BUSINESS ENVIRONMENT IN

[BBA V Semester, Citizen College] NEPAL

NEPAL AT A GLANCE
(The geographical structure of
NEPAL)

Nepal economic update

[* Source: The Heritage Foundation Index of Economic Freedom,
http://www.heritage.org/index/ ]

Nepal ended a decade-long conflict when key stakeholders reached the Comprehensive
Peace Agreement in 2006, and successfully held the constituent assembly election in 2008.
The country has since been making efforts to establish a 'new' Nepal with inclusive and
accountable governance structures. Fiscal management has remained prudent: there has
been progress in revenue administration, and a three-year budgeting framework is being
established. The ongoing efforts to increase block grants to local bodies, if managed well,
can take resources closer to where they are used. Furthermore, service provision, especially
in education and health, is improving as community/user groups are increasingly involved in
taking decisions that affect their lives. Economic activities remain constrained: gross
domestic product (GDP) growth for FY13 is now projected to be 3.5 percent, from 6.1
percent in FY08 when the economy briefly enjoyed peace dividends boosted by good
weather. High remittances estimated to exceed a quarter of GDP have helped reduce
poverty (from 42 percent in 1996 to 31 percent in 2004 to 27 percent in 2012) and keep the
economy afloat. But they have also injected a significant amount of liquidity into the
economy. This, combined with an accommodative monetary policy and supply bottlenecks,
such as transport disruptions and cartel activities, has resulted in double-digit inflation.
Much of the new liquidity has gone into real estate creating a boom that involves
speculative activities often funded by banks and credit cooperatives. Nepal can build on
some of the positive beginnings and translate them into higher inclusive growth provided
the political uncertainties diminish and the investment climate improves. This will require
urgent and continued attention of policy makers to economic issues. A timely response to

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address the emerging financial sector vulnerabilities is essential in the immediate future.
Alleviating structural impediments to growth and creating a better investment climate are
important for realizing the country's significant potential in the medium term.

Economic Competitiveness : The Nepal context

Pranav Bhattarai [Economic Analyst]

Nepals performance in the economic sector has been pathetic over the last decade.
Growing trade deficit, low economic growth, dwindling exports, trade-unionism and
declining investment confidence can be listed as some of the reasons behind Nepals poor
economic performance.

The Global Competitiveness Report (GCR) recently released offers both the good and bad
news to Nepals bad-performing economy. The good aspect of the news is that after many
years, Nepal has climbed five notches to rank 125th in the global competitiveness index
among 142 countries assessed by the World Economic Forum in its annual report for 2011-
12. The report assigns the anticipated promotion to the relatively healthy macroeconomic
indicators along with slow-paced social indicators.

The report has placed Nepal in 19th position from the top over gross national savings and at
41st position in government budget balance. Similarly, on GDP to government debt ratio, an
issue that has shattered the Euro zone, Nepal has been placed at 53th status. Likewise, on
social indicators, there is a glimmer of progress in areas like HIV, infant mortality and life
expectancy, among other indicators.

Despite these positive indicators, Nepal still has a long list of factors that continue to plague
Nepals economic infrastructure. In terms of availability of electricity and road connectivity -
a key factor for economic growth, Nepal has been positioned at the very bottom and at
128th status respectively among the 142 countries. About 22 per cent of Nepali executives
interviewed for preparation of the report pointed to political instability as one of the most
problematic factors in doing business in Nepal.

Even regional comparisons show that Nepals efficiency of labor is the poorest in entire
South Asia. The scenario of labor-employer relations is the most troubled in Nepal with
139th position in the report. Nepal is the least competitive among all South Asian countries.

The law and order situation is still not satisfactory. The power shortage is alarming, and
labor militancy has recently forced two foreign ventures to pull down their shutters for
good, although the Baburam Bhattarai-led governments new relief package has rekindled
some hopes of reviving the business environment in Nepal, which is yet to materialize.

Nepal - Interim strategy note (ISN) for the period

FY2012-2013
Nepal is passing through a momentous and prolonged political transition whereby political
transition and attainment of peace has overshadowed economic issues. Notwithstanding
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the challenging political environment, the country has made significant progress in social
development indicators. The Governments development strategy for the Three Year Interim
Plan (July 2010-June 2013) has two major objectives - poverty alleviation and the
establishment of sustainable peace through inclusive employment-centric growth. The
proposed Interim Strategy Note (ISN) focuses on agriculture, infrastructure, and social
development which are basic priorities for Nepal and consistent with the Plan. The ISN
concept served as an input to International Development Associations(IDA) 2011 South
Asia regional strategy which emphasizes selectivity based on client demand, possibility to
leverage results, particularly for Millennium Development Goals (MDGs), and opportunities
for regional integration. In addition, criteria for Nepal operations include: (i) government
and broad political support; (ii) IDAs comparative advantage vis--vis other development
partners; and (iii) evidence of effective implementation capacity. All proposed FY12/13 IDA
Nepal operations build upon ongoing operations which are being implemented successfully.
IDA will maintain its interventions in seven areas under the three ISN pillars: (i) power,
roads, and, agriculture; (ii) food security/livelihood vulnerability; and (iii) education, health,
and urban services. An eighth area of climate change and disaster management will
continue to be supported exclusively through trust funds. These interventions should
contribute to increased access to social and infrastructure services. Major risks to the
proposed programs are associated with political uncertainties. As a result, IDA will engage
with political leaders on a regular basis about development challenges so that all key
parties are informed.

Nepals business environment: Stained by

political uncertainties
By, Bhuwan Thapaliya

In the past couple of years, whole world has hailed an improvement in Nepals political
performance. But sustained political development is impossible without greater economic
stability. Is that in prospect?

Nepals economy looks remarkably shaky given the storm clouds gathering all over the
global economy, and the various economic indicators does not expect the country to
accelerate its economic pace in the near future, though the political situation in Nepal is
slowly but surely improving.

Inflation is a major setback and Nepals position is made trickier by continued domestic
inflationary concerns. Double digit inflation has completely devastated the life of the
ordinary Nepalese, who are fighting hard for their survival and there are no signs of
recovery for them as the global recession lurks in.

Political environment has a direct impact on any countys business environment and when it
comes to underdeveloped nations such as Nepal, whose economy has been seriously
affected by the political conflict in recent years; its impact on business has been very lethal.

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Nepals business environment has been seriously affected by the series of political conflicts
following one after another in the last ten years or so.

Overall GDP growth has dropped sharply from 5 percent in the 1990s to just over 2 percent
in the past three years. This means that Nepal is only creeping in per capita terms, which
further reckons that Nepalese business environment is not fertile and there are enough
indicators indicating some serious macroeconomic vulnerability.

The adverse impact of the political conflict on business has annihilated the business
environment of Nepal. And unfortunately, it could take decades to recover from such a
grave mayhem even after the restoration of peace. The loss of business opportunities, due
to personal security and grave human rights violationare the desolate affects of a decade
long conflict no one seems to fancy anymore- especially Nepalese business personals.

To make the matter worse, even after the end of the Constituent Assembly Election, the
downside risks of Nepals business sectors are rising and hence the short-term economic
outlook looks blurred. As far as I am aware, Nepals business partners, all over the world
share similar views, when it comes about investing in Nepal. Hence, the political and
security situation in Nepal has huge implications for further business assistance and its
effectiveness in the long run.

Furthermore, most entrepreneurs have been evaluating the ongoing politics and its
direct/indirect impact on the Nepals business. Will it improve for the better or remain
stagnant is yet to be seen by us all.

Rationally speaking, for the business to flourish in Nepal the political change needs to be
institutionalized at the earliest possible but looking at the current political chaos in Nepal, it
seems we will remain in doldrums till the next election of the parliament under the new
constitution. Nonetheless, time has come for the political parties to unite for a common
minimum economic program but that looks just a forlorn reverie judging by the ongoing
political battle amongst the Nepalese political parties.

To make the business environment further unstable, after the emergence of the Maoists as
the political power house in Nepal , there are speculations that Nepal s Capital is being
transferred abroad leading to acute capital and liquidity shortages in Nepal . Analysts
reckon that this is not good for Nepal because business people have lost their faith due to
hyper insecurity, trade unionism and the political abnormalities.

To minimize the risk of capital flight, we need peace, security & political stability as these
three factors are the prerequisite for the business development of Nepal. And having said
so, I think the future of business environment will be congenial because it is possible to
transform Nepal into a prosperous peaceful Nepal in the next few decades. For that to
happen, all we need is a business and economic policy beyond politics as there are various
business opportunities in Nepal though as of now many international and domestic
investors are still speculative about business investment and promotions in Nepal.

Hence, the first challenge for Nepal is to pave a fertile field to attract both domestic and
foreign investment in the country to boost the fragile business sector. Second, in business,
new products and services have to be introduced. The business industry cannot sustain
itself by indulging in traditional business only new frontiers will have to be explored. While
focusing more on some core sectors such as hydropower, real estate, tourism, herbs and
adventure sports.

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Finally, if peace and political stability is established in Nepal, then its business sector too
would blossom. There is light at the other end of the tunnel for both domestic and
international business personals in Nepal Business environment is slowly but surely
regaining its lost glory and there are every chances of it gaining the momentum in the next
few months.

But for this to happen, considering the political gravity and the geo political liquidity, our
political parties have to realize that the main objective for Nepal in the next few weeks is
establishing a credible Nepali government that could protect the secular fabric of the nation
and bring together the different ethnic and religious groups under the broader umbrella of
New Nepal.

The sooner they realize this the better it would be for the business environment in Nepal.

Nepalese are looking towards a new future, full of hope. They believe that the political
change has brought fresh hope among Nepalese about their future. Nepali people are very
happy. They look forward to a future of national reconciliation between Nepalese in order to
build the new and free Nepal, a Nepal of equality.

But plenty of new worries have already begun to sprout out. The anger and frustration over
the lack of civic amenities is bubbling over and poses as much threat as the continuing
political uncertainty. To make the matter worse, there is a strike going on almost daily in
every sector.

Considering so, Nepalese leaders must unite and end this status quo if Nepal is to grow
economically.

On the other hand, the Nepali public should realize that they have lived together for
generations, for hundreds of years and they will continue to live together for hundreds of
years. So what this political mess is all about? Let them realize that only political interests
are tearing them apart.

In short, Maoists shock win in the election has created its own set of problems for the Bush
administration and in the long term interests of India. However, the Indian government
should participate in Nepals reconstruction- political and economic only when they are
called upon and not under the evergreen hegemony of Indian government, who seems set
to once more overplay its hand in Nepal in the wake of the Kings downfall.

Regardless of the whys, the facts are clear outsiders are trying to fish in the muddy
waters of Nepali politics. So let this be understood by our leaders the sooner the better.

[ Bhuwan Thapaliya is a Nepal-based economist, author, analyst, poet and journalist. He

serves as an Associate Editor of The Global Politician (http://www.globalpolitician.com) ]

Business confidence low, future bleaker: Survey

REPUBLICA
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KATHMANDU, Nov 8, 2012: The first business confidence survey conducted by the Nepali
private sector has found that lingering political instability, energy crisis, weak governance,
labor problems and scarcity of financial resources are major factors undermining the
confidence of business people in Nepal.

The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) - apex

representative body of the Nepali private sector, with the support of the Nepal Economic,
Agriculture and Trade (NEAT) program of the United States Agency for International
Development (USAID), conducted the survey between June and August 2012 as a baseline.

A total of 403 respondents from 42 districts in all five development regions expressed their
dismay over declining business confidence in the country.

"The Business Confidence Index (BCI) stands at just 39.7, which indicates low private sector
confidence in the business environment of the country," states the survey report unveiled in
the capital Thursday.

Worse still, the report portrays a bleaker picture for agriculture -- an engine of the Nepali
economy -- in terms of BCI, compared to other sectors such as manufacturing and services.

"The BCI in the agriculture sector is just 35.7, which is lower than the overall BCI, whereas
manufacturing and services are at 37.7 and 41.3 respectively," the report further says.

BCI-- an indicator of the perception of the business community about business prospects
and the investment climate, is a consolidated form of sub-indicators such as production,
employment, cost of production, profitability of company, export, import, companys
situation, inflation and process for securing loans.

According to the survey report, 67 percent of respondents expect the cost of production to
go up in the next six months. "Various factors such as inflation, hike in labor cost and
energy crisis are going to further push up the cost of production in the next six months,"
adds the report.

However, 31 percent of respondents think that the employment rate will increase in the
next six months while 22 percent expect employment to decline.

Highlighting dissatisfaction among respondents over the weakening business environment,

the report further states that 51 percent of respondents predicted that the economic
situation in Nepal would deteriorate in the next six months.

Analyzing the views of respondents, the survey also predicted a worse economic situation in
the coming six months.

"The upcoming six months also do not show any satisfactory environment in terms of
business confidence in the country," the report concludes after summarizing the views of
respondents.

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According to Dr Vikas Raj Satyal, a member of the survey team, the respondents
represented different sectors, including agriculture, industry and services. "The future is
more insecure for the business community," Satyal said, sharing the survey findings.

On the occasion, Krishna Gyawali, secretary at the Ministry of Industry, stressed the need
for collective efforts to create a conducive environment for doing business."We have to wait
some time to see the political instability improve. However, we can address other
challenges through our collective efforts," he said.

Nepalese Business Environment : Trade policy,

2009
Background

Nepal has been adopting an open and market oriented trade policy for the last two decades
with expectations that such policy generates positive impacts on the resource mobilization,
economic development and poverty alleviation. However, the poor and backward countries
are not able to realize the benefits of trade liberalization due to difficulties in accessing
capital, technology and market, and the unequal economic levels existing among the
various countries. In spite of extension of market access due to the entry into the World
Trade Organization and regional trading arrangements of SAFTA and BIMSTEC.

1. Main Objective:

To support the economic development and poverty alleviation initiatives through the
enhanced contribution of trade sector to the national economy.

2. Objectives:

2.1 To create a conducive environment for the promotion of trade and business in order
to make
it competitive at international level.

2.2 To minimize trade deficit by increasing exports of value added products through
linkages
between imports and exports trade.

2.3 To increase income and employment opportunities by increasing competitiveness of

trade in goods and services and using it as a means of poverty alleviation.

2.4 To clearly establish interrelationship between internal and foreign trade, and develop
them as
complimentary and supplementary to each other.

Policy:

1. The government will play the role of a guardian, regulator and facilitator to make
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export trade
competitive through commodity and regional diversification by bringing the private
sector in
the forefront.

2. The fiscal and monetary policies, foreign investment, industrial estate , tourism,
agriculture,
forest, and physical infrastructures policies will be reviewed with a view to harmonizing
them
with the trade policy.

3. The export base will be widened by maintaining forward, backward and parallel
linkages among
the above mentioned sectoral policies.

4. Efforts will be made for concluding bilateral and regional agreements for the
recognition of Nepalese quality standards with a view to enhancing the supply of goods
in the quantity and quality in line with the demand of international markets.

5. Foreign investors and non-resident Nepalese nationals will be encouraged to establish

international production network through the means of out-sourcing and contract of
services
and production with a view to harnessing benefits from the cost effective and qualitative
production opportunities which are available in the country and to be developed in
future.

Nepalese Business Environment : Labor and

employment policy, 2062

1. Background

Labor is the keystone of development of human life, personality and civilization. The gene
ration of income-generating employment opportunities is necessary for proper human
living. Since income distribution can take place in society only through occupation or
employment, the right to work is considered one of the fundamental rights of the person.
Similarly, the generation of income- generating employment opportunities is the chief
means of poverty alleviation. In this context, it becomes the States duty to build an
environment that enables a life that is full of dignity, exploitation-free and just with at least
the minimum social and professional security by ensuring access to income-generating
employment opportunities for all citizens of the country without discrimination.

2. Long-term Goal

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The long-term goal of the Labor and Employment Policy 2062 is to provide productive, non-
discriminatory, exploitation-free , decent, safe and healthy work opportunities for citizens of
the working ages by building an environment of friendly investments, in addition to building
and managing a labor market that contributes to the national economy so that it can
compete at the global level.

3. Objectives

3.1 To pave the path of sustainable economic development by offering opportunities of

productive and full employment for the entire workforce available in the country and by
creating an investment-friendly environment.

3.2 To augment productivity by eliminating forced labor practices, including bonded labor,
as well as by establishing congenial labor relations through gradual introduction of
international labor standards at the workplace in both formal and informal sectors.

3.3 To make the labor market safe, healthy, competitive and open by developing a social
security system that also encompasses the informal sector, as well as by promoting and
developing occupational safety and health.

3.4 To enhance the prospects of employment and self -employment by developing high
quality multi-skilled human resources.

3.5 To ensure equal access of women, dalits, indigenous nationalities and the displaced to
employment.

3.6 To eliminate child labor.

3.7 To make labor and employment administration smart, up-to-date, efficient and effective.

Emerging trends in Nepalese business

Environment

Nepal has adopted the policy of free market and economy liberalization after 80s. It has
already privatized some of the state owned public corporation. Nepal government has also
adopted the policy to hand over state owned enterprises to private sectors expect those
related to defense and other basic needs. The government has made no policy to
nationalize any private company.

The social awareness of Nepalese people has already risen high. Consumers are conscious.
consumer's forum, environment protection forum etc. are active. So Nepal civil society has
awakened. Nepal has remained active in different international forum. Nepal has expressed
its commitment in different international issues. Employee's participation us increasing in
decision making process. High level technology and methods have transferred. So private
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sector investment is increasing in core industries. Private sector is developing and

multinational companies are appearing.

1. Increase of private investment in core industries: Nepal's core industries such as

electricity, communication, transportation etc. were conducted only by the government. But
now the government has adopted open door policy in all the sectors including these sectors
except those related to defense and very important basic needs. This has paved the way
towards industrialization. As a result private investment in hydro power, communication and
other sectors is increasing.

2. Development of private sectors: Economic reform program has shown symptoms in

economic sectors mainly in the private sectors. Private sectors has gone ahead in sectors of
hydro power, airlines, communication, road, water supply, food and drinking water, banking
and financing companies, hotel, small and cottage industries, services industries etc.

3. Appearance of multinational companies: Nepal has adopted the policy of open

market and economic liberalization. It has forwarded special policy to attract foreign
investment. So, the foreign investor have entered Nepal through multinational companies.
Now hotels, banks, hydro power projects, nursing homes, finance companies etc are being
run in joint venture with the members of WTO. Globalization has begun to influence Nepal's
business environment.

Strategies of 10th plan

The Tenth Plan, also known as Poverty Reduction Strategy Plan (PRSP)'s sole objective is to
bring about a remarkable and sustainable reduction in the poverty level in Nepal over the
next five years. To this end, Government has formulated a "four pillar" poverty reduction
strategy, which squarely addresses the main causes and determinants of poverty identified
in the preceding poverty analysis. The strategy, which is discussed in more detail below, is
based on four overarching approaches: achieving sustained high and broad-based economic
growth, focusing particularly on the rural economy; accelerating human development
through a renewed emphasis on effective delivery of basic social services and economic
infrastructure; ensuring social and economic inclusion of the poor, marginalized groups and
backward regions in the development process; and vigorously pursuing good governance
both as a means of delivering better development results and ensuring social and economic
justice.

The Tenth Plan/PRSP has adopted a number of new approaches and initiatives, which
represent a radical departure from past plans and strategies.

(a) The poverty reduction strategy itself is significantly different.

(i) While emphasizing sustainable high economic growth as in the past, the PRSP focuses
more sharply on accelerating income and employment growth in the rural economy where
the majority of the poor live.
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(ii) The emphasis on social inclusion and on improving governance is altogether new.
(iii) So is the commitment to effective implementation of programs and better delivery of
social and economic services and infrastructure as the primary means of accelerating
human development, particularly among the poor and neglected groups and areas.

(b) In carrying out the strategy, the Tenth Plan/PRSP explicitly recognizes the fiscal and
implementation constraints, unlike previous plans, which sought to do everything. This
pragmatic approach has led to the identification of new modalities of implementation and
service delivery for ensuring better development results:

(i) In particular, the role of the Government has been redefined; and public interventions
will be limited and focused on areas where they can yield the maximum social benefits.

(ii) The Plan relies heavily on the private sector, NGOs, INGOs and Community Based
Groups (CBOs) for carrying out economic activities, infrastructure development and service
delivery wherever possible, both in partnership with central and local governments and
agencies and to complement the role of the government.

(iii) Strong emphasis is also placed on decentralization and maximizing the involvement of
local governments and community groups for identifying development activities and
allocating resources for them in accordance with people's needs, for strengthening service
delivery and for ensuring better program
management, accountability and transparency through people's participation.

(c) The PRSP also seeks to ensure strict adherence to a sustainable macroeconomic
framework, setting annual budgets and spending plans within realistic levels. For this
purpose, alternative
macroeconomic scenarios have been developed as a broad framework to guide future
spending decisions.

(d) The PRSP/Tenth Plan also place strong emphasis on prioritizing resource allocations
annually through a rolling Medium Term Expenditure Framework, so that the key poverty
reduction priorities can be protected despite shortfalls in resources.

(e) To bring about the necessary changes in key areas, detailed structural and sectoral
reform
programs have been developed, together with a program of key Immediate and Medium
Term
reform actions.

(f) Finally, reflecting its emphasis on better implementation and service delivery, the Tenth
Plan stresses the need for effective monitoring and evaluation arrangements, together with
appropriate benchmarks and intermediate goals/targets for key activities, so that
performance can be evaluated and monitored on a regular basis.

Key Goals and Targets

1. The Normal Case scenario aims to reduce the overall poverty ratio from 38% estimated
at the end of the Ninth Plan (2001/02) to 30% by 2006/07.
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2. Raising literacy to 63 percent, reducing the infant mortality rate to 45 thousand births.

3. Raising life expectancy to 65 years from 59 years.

4. Increasing access to drinking water for 85 percent of the population.

5. Electricity to 55 percent from around 42 percent.

6. Telephone facility to almost all village development committee.

7. Overall GDP growth rate of 6.2% per annum is also envisaged, together with a substantial
improvement in agricultural growth to around 4.1% per annum.

DEFICIENCIES IN THE PLAN

1. Unrealistically ambitious targets

2. No / poor modeling
3. Lack of ownership
4. Weak strategic focus
5. Weak linkage between targets and activities
6. Weak targeting

Review of 10th Plan

1. Economic growth rate remained 3.4 percent on an average during the Plan period.

2. Poverty line has fallen to 31 percent from 42 percent.

3. Inflation was envisaged to be limited to 5 percent during the Plan period. These work out
to 5.5 percent on an average.

4. The net enrollment rate at the primary schools has reached 87.4 percent.

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