Nepal Finance Profile 2012

Market-based competition Nepal’s interim constitution of 2007 guarantees a market-based economic system. Although the foundations of a competitive market economy exist pro forma, practical implementation remains uneven. Despite efforts at privatization and deregulation in the past two decades, market competition still suffers from a weak institutional framework. As in every South Asian economy, the informal sector is significant. In a labor force of more than 11 million, 76% work in the agricultural sector, 6% in industry and 18% in services. According to a new report by the Central Bureau of Statistics, slated for publication in March 2009, the employment rate has risen from 42% in 2004 to 85.8% (90.2% for men and 81.9% for women). These figures include many young people who have gone for jobs to foreign countries, especially to India, the Gulf region, Malaysia and Korea.

Anti-monopoly policy Article 35(12) of the 2007 interim constitution declares that the state shall adopt policies to attract foreign capital and technology, while at the same time promoting indigenous investment for the purpose of national development. The Maoist-led government has started efforts to attract foreign investment, though results have been slow due to the political background of the leading party. Indigenous investment is slowly starting, such as in the power generation sector, but is hampered by the lack of supply of essential goods.

Liberalization of foreign trade In general, foreign trade is liberalized. The country’s trade with India is an exception, being subject to special regulations and somewhat restrictive requirements. Trade with India makes up 63.9% of Nepal’s total trade. Over the long run, Nepal is part of the agreement to establish a South Asian Free Trade Area (SAFTA) by the end of 2016. In 2008, talks with China to aimed at improving bilateral trade relations intensified. In March 2009, the Nepalese government submitted a list of 497 products for which it sought duty-free entry into China, in a bid to promote exports and reduce the growing trade deficit with its northern neighbor. Nepal’s total foreign trade grew by 20.4% during the first six months of the fiscal year 2008 –2009. However, higher growth in imports, as compared to exports, expanded the country’s trade imbalance, with the trade deficit widening by 27.3% during this period.

Financial sector reforms in recent years affecting both the central bank (Nepal Rastra Bank) and the largest commercial banks in the country have contributed to the development of a better functioning banking sector and capital market. The implementation of financial sector reforms included the enactment in 2002 of legislation to increase cent al bank autonomy and strengthen its supervisory and regulatory functions. The capital market is efficiently overseen by a securities board. There are further efforts under way for improvements in corporate governance, accountability and transparency in order to tackle a number of problems such as strong government ownership and rather high ratios of non-performing assets (NPA). The NPA volume has been on the decline in recent years, at the same time that total loans have been continually increasing, thus resulting in a more favorable proportion. However, the NPA ratio is still a long way from being satisfactory. Insufficient regulation and supervision, inadequately developed financial markets, low-quality corporate governance in the banking sector, the lack of a competitive environment resulting from fragmentation of the banking system, a poor banking culture, and ineffective banking services for the rural sector have all been in the focus of financial politics in recent months. As part of stern action against willful defaulters on bank loans of more than 10 million Nepalese rupees, the government decided in early 2009 to impose a ban on property transactions for these individuals, bar them from operating businesses and seize their passports.