communication costs, lower transport costs have played a crucial role in fuelling globalization. Pre-shipment transport costs in Nepal are estimated to be twice those of competitors in the region. Some of this reflects Nepal’s difficult geography and landlocked position. However, reductions in the cost of shipment from Kolkata port and improvements in the internal road network are crucial for improving competitiveness, and supporting trade expansion. The establishment of an Internal Container Depot (ICD) at Birgunj that will accommodate containerized rail transport has the potential to reduce costs significantly (by 30 percent). Key issues in the domestic road system include more effective and timely maintenance as well as strategic expansion of the national road network. A second crucial area is the power sector, where electricity costs are significantly above other Asian competitors. This is attributable to inefficiencies at the NEA, high transmission losses, piecemeal expansion of the grid, and the high cost of power purchase agreements. The required reforms include an unbundling of NEA by separating generation, transmission, and settlement and allowing for increased private sector participation in the sector.

17. Improvements in the business climate are key to attract FDI. Firm level surveys in Nepal reveal that poor reform implementation, bureaucratic burden, and continued political and policy uncertainty are important constraints on doing business (Biggs et. al., 2000). It costs around 70 percent of income per capita to start a business (World Bank, 2005a). Red tape, delays in the provision of government services, and corruption impose costs. Business support services are not readily available, constraining the private sector’s information on new markets and technologies. In addition, weak enforcement of property and creditor rights has impeded the recovery of nonperforming loans and credit allocation to more productive uses (World Bank, 2005b). Bankruptcy and foreclosure procedures have traditionally been weak, although the new Insolvency Ordinance, if implemented effectively, would be a step forward. Regulation of business, investment promotion and trade facilitation has been diffused across many institutions with weak coordination.

18. More flexible labor markets would also facilitate investment. Nepal has rigid labor regulations which lower competitiveness. Restrictive anti-dismissal rules reduce labor efficiency by reducing the cost of nonperformance, and discourage firm expansion and investment in training. Minimum wage provisions, the mandatory payment of a percentage of profits to employee welfare funds, and union resistance to performance related pay undermine performance incentives. Greater flexibility is needed to adjust the labor force to market conditions, while adhering to core labor standards. This could be done through increased flexibility in hiring and firing by revising the 1992 Labor Act, as is being contemplated at present. Given the political challenges of labor market reform and limited regulatory capacity, such flexibility could be introduced in clearly defined special economic zones—with careful attention to fiscal implications—targeted at export-oriented industries.

19. Further reforms are required to facilitate trade through customs modernization. Donor technical assistance has identified a wide-ranging agenda for customs reform, including for compliance with WTO commitments on trade facilitation. The current three-year customs modernization plan has effected some improvements in the adoption of transactions values and computerization of some functions, although problems remain. These include a poor infrastructure and facilities, complicated procedures and excessive documentation which are poorly harmonized with neighboring economies, and weak governance and human resource management. Critical short-term measures required include improved customs valuation, introduction of risk based clearance procedures, computerization, development of a value database, more effective use of ASYCUDA, better training in customs valuation, and rationalization of exemptions.

20. Globalization poses some risks which can be mitigated.

  • Greater trade integration would increase exposure to external shocks. Increased openness since the early 1990s has led to export volatility as well as vulnerabilities to shifts in trading partners’ policies. However, simulations suggest that impact of MFN tariff reductions would be relatively modest (2½ percent of total exports). Moreover, Nepal enjoys a preference margin of about 10 percent in Quad markets (United States, EU, Japan, and Canada), and is yet to fully reap the benefits of this preferential treatment, particularly in the EU and Canadian markets.

  • Greater volatility in financial markets can be mitigated by overall macroeconomic stability, particularly through prudent fiscal and suitable exchange rate policies and enhanced financial sector supervision.

  • Trade taxes account for about one-quarter of Nepal’s total revenues. MFN tariff reduction and the commitments to eliminate other duties and charges are likely to lead to a reduction in trade tax revenues. These revenue losses could be offset by better revenue administration, especially in customs.

  • Globalization will produce winners and losers, especially over the short term. While those able to take advantage of new opportunities and with access to cheaper inputs have the potential to secure significant benefits, others with poor endowments and limited access could be left behind. The appropriate response is more openness and higher growth. This growth can be accompanied by reforms which ensure that growth is pro-poor, including through better governance and social service delivery. Improved skills and an appropriate social safety net are key to ensuring that the benefits of globalization are widely shared.

References

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STATISTICAL APPENDIX

Table 1.

Nepal: Nominal Gross Domestic Product by Sector, 1998/99–2003/04

article image
Sources: The Central Bureau of Statistics; Nepal Rastra Bank; and Fund staff estimates.
Table 2.

Nepal: Real Gross Domestic Product by Sector, 1998/99–2003/04

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Sources: The Central Bureau of Statistics; and Nepal Rastra Bank.
Table 3.

Nepal: Nominal Gross Domestic Product by Expenditure Components, 1998/99–2003/04

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Sources: The Central Bureau of Statistics; Nepal Rastra Bank; and Fund staff estimates.
Table 4.

Nepal: Saving and Investment, 1998/99–2003/04

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Sources: The Central Bureau of Statistics; Nepal Rastra Bank; and Fund staff estimates.
Table 5.

Nepal: Agricultural Production and Yields, 1998/99–2003/04

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Source: The Central Bureau of Statistics.

Private sector has participated in fertilizer trading activity since November 1997.

Areas cultivated with more than one crop are included under each crop.

Table 6.

Nepal: Manufacturing Production Indices, 1998/99–2003/04

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Source: The Central Bureau of Statistics.

Weights are based on the Census of Manufacturing Establishments (1996/97).

Table 7.

Nepal: Energy Consumption, 1998/99–2003/04

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Source: Data provided by the Nepalese authorities.
Table 8.

Nepal: Tourism Indicators, 1998–2004

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Source: Data provided by the Nepalese authorities.

By air only.

Excluding Indian tourists.

Table 9.

Nepal: Consumer Price Index, 1998/99–2003/04 1/

(Average annual percentage change)

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Source: Nepal Rastra Bank.

Base year is 1995/1996.

Table 10.

Nepal: Monthly Wages in Major Sectors, 1998/99–2003/04

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Sources: Data provided by the Nepalese authorities; and Nepal Rastra Bank.

Minimum monthly wage, including allowances, which are the same in Kathmandu, Birgunj and Birtanagar.

Carpenters and masons.

Table 11.

Nepal: Summary of Government Operations, 1998/99–2003/04 1/

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Sources: Data provided by Ministry of Finance; Nepal Rastra Bank; and Fund staff estimates.

Fiscal years start in mid-July. Table confined to central government operations as contained in the budget.

Table 12.

Nepal: Central Government Revenue, 1998/99–2003/04

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Sources: Data provided by Ministry of Finance; Nepal Rastra Bank; and Fund staff estimates.

Excludes principal repayments from corporations.

Table 13.

Nepal: Central Government Expenditure by Economic Classification, 1998/99–2003/04

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Sources: Data provided by Ministry of Finance; FCGO; and Fund staff estimates.
Table 14.

Nepal: Central Government Expenditure by Functional Classification, 1998/99–2003/04

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Sources: Data provided by Ministry of Finance; FCGO; and Fund staff estimates.

Excluding amortization payments on domestic and foreign loans.

Including net lending and excluding principal repayment from corporations.

Table 15.

Nepal: Monetary Survey, 1998/99–2003/04

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Sources: Data provided by Nepal Rastra Bank; and Fund staff estimates.

Includes credit to public financial enterprises.

Table 16.

Nepal: Assets and Liabilities of Nepal Rastra Bank, 1998/99–2003/04

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Sources: Data provided by Nepal Rastra Bank; and Fund staff estimates.

Includes claims on public financial enterprises.

Table 17.

Nepal: Assets and Liabilities of Commercial Banks, 1998/99–2003/04

(In millions of Nepalese rupees, end of period)

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Sources: Data provided by Nepal Rastra Bank; and Fund staff estimates.

Excludes loanable fund of the Agricultural Development Bank of Nepal.

Table 18.

Nepal: Assets and Liabilities of Finance Companies, 1998/99–2003/04

(End of period)

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Source: Data provided by Nepal Rastra Bank.

Including loan loss provision.

Table 19.

Nepal: Gross International Reserves, 2000/01–2003/04

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Source: Data provided by the Nepalese authorities.
Table 20.

Nepal: Structure of Interest Rates, 1998/99–2003/04

(Annual percentage rates, end of period)

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Source: Nepal Rastra Bank.

Annual weighted average.

Table 21.

Nepal: Balance of Payments, 2000/01–2003/04

(In millions of U.S. dollars)

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Source: Data provided by the Nepalese authorities.
Table 22.

Nepal: Composition of Foreign Trade, 2000/01–2003/04 1/

(In millions of U.S. dollars)

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Source: Data provided by the Nepalese authorities.

Includes unclassified exports and imports, and adjustments to reconcile figures with summary balance of payments data.

Table 23.

Nepal: Exports of Major Commodities, 1998/99–2003/04

(In thousands of U.S. dollars)

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Source: Data provided by the Nepalese authorities.

excluding re-exports.

Includes exports to third countries only.

Table 24.

Nepal: Average Customs Duty by Main Categories of Goods, 2001/02–2002/03 1/

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Source: Ministry of Finance.

Harmonized System classification; average of customs duties for all items in each category.

Table 25.

Nepal: Services, Income and Current Transfers, 2000/01–2003/04

(In millions of U.S. dollars)

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Source: Nepal Rastra Bank.
Table 26.

Nepal: Composition of Imports and Import Duties, 1998/99–2003/04

(In millions of Nepalese rupees)

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Sources: Department of Customs, Ministry of Finance.
1

Prepared by Sukhwinder Singh and Christian H. Beddies.

2

Based on recorded trade data. If estimates unrecorded trade are also included (at least one-fifth of recorded trade), India’s trade share becomes larger. Under the Nepal-India bilateral agreement, third country exports do not meet rules of origin requirement and are traded informally.

3

Relatively high installed capacity contributes to high tariffs. This is especially the case for run-of-river hydropower plants which have low generation capacity in winter season when demand rises and an excess supply in the rainy season.

4

Financial integration may be understated to the extent there capital controls are bypassed by extensive informal networks between Nepal and India.

5

See IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions.

6

In all but one mode of supply, Nepal has committed to having virtually no limitations on market access and national treatment in both insurance services and banking and other financial services, effective 2010 (Maskay et. al., 2005).

7

Following the 13th SAARC Summit in November 2005, agreement was reached on some outstanding issues to render SAFTA effective from January 2006, including negative lists (to be within 20 percent of the total tariff lines of member countries); rules of origin (at least 40 percent value addition); and revenue compensation mechanism for the least developed country members for loss of customs duty (to be in place for four years).

8

Available data suggest that in 1999, value added per worker in Nepal was the lowest among nine selected Asian countries (Nepal Trade and Competitiveness Study, 2004).

9

Estimates of total factor productivity based on firm level data show that average levels of productivity in Nepal are lower than in other developing countries (Biggs et. al., 2000). The average level of firm productivity (using a total factor productivity index) in Nepal’s manufacturing sector was estimated at 53 percent (measured against the most efficient benchmark) compared with a mean level of productivity in other developing countries ranging from 60–70 percent.

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Cover IMF Staff Country Reports
Nepal: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
Volume/Issue:
Volume 2006: Issue 045
Publisher:
International Monetary Fund
ISBN:
9781451830033
ISSN:
1934-7685
Pages:
53
DOI:
https://doi.org/10.5089/9781451830033.002

Nepal: Total Trade

(In percent of GDP; 5 year moving-average)

Nepal: Share of Exports

(In percent of Nepal exports)

Nepal: Share in Global Exports

(In percentage of global exports)

Gross Foreign Assets and Liabilities

(In percent of GDP)

Nepal: Foreign Direct Investment

(In percent of GDP)