Country report Nepal

Economic overview

After the terrible repercussions caused by the pandemic, the country seems to have gradually returned to normal growth levels and in 2021 recorded a GDP growth rate at constant prices of +4%. However, Nepal remains one of the poorest countries in South Asia.

Per capita income in 2021 was approximately $1,218, up from $900 in 2018. The latest available data show a particularly large segment of the population (25%) living below the threshold of poverty.

The economy of Nepal is still based on agriculture and livestock, especially subsistence farming, on tourism, on the activities of small manufacturing companies (artisan and textile sector). The development of the industrial sector (about 13% of GDP) is hampered by energy and infrastructure shortages. The country presents serious problems in the infrastructure sector. In addition, the capital market is not developed enough to meet the urgent need for credit. In the latest ranking available on the Doing business elaborated by the World Bank, Nepal is in 94th place (out of 190). The range for Nepal’s ranking in GII (Global Innovation Index) 2021 is between 102 and 113.

On the other hand, tourism is an important source of foreign exchange income and in order to fully exploit its potential, a process of modernization of the related infrastructure is underway. Potentialities of a certain importance are represented by the exploitation of hydroelectric resources.

To date, however, there has been a significant increase in the contribution of the services sector to GDP (around 60%[4]).

India remains the main trading partner, accounting for about 60% of trade, which however sees Nepal with a significant deficit. In the period 2020-2021, trade reached 7.4 billion US dollars. The flows of foreign investments are negligible. Inflation remains high and reached 6.8% in 2022[5].

Nepal is a signatory to two regional intra-SAARC trade agreements: South Asian Free Trade Agreement (SAFTA) and South Asian Preferential Trade Arrangement (SAPTA). In April 1993, the SAARC Preferential Trade Arrangement (SAPTA) was signed in Dhaka which provides for the creation of a preferential trade area between the seven member states of the SAARC, namely Bangladesh, Butan, India, Maldives, Nepal, Pakistan and Sri lanka.

Main sectors of economy

AGRICULTURE

Nepal, is a predominantly agricultural country with approx. 75% of the population employed in the sector. It mainly produces rice, sugar cane, ghee (melted butter), tea, coffee and in the mountains, mainly, it deals with the herding of goats, buffaloes and yaks according to the regions. Most farmers own little land, often insufficient to feed their families.

The south of the country, the Terai, almost entirely flat, is the “granary” of the country where in part a more industrialized and mechanized agriculture is also practiced, while on the hills and mountains, agriculture is practiced more for subsistence than for production to be sold .

As in other countries, organic or alternative agriculture is gaining ground. In recent years, some agricultural products have also been exported to the West, such as tea or coffee, but also “Himalayan” honey.

THE INDUSTRY

Industry has relatively little influence on the economy, mainly producing tobacco, cement, carpets, soaps, electrical and electronic appliances, clothing, carpets, cigarettes, soft drinks, computer software, steel and glass. Industrial production is mainly concentrated in the south of the country.

Of great interest to investors is the hydroelectric potential, especially for medium and large hydroelectric plants.

TOURISM

Since 1951 the country has opened up to travellers, in the beginning it was mostly scientists, ethnologists, archaeologists and climbers of the high peaks of Nepal. In the 60s approx. 600 foreigners visited Nepal annually, increasing the number in the ’70s to 50,000 and, subsequently to 120,000 visitors in the ’80s up to the current 700,000 arrivals, thanks above all to the increase in Asian tourism and religious tourism primarily from China and from India. A third of tourists go trekking in the foothills of the Himalayas. Tourism is a major source of foreign exchange (ca. 40%) for the country, but contributes relatively little to the GDP with ca. “2.4% in 2014, but significantly influencing the labor market, where it contributes directly with about 140,000 jobs and indirectly (suppliers, etc.) with about 500,000 jobs. Italian tourists fluctuate from 5-9,000 per year.

Taxation for businesses in Nepal

The Nepalese tax system is characterized by major structural limitations and the inability to carry out an effective action to combat tax evasion also due to widespread corruption. The establishment of 14 Special Economic Zones, in imitation of what has been done by neighboring India and China to catalyze foreign investments, should be operational in a year for Bhairahawa; much longer times are expected for the remaining thirteen. Our country has not entered into an agreement to avoid double taxation, which are instead in place, almost all, with countries in the area (China, Pakistan, Sri Lanka, Thailand, Korea… among the European countries those with a strong mountaineering vocation Norway and Austria). In addition to the agreement, an agreement was made with India to neutralize losses caused by non-commercial events valid only for large Indian companies (bilateral protection & promotion agreement). 

The income of resident natural persons (who stay 183 days in the state) is taxed on a cash basis, according to the worldwide taxation principle; non-residents are taxed on income produced in Nepal at a flat rate of 25%. Imports are free (OGL open general license regime), upon payment of duties (5/30%), exports are exempt. Manufacturing taxes affect both products traditionally subject to them – tobacco and petroleum products, including derivatives (plastic ) – both motor vehicles and concrete. For both natural and legal persons, the tax period ends on 15 July. 

Among the measures worthy of note in the regulation of imports and/or exports, it should be highlighted the possibility of providing a bank guarantee for the subject who exports at least 40% of the total sales of the last 12 months on the importation of raw materials used in the finished products destined on export. Direct taxes, on the other hand, which have brought the declaration obligation to 34,800 euros of annual income, allow for tax installments in two successions, based on the turnover achieved. Finally, the dividend intended to capitalize the profits necessary to expand industrial capacity, 30% of that deriving from tourist, agricultural and special activities, when companies employ more than 100 Nepalese, was fully exempt. There are no major non-tariff trade barriers on imports.

Investing in Nepal

Products from mines and quarries

Nepal is rich in water resources (thanks also to the presence of glaciers and melting snow from the Himalayas, abundant rains and underground sources). The hydropower production capacity is approximately 80,000 MW. At the moment the domestic demand is around 1000 MW and the supply is only 750 MW. Demand has a growth that is around 7-9% per year. One could speak of a monopoly of water energy management held by the Nepal Electricity Authority (68%). Private organizations hold 32% of the market shares. In 2016 the government approved the “Work Plan on National Energy Crisis Alleviation and Energy Development Decade” to outline some guidelines for a reform policy and initiatives to stimulate private investment in the sector.

Products from mines and quarries

The naturalistic riches, the abundance of traditions and archaeological sites, the topographical diversity of Nepal, home to eight of the fourteen highest mountain peaks in the world, make it a particularly attractive tourist destination. Nepal can potentially attract large flows of cultural and naturalistic tourism, tourism related to trekking and adventure, but also social and religious tourism. Below are some ideas proposed by the Investment Board for potential investments.

Buildings

Nepal has an urgent need for infrastructure modernization and development, not only in the energy sector, but also in that of highways, airports and rural roads. Important projects are financed by international donors, in particular the World Bank and the Asean Development Bank. Others are looking for investors

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