business conditions and sector potentials in nepal - a guide for norwegian companies
DESCRIPTION
This report has been commissioned by the Royal Norwegian Embassy in Kathmandu and was developed by Nepal Economic ForumTRANSCRIPT
Business Conditions and Sector Potentials in Nepal A Guide for Norwegian Companies Commissioned by the Royal Norwegian Embassy in Kathmandu, August 2014
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Contents Abbreviations ..................................................................................................................... 3
Introduction ........................................................................................................................ 4
Country Context: Political and Economic Conditions ................................................. 5
Business Climate Profile .................................................................................................. 7
PESTEL Framework ........................................................................................................... 8
SWOT Analysis ................................................................................................................. 12
Sectorial Analysis ............................................................................................................ 14
Telecommunications and Information Technology (ICT) ........................................ 14
Aquaculture ........................................................................................................................ 16
Tourism ............................................................................................................................... 18
Industrial Sector .............................................................................................................. 20
Energy ................................................................................................................................. 23
Solar Energy ................................................................................................................... 23
Wind Energy ..................................................................................................................25
Hydropower .................................................................................................................. 26
Health Sector .................................................................................................................... 29
Financial Services ............................................................................................................30
Doing Business ................................................................................................................ 34
Establishing a Business ................................................................................................. 35
Financing, Risk Mitigation and Advisory Services ................................................... 36
Corporate Social Responsibility ................................................................................... 37
Appendix 1: Methodology ............................................................................................... 39
Appendix 2: References ................................................................................................. 40
DISCLAIMER: This publication is a product of Nepal Economic Forum (NEF). The findings, interpretations and conclusions expressed in this publication do not necessarily reflect the views of the Royal Norwegian Embassy in Kathmandu or the Norwegian Ministry of Foreign Affairs. PHOTO CREDITS: Axel Revheim
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Abbreviations
AEPC Alternative Energy Promotion Center
ATM Automated Teller Machine
BIPPA Bilateral Investment Promotion and Protection Agreement
BOP Balance of Payment
BPO Business Process Outsourcing
FDI Foreign Direct Investment
FY Fiscal Year
GDP Gross Domestic Product
GoN Government of Nepal
GWh Giga Watt hour
ICSID International Center for the Settlement of Investment Disputes
INR Indian Rupee
IPP Independent Power Producers
ISO International Organization of Standardization
IT Information Technology
KGS Kilograms
KPO Knowledge Process Outsourcing
KWh Kilo Watt hour
LGCDP Local Governance and Community Development Program
MT Metric Ton
MDGs Millennium Development Goals
MoU Memorandum of Understanding
MW Mega Watt
NEA Nepal Electricity Authority
NEPSE Nepal Stock Exchange
NPR Nepali Rupee
NRB Nepal Rastra Bank
NTC Nepal Telecommunication Company
PPA Power Purchase Agreement
PV Photovoltaic
SC Solar Cookers
SD Solar Dryers
SEBON Securities Exchange Board of Nepal
SME Small and Medium Enterprise
SSRP School Sector Reform Program
SWAP Sector- Wide- Approach
SWERA Solar and Wind Energy Resources Assessment
SWH Solar Water Heater
TW Terra Watt
USD US Dollar
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Introduction
The aim of this guide is to provide Norwegian companies with an overview of business conditions
in Nepal and identify industries which offer viable opportunities for trade and investments. There
is a great potential for further business cooperation between Norway and Nepal. Sectors
including hydropower development, IT and telecommunications, industrial production, fisheries
and tourism may offer profitable opportunities to Norwegian companies. Likewise, a
strengthening of trade and investment activities may bring a number of benefits to Nepal
including job creation, increased tax revenues, greater participation of women in the economy,
exchange of expertise and technology development.
In recent years, Norwegian companies have developed a much stronger interest in exploring
market opportunities and establishing businesses in non-OECD countries. Economic forecasts
indicate that the greatest future growth will occur in Asia, Africa and Latin America. Entering
markets in developing countries, however, will always involve taking risks. In Nepal, there are
significant challenges related to weak factors and products markets, poor infrastructure and an
opaque legal and institutional framework. The business climate is therefore best described as
high-risk, but with potential high returns. Although a number of factors have put severe
restrictions on private sector development in Nepal, there are several niche sectors growing and
expanding employment.
One way to reduce the risk of engaging in trade and investments activities is to have a deep
understanding of the country and the special circumstances that apply in the relevant sector. With
this guide, the Norwegian Embassy in Kathmandu aims to provide a starting point for Norwegian
investors and companies looking to establish themselves in Nepal. A greater involvement of the
Norwegian private sector may lead an increase in employment, incomes and welfare, to the
mutual benefit of both Norway and Nepal.
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Country Context: Political and Economic Conditions
Nepal is a landlocked country in South Asia undergoing rapid change. After a long period of civil
unrest and political instability, nation-wide elections were successfully concluded in November
2013, leading to the establishment of a new government and constituent assembly. These recent
developments are likely to bring about a more favourable business climate and new opportunities
for human and economic development.
With its abundance of natural resources, Nepal is increasingly getting the attention of foreign
businesses. It has a diverse workforce that can be employed for both high- and low-skilled work
as well as a strategic location that enables market expansion to major consumer markets in China
and India. The comparative advantages of Nepal for foreign investors include its scenic nature,
great water resources, moderately priced labour with a service-minded attitude and generally
good English language skills in urban areas. The World Bank has identified hydropower, service
industries and high value agriculture as the most important sectors for long-term economic
growth.1 With an impressive landscape of mountains, lakes and national parks, Nepal also has a
great potential for increasing incomes from high value services in the tourism industry.
There are still major barriers to overcome before Nepal embarks on a lasting economic
development. Extensive policy reforms began in the early 1990s, but these have not succeeded
in transforming the economy or increasing its competitiveness significantly. Prudent fiscal policy
has so far led to relative macroeconomic stability, but the bureaucracy is still characterized by
low implementation capacity, poor coordination and slow decision-making processes. These
hurdles are exacerbated by the frequent replacements of bureaucratic officials. However, there
is an adequate regulatory framework in place for foreign trade and investments, which is not too
restrictive and can be constructively worked around. The government has also recently
implemented a number of policies to strengthen trade relations and facilitate the involvement of
foreign investors in the country.
Nepal is at an early stage of industrial development and ranks among the world’s poorest
countries. Key sources of income include agricultural production, textiles export, tourism and
remittances. Current GDP is USD 40.03 billion, with a growth rate of 3.5% in 2013.2 Agriculture
employs over 75% of the population and accounts for 33% of GDP. The sector has, however,
experienced highly volatile income streams and a low job creation rate, which causes thousands
of Nepalese men to seek temporary employment abroad every year. Remittances from this
diaspora population now exceed a quarter of GDP. Remittances have been largely channelled into
consumption creating inflationary pressures on goods and assets. Only about 2.4% of the money
is used for capital formation.3 Monetary growth caused by remittances has also led to abundant
liquidity for financial institutions with weak supervision, putting the economy at risk in a number
of ways. The increase in imports of consumer goods made possible by remittances has also
caused a widening trade deficit.
With regards to employment, it is estimated that the informal sector employs about 70% of all
workers. 4 Besides agriculture, the private sector is dominated by small, non-exporting
1 Afram, G. G., and Del Pero, A. S. Nepal’s Investment Climate: Leveraging the Private Sector for Job Creation and Growth. World Bank Publications, 2012. 2 Central Intelligence Agency. The World Factbook 2013-14: Nepal. 3 Parajuli, R. B. Consumed but not Invested: An Inquiry into the Remittance-Growth Nexus in Nepal. Centre for South Asian Studies (CSAS), 2013. 4 Afram, G. G., and Del Pero, A. S., 2012.
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enterprises. The two most common industries are manufacturing (about 12%) and hotels and
restaurants (about 15%). The formal sector only covers a small portion of the Nepali labour market.
Although there has been a steady increase in education provision and school attendance in Nepal,
the sector still relies on low-skilled labour.
India is Nepal’s main trading partner and the Nepali Rupee (NPR) remains pegged to the Indian
Rupee (INR). India is also the largest contributor (44%) to foreign direct investment (FDI).5 Other
important trading partners include the United States and Germany. The bilateral trade between
Norway and Nepal is not extensive, but Norwegian companies have invested significant amounts
in the hydropower sector. Norway and Nepal established diplomatic relations in 1973, and the
country has been a large recipient of Norwegian bilateral assistance over the years, particularly
in the domain of education, energy and good governance. It is the aim of the Embassy to expand
these relations, particularly in the areas of trade and investments.
Figure 1: Economic Indicators, 2008-20126
Economic Indicator 2008 2009 2010 2011 2012
Per capita GNI, Atlas method ($) 400 440 490 540
GDP growth (% change per year) 5.8 3.9 4.3 3.8 4.6
CPI (% change per year) 7.7 12.6 9.6 9.6 8.3
Fiscal balance (% of GDP) -2.1 -3.3 -1.9 -2.4 -2.2
Export growth (% change per year) 9.3 -4.7 -6.3 11.7 5.7
Import growth (% change per year) 24.1 8.3 35.5 8.9 4.7
Current account balance (% of GDP) 2.9 4.2 -2.3 -0.9 4.9
External debt (% of GNI) 27.6 27.0 23.5 22.0
5 Ibid. 6 Sources: ADB. 2013. Asian Development Outlook 2013. World Bank. 2013. World Development Indicators.
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Business Climate Profile
A healthy business and investment climate is essential for the success of private sector led
economic growth. There have been improvements in Nepal’s business environment with the end
of the ten year insurgency, and particularly the successful completion of elections in 2013 and the
subsequent formation of a constituent assembly. A review of the country’s performance in global
indices, as can be seen in Table 1, indicates a gradual improvement in its business environment.
Table 1: Global Index Rankings of Nepal
Index 2011 Ranking 2012 Ranking 2013 Ranking 2014 Ranking
Doing Business Index7 116/183 107/183 103/185 105 / 189
Global Enabling Trade Report8 118/125 (2010) 124 / 132 - 116 / 138
Corruption Perceptions Index9 154/182 139/174 116 / 177 -
Global Competitiveness Report10 125/142 125/144 117 / 148 117 / 148
Logistic Performance Index11 147/155 (2010) 151/155 - 105/ 160
Global Peace Index12 95/153 80/158 82/162 76 / 162
According to the Doing Business Report for 2014, Nepal is ranked 105 out of a total of 189
countries, a steady improvement from its rank in 2011. While the rank has dropped in comparison
to 2013, this is due to increased number of countries in the index and not due to decreased
performance.13 While Nepal lies below the global average in terms of doing business, it has been
on an improving trend and is steadily moving towards a better business environment. Under the
Doing Business Index, while Nepal is ranked well below global average in seven areas, it is
ranked above the global average in other areas such as registering property, getting credit, and
protecting investors, and is close to the global average in areas such as, starting a business and
getting electricity.
Nepal’s rank in the Global Enabling Trade Index,14 has improved to stand at 116 out of 138
countries in 2014 from 118 out of 125 countries in 2011. Similarly, there have also been
improvements in Nepal’s performance in other indices such as Corruptions Perceptions, Global
Competitiveness, Logistic Performance, and Global Peace, further indicative of an improving
business environment.
The Government of Nepal’s (GoN) steps to promote and facilitate Foreign Direct Investment
(FDI) by introducing appropriate policies and legal arrangements to create an enabling
environment for investors is also a step in the right direction. As of FY 2012/13, a total of 317
companies were approved for foreign investment in Nepal, bringing up the total number of
companies approved for foreign investment to 2,652 and total FDI to NPR 95.08 billion (approx.
7 “Doing Business Report 2014”, International Finance Corporation, http://www.doingbusiness.org/data/exploreeconomies/nepal/ 8 “Global Enabling Trade Report, 2014”, World Economic Forum, http://www.weforum.org/reports/global-enabling-trade-report-2014 9 Corruption Perceptions Index 2013, Transparency International, http://cpi.transparency.org/cpi2013/results/ 10 Global Competitiveness Report 2013-2014, World Economic Forum, http://www.weforum.org/issues/global-competitiveness 11 Logistics Performance Index 2014, The World Bank, http://lpi.worldbank.org/international/global 12 Global peace Index, Institute of Economics and Peace, http://www.visionofhumanity.org/terrorismindex/about-the-gti/ 13 See Annex 2 for Ease of Doing Business Rankings 14 The Global Enabling Trade Index assesses the quality of institutions, policies and services facilitating the free flow of goods over borders and to their destinations.
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USD 950 mill). Most of the investments are directed towards manufacturing, service or tourism
sub categories. The key trading partners for Nepal are India and China. With investments worth
NPR 1.13 billion (approx. USD 11 mill) up to the FY 2012/13, Norway ranks in the top fifteen
investors in Nepal.15 A review of foreign investment to Nepal in consecutive years, as shown in
Table 2, also show cases a growing trend. FY 2012/13 has shown a significant improvement in
the FDI flows to Nepal.
Table 2: Foreign Investment from FY 2008/09 to FY 2012/13
Category 2008/09 2009/10 2010/11 2011/12 2012/13
No. of companies approved for investment 231 171 209 227 317
Foreign Investment (in NPR billions) 6.25 9.10 10.05 7.14 19.93
PESTEL Framework
A brief analysis of the business climate in Nepal using the PESTEL framework, which highlights
the positives as well as negatives in the business environment, has been provided below.
Political Factors
A certain level of political development has taken place in Nepal after the decade long conflict and
the political transition faced by the country. As can be seen through the Global Peace Index, the
country’s rank has seen a considerable improvement from 95 in 2011 to 76 in 2014. A few key
factors resulting in the improved business climate have been listed below:
i. The Maoists, who were a part of the ten year insurgency, have come to the larger fold
of parliamentary democracy. Former fighters have either being integrated within the
National Army or compensated under different programs.
ii. The successful conclusion of nation-wide elections in November 2013 and the
establishment of a new government and Constituent Assembly have sent a positive
message of stability to potential investors to Nepal. Post 2013 elections, there has
been a significant decrease in the frequency of strikes and demonstrations within the
country.
iii. The current coalition government holds a positive attitude towards FDI, which is
considered an important aspect for economic development. Efforts are being made to
ensure an investment-friendly environment in Nepal, with the GoN ready to introduce
policy reforms and committed to ensuring the security of foreign investors in Nepal.16
The current government in its bid to increase FDI in Nepal is considering to open
previously FDI restricted sectors. Some of these sectors, as identified in a draft of the
Foreign Investment and Technology Transfer Policy, are motion pictures, travel
agencies, trekking agencies, water rafting, pony trekking, horse riding, tobacco and
alcohol, internal courier services, atomic energy, tourist lodging, poultry farming,
fisheries and bee-keeping. In sectors such as multi brand retail stores, investment
above NPR 5 billion will be required with prior requirements of similar operations in
15 “Industrial Statistics – FY 2012/13”, Department of Industries, Nepal 16 Lekhanath Pandey, “Call for FDI Friendly Climate”, The Himalayan Times, March 30, 2014, http://www.thehimalayantimes.com/fullNews.php?headline=Call+for+FDI-friendly+climate&NewsID=410304
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two other countries. These actions are also in keeping with the country’s
commitments to the WTO in 2004 where Nepal promised to open 11 sectors with a
maximum foreign equity condition ranging from 51 - 80 %.17
Economic Factors
Nepal’s GDP growth has been hovering around the 4% mark for the last few years. Although
Nepal’s GDP saw a sluggish growth of 3.85% in FY 2012/13, the Nepali economy is projected to
grow at 5.48%18 in FY 2013/14. The improvement in Nepal’s GDP growth can be attributed to
favourable monsoons, continued strong remittance flows, and the adoption of a full budget.19
Some of the factors that have contributed towards cushioning the Nepali economy are listed
below:
i. Service sector: This sector attracts one of the highest amounts of foreign investment in
Nepal. A high growth rate in service sub-sectors such as transport, hotel and restaurants,
health and social services, and communication have also positively influenced economic
growth.
ii. Remittances: Remittance is one of the largest sources of foreign exchange inflows,
comprising of approximately 26% of GDP in 2012/13, making Nepal the third highest
remittance recipient (in terms of percentage of GDP) in the world.20 While remittance
inflows have been on an incline, their contribution towards GDP will be close to 23% in
terms of projected GDP for FY 2013/14.21 Increased remittance flows have led to higher
disposable incomes among the Nepali population. Income from remittance is mostly
channelled into consumption and only 2.4% of remittance inflows are used for capital
formation.22
iii. Financial sector: While penetration of commercial banks and financial institutions has
increased in the economy, the monetary growth stemming primarily from remittances
has led to excess liquidity for financial institutions. The financial sector’s underdeveloped
capacities, and weak supervision and monitoring mechanisms, has resulted in less than
optimum translation of remittance influx into sound credit opportunities, which can fuel
further growth for Nepal.
iv. Private sector: The private sector has been a major engine for economic growth in Nepal
creating job opportunities and facilitating employment. The private sector is dominated
primarily by small non exporting enterprises, with the two primary industries being
manufacturing, and hotels and restaurants. However despite its significant contributions
to the GDP, the private sector suffers from a significant lack of transparency.
17 “Government mulls opening restricted areas to foreign investment” The Kathmandu Post, May 05, 2014, http://www.ekantipur.com/the-kathmandu-post/2014/05/05/related_articles/govt-mulls-opening-restricted-areas-to-foreign-investment/262477.html 18 “Annual National Accounts of Nepal 2070-71 (2013-14), Press Release”, Central Bureau of Statistics, Nepal 19 Migration and Remittances 2014, World Bank, http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1288990760745/MigrationandDevelopmentBrief22.pdf 20 Remittance Figures Based on Ten Months Data as per Current Macroeconomic Situation, Nepal Rastra Bank, and projected GDP for FY 2013/14 as per Annual National Account of Nepal 2070-71, Central Bureau of Statistics 21 Parajuli, R. B. Consumed but not Invested: An Inquiry into the Remittance-Growth Nexus in Nepal. Centre for South Asian Studies (CSAS), 2013. 22 Migration and Development Brief 22, World Bank, http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1288990760745/MigrationandDevelopmentBrief22.pdf
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Social Factors
i. Population: According to the census in 2011, over 57% of the population falls into the 15-
59 age group category. This alludes to the abundance in workforce as a result of a large
active population. A comparison of labour force participation rate, which identifies the
percentage of the population aged above 15, and economically active, indicates that Nepali
has one of the highest labour force participation rates in the world standing at 83%.23 The
labour costs in Nepal are generally below regional and global standards, whereas the
literacy rate stands at 65.9%. As per the last Enterprise Survey carried out in 2009 the
percentage of skilled labour stood at 64% of the total workforce.24
ii. Migration: Migration to foreign countries, over the past decade, has increased to 5.42%
of the active workforce. In spite of a significant migration, labour in Nepal is still abundant.
There is however a gradual decrease in the pool of skilled workforce.
iii. Consumerism: There is a growing middle class as well as disposable income, a result of
the increase in remittances entering the economy.
Technological Factors
The Government of Nepal has initiated a number of efforts to strengthen the use and
development of information technology in the country.
i. The National Information Technology Centre was established in 2002 to develop and
promote the Information Technology sector in Nepal, as identified in the GON’s IT Policy
in 2000. Similarly, the IT Park envisioned in the GON’s IT Policy for 2000 is expected to
come into operation in the current year. The IT Park has been established with the aim
of developing software, promoting IT based businesses, and providing ITES (IT enabled
services); however the IT Park has not been able to attract a good number of IT
companies and IT entrepreneurs.
ii. With the IT sector becoming a vital and integral part of doing business, the GoN is
committed to develop its IT infrastructure. The E-Governance Plan was initiated in 2008
and covers e-health, e-agriculture, e-education, and other areas. While these policies are
in place implementation has still been slow.25
iii. Due to the availability of skilled computer engineers, Nepal has a number of outsourcing
companies. There has been a tremendous increase in the number of IT solution providers
in Nepal like Verisk (earlier D2Hawkeye), Deerwalk, and Cloud Factory which are
engaging professionals in providing integrated IT solutions, risk assessment, and
decision analytics.
iv. In recent years, there has been significant improvement in telecommunication services
in Nepal with a growing number of users and adoption of new technology. As of May 2014,
the total penetration rate for telephony services stood at 90.09%, whereas the penetration
23 “Data - Labor Force Participation Rate”, World Bank, http://data.worldbank.org/indicator/SL.TLF.CACT.ZS/countries/BD?display=default 24 Nepal Enterprise Survey, 2009 25 Patricia B. Arinto, Shahid Akhtar, Orbicom, “Digital Review of Asia Pacific 2009 - 2010”
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rate for data and internet services stood at 31.88%.26 The government also adopted the
Telecommunication Radio Frequency Distribution and Pricing Policy in 2012, which is
aimed at bringing in four more operators for third generation (3G) services.
Environmental Factors
Nepal is unique in terms of its geography which allows for incredible biodiversity. Because Nepal
relies heavily on water resources from snow and glaciers, climate change is a key issue.
Unfavourable climatic conditions and natural disasters often have far-reaching adverse effects to
the agriculture sector, which is a key sector in Nepal.
Nepal is sensitive to environmental impact. Most of the environmental issues faced have resulted
from unplanned urbanization and increased population growth, some of which are listed below.
i. Water pollution resulting from sedimentation and discharge of industrial effluents into
rivers.
ii. Traditional sources such as firewood being a primary source of energy in the rural areas;
this often results in deforestation as well as indoor air pollution and respiratory diseases.
iii. Land degradation resulting from increased population pressures, improper use of agro-
chemicals and unsustainable use of land holdings.
iv. Rise in population levels has led to increased demand for wood, and therefore an increase
in deforestation. This has resulted in habitat degradation and threatened biodiversity.
Additionally Nepal is prone to natural disasters such as earthquakes, soil erosion, landslides, and
glacial lake outbursts due to its geography; topography; climate and geology. Lack of
consideration of these factors in infrastructural development and planning therefore leaves the
country vulnerable to high environmental risk. While the Government of Nepal has taken a
number of steps for the protection of the environment such as the adoption of the requirement
for ISO 14001 for environment management, and Environment Protection Act 1997, effective
implementation is yet to be seen.
Legal Factors
While attempts to liberalize the investment policies in Nepal began in the 1980s, the liberalization
process gained ground only after the 1990s. Several acts and major reforms in regulations have
been introduced which has not only spurred growth across various sectors, but has also opened
up key domestic sectors for foreign investment opportunities in Nepal. However, effective
implementation and enforcement of these laws and policies remain a challenge.
In 2011, an Investment Board was established with the aim to create and promote an investment
friendly environment for both domestic and foreign investors. However, the functions and
authorities of the Investment Board have not been clearly laid down in the Investment Board Act.
26 “Management Information System”, Nepal Telecommunication Authority, July 2014
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Although the Government has adopted various policies,27 dispute resolution mechanisms, in the
case of labour disputes, tax policy and administration, are not satisfactory and in need of review.
Nepal has also taken numerous steps to promote foreign investment by creating favourable
conditions for investors. Some of the key institutional arrangements that have been achieved are
listed below.
i. Nepal signed the BIPPA (Bilateral Investment Promotion and Protection Agreement)
with six nations.28 The Agreements seek to promote and protect investments from either
country in the territory of the other by treating investors from these countries at par with
Nepali investors and vice versa. Additionally, it also has an elaborate dispute resolution
mechanism to help settle disputes between investors and the Nepali government, as well
as between the two governments with a view of increasing bilateral investment.
ii. Nepal has also entered into the Double Taxation Avoidance Agreement 29 with ten
countries to avoid double taxation. This treaty avoids levying of tax by two or more
jurisdictions on the same declared income, asset or financial transaction. In addition to
Norway, Nepal has DTAA with India, Qatar, China, Austria, Republic of South Korea,
Mauritius, Pakistan, Sri Lanka, and Thailand
iii. Nepal is a signatory to the convention on the settlement of Investment Dispute between
the State and Nationals of Others States, and a member of the International Centre for
the Settlement of Investment Disputes (ICSID), which is associated with the World Bank.
This means that in case of a dispute, Nepal has agreed on the terms of international
dispute settlement mechanisms.
Overall, the business climate of Nepal is characterized by number of high risk factors, but
increased interest in FDI in Nepal alludes to the fact that Nepal also presents a good potential for
high investment returns. While there is sufficient regulatory framework in place to guide foreign
investors in Nepal, there are gaps in the implementation of these policies.
SWOT Analysis
Strengths Weaknesses
Adequate policy environment, with
comprehensive policies such as the Foreign
Investment and One-window Policy 1992-
which identifies the types of foreign
investment allowed in the country, facilities
and concessions provided, provisions for
repatriation, and others being adopted by the
government.
Abundance of trainable and active workforce
at a low cost that can be used for either high
or low skilled work.
Despite the risky business climate, the return
on investments is relatively high.
Recently emerging from political transition.
Underdeveloped and poorly maintained
infrastructure, and therefore problematic
transport, electricity and water supply.
Inadequate implementation of policies, laws
and regulations, as well as inspection systems
and enforcement capacities.
High frequency of bureaucratic delays,
inefficiency and private sector protectionism
policies. Non-transparent legal system and
negative attitudes within the bureaucracy
makes it difficult for foreign investors to obtain
reliable information easily.
27 See Appendix 4: Additional References 28 France, Germany, Britain, Mauritius, Qatar, Finland, and recently India have BIPPA with Nepal. 29 Tax Treaties, Inland Revenue Department, Nepal, http://www.ird.gov.np/ird/index/document-30.html
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Nepal is blessed with unique geography,
incredible biodiversity and rich cultural
heritage.
Rich in water resources; ranked among the
countries with the highest potential for
hydropower development.
Increase in remittance inflow and disposable
income leading to increase in domestic
demands and in the consumerism culture.
Booming Sunrise Sectors: Health Care,
Education, MICE (Meetings Incentives
Conferencing and Exhibitions) Destination, and
Adventure Tourism.
Good scope for Lifestyle Enterprises30 with
various enterprises flourishing within the
economy.
Private sector apprehensive to expand and take
advantage of economies of scale. The size of
formal firms in the private sector is therefore
small.
Economy has developed an unhealthy
dependence on remittances.
The legal framework in terms of securing
property has issues as there are more than 60
laws and policies on land, land rights and land
use. This has led to the repetition and
contradiction of legal provisions relating to
property law in Nepal.
Topography is considered challenging for
infrastructure development.
Opportunities Threats
Strategic location advantage due to easy
access to Indian and Chinese Markets.
Therefore high market expansion
opportunities for foreign investors.
High potential for hydropower generation
Because of excess liquidity in the banking
system, banks are looking for investment
opportunities. Nepali banks can provide loans
to companies with foreign investments.
Young population with increasing disposable
incomes.
High potential for tourism because of Nepal’s
unique geography, incredible biodiversity and
rich cultural heritage. Nepal’s natural and
cultural heritage provides opportunities for
adventure tourism, health tourism, and
cultural tourism is abundant.
Opportunities for developing a variety of niche
agriculture products and agro-business
activities.
Nepal is ranked 116th in the Global Corruption
Index out of 177 countries, which alludes to the
fact that corruption is rampant in Nepal.
Issuance of travel warnings for Nepal in the
past has acted as a big threat leading to a sharp
drop in tourist arrivals.
Multiple trade unions, with strong political
associations, have been a hurdle to the smooth
operation of companies. Many companies with
foreign investment have had to close
temporarily because of unresolved labour
issues.
While exit mechanisms for foreign investors
are included in the regulatory framework, there
is a lot of resistance from the government to
such divestments.
30 A lifestyle business is one that is geared toward supporting the owner’s income and personal requirements rather than maximizing revenue.
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Sectorial Analysis
Following is an analysis of seven priority sectors identified for Norwegian trade and investment.
These sectors have been based on high growth potential sectors as identified by the Norwegian
Embassy, sectors identified in Nepal Trade and Integration Strategy and Nepal’s sunrise sectors.
The sectors detailed below support synergies between the Norwegian and Nepali economies.
The following areas were analysed to determine the above mentioned priority sectors.
i. Analysis of financial returns. All sectors record a Return on Investment (RoI) of above
10%.
ii. Analysis of market potential (domestic and export potential)
iii. Analysis of enabling environment
iv. Analysis of risk factors
v. Analysis of social impact
Telecommunications and Information Technology (ICT)
The liberalization of telecommunication and IT services in Nepal began in 1995, when the
government allowed the involvement of private actors in the development and expansion of the
sector. After liberalisation, there has been a major growth in the telecommunication and IT
industry. While subscriber bases and tele-density were very low before 1995, when
telecommunication and IT sectors were monopolised by the government, there is a now greater
involvement of the private sector. In the last decade, there has been significant growth in mobile
subscribers and significant decrease in landline usage. Total mobile subscribers increased from
0.2 million in 2005 to 20 million in 2014 and the number of internet users has accelerated from
0.04 million to 8 million. As of 2014, the penetration rate of voice telephony service is at 90% and
internet penetration is at 32%. Nepal fairs better than India, where the voice telephony service
penetration is at 87% and internet penetration is 17%.
There are two main telecommunication providers: Nepal Telecom (NT) and Ncell, with market
shares of about 40% and 50% respectively. NT is a state-owned telecommunication service
provider with 85% of its shares owned by the government, whereas Ncell is a privately owned
mobile operator and the first to offer GSM services in telecommunications sector. The
Swedish/Finnish TeliaSonera Holdings, which owns 80% of Ncell, is currently ranked as the
largest foreign investor in Nepal. Other telecom companies that have foreign investments are
United Telecom, Smart Telecom, Nepal Satellite, and STM Telecom. Considering the telecom
sector in Nepal is at a mature stage, investments in ITC can be geared toward mobile technologies
in the form of software applications and mobile banking.
Business Process Outsourcing (BPO) is an emerging area in Nepal. These IT entities are often
referred to as ITES-BPO (Informational Technology Enable Services-BPO). The Government of
Nepal has identified IT and BPO as one of the most promising sectors for exports. It has potential
for high growth, investment, and significant profits in the coming years and is expected to be one
of the most significant growth contributors for the Nepali economy. There are increasing scales
of operation, expansion to new markets (previously only North America; now to EU, Asia and
Oceania), and a wide array of services offered to clients.
It is estimated that there are over 6,000 BPO companies in Nepal working for international
companies around the globe. Of these 6,000 BPO companies, however, only 250 companies are
15
legally registered. The IT and BPO companies offer highly skilled services such as software
development, data processing, map digitization, animation, medical transcription services, cloud
computing and mobile application development. Some of the renowned IT companies operating
in Nepal are Verisk Information Technologies, Javra Software, F1Soft, Incessant Rain Animation,
and Cloud Factory.
The legal framework of the telecom industry towards foreign investors is highly favourable.
Foreign investors are allowed to invest 80% of capital in a company. A minimum of 20% domestic
participation is required. According to the technology transfer agreement, investors and suppliers
are allowed to repatriate profits.
The return on investment for this sector stands at 40%.
Strengths Weaknesses
Beneficial regulatory framework. The
Government of Nepal is supportive of the
telecom and IT industry. Investment policies
are clear for foreign and private investors
along with repatriation policies. Private
sector exporters enjoy VAT exemption in
foreign currency earnings.
The IT firms are in the lower corporate tax
bracket of 20% instead of the general 25%.
The IT sector is less affected by political
disturbances as compared to other sectors.
There are currently no labour unions in IT
sector.
Nepal Telecom Authority is planning to
expand optic fibre network in the country
with China and India. Optic fibres have
already been laid across the east to west
highway.
The IT Promotion Policy Act encourages
development of information technology and
related infrastructure via domestic and
foreign investment.
5,000 graduates enter into the IT sector
every year.
Ineffective implementation of IT related
polices/laws such as intellectual property
rights. Weak implementation of policies can lead
to unwanted leakage of client’s data and
information.
There is a lack of adequate infrastructure in both
the IT and telecom sector. Electricity crisis has
increased the cost of running IT business;
shortage of petrol fuel has made business
operations difficult and unavailability of high-
speed internet connectivity pose serious
challenges. Furthermore, there is a lack of
telecommunication infrastructure in rural areas
of Nepal.
Data security/data protection issues. Ineffective
legal mechanisms in place to enforce such
protections and very few companies
benchmarked by international standards due to
lack of implementation of legal mechanisms.
No distinctive brand positioning of Nepal in IT
services, as opposed to India, which is well
known worldwide for its IT and BPO services.
Insufficient effort from the government to
support IT innovation.
16
Opportunities Threats
Late adopter of new telecom technology such
as 4G and LTE. New players in the market
with new technology could be competitive in
the industry.
Labour costs are increasing in India, which
could make Nepal a more attractive IT
destination.
Global IT/BPO markets have seen increasingly
successful trends. There is therefore much
scope for growth in this field.
There has been strong growth of IT sector in
emerging economies such as India and China.
Nepal can benefit from its location between
these two countries.
Emigration of highly skilled human resources
has resulted in brain drain and therefore a
smaller pool of resources.
Lack of coordination between government
ministries and private sector might hamper
growth. The bureaucracy has so far not
cooperated well with the Computer Association
of Nepal (CAN).
Effective implementation of IT policies is
essential to make improvements in this sector.
Many illegal IT companies have been
mushrooming despite the laws and regulation
in place.
Norway has some of the largest IT companies in Europe specializing in software development,
mobile application development and web development. Nepal, on the other hand, has a growing
IT sector with many reputed IT companies providing quality service worldwide. With IT
companies in Norway specializing in banking payment services and other electronic services,
areas where Nepal is lagging behind, there are opportunities for collaboration in terms of
knowledge transfer and technology development. Within the telecommunication industry,
internet infrastructure and service of broadband internet in the country is very poor. Therefore,
investment in ISP has good potential.
Aquaculture
Both Nepal and Norway have long, but separate traditions in agriculture and fisheries. There are
potential gains for all involved partners if Norwegian companies working within the sector
increase their presence in Nepal. In particular, there is great scope for more business
collaboration in fish farming, an industry in which Norway has extensive experience and
expertise. The Nepal Agriculture Perspective Plan has categorized fisheries and aquaculture as
a small but promising sub-sector of agriculture in Nepal. Fisheries have been practiced in Nepal
for a long time, but aquaculture is a relatively new activity, starting in the early 1950s, with the
introduction of exotic species of common carps from India. Subsequent successful breeding
using monoculture practices in the 1960s and 1970s led to its considerable popularity within the
private sector. Nepal is the third richest country in the world in terms of its fresh water resources,
with its inland water bodies – rivers, streams, lakes and reservoirs – characterized by a high
diversity of fish species. The area surface of water in Nepal is approximately 4,121 km2.
With the growing demand for fish products in Nepal and the region as a whole the aquaculture
industry has grown significantly. Fishery supports a large number of communities in the
southern plain (Terai) regions in Nepal; however the current production in Nepal is far less than
the demand. Imports in this sector have therefore been on the rise in recent years. In the FY
2011/12, total direct employment generated by fishery was 1.2 million approximately and
contribution of fishery to the GDP was 0.94%. In the same fiscal year, fish production from
aquaculture practices was 34,500 MT whereas production from capture fisheries was 21,500 MT.
It is estimated that annual demand has grown to more than 400,000 MT.
17
The compound annual growth of fish production in the last decade has been 7%. Given its fresh
water resources and accessibility to huge fish consuming markets such as Bangladesh and India,
the current growth rate of production is very low. Bangladesh has per capita fish consumption of
14.5 kg and India 5.2 kg. Daily fish consumption of Kathmandu valley as a whole is 10,000 kg.
From a food security perspective, Nepal is in urgent need of increasing its food production. As
the third richest country in the world in terms of its fresh water resources, the fisheries and
aquaculture sector has a great potential for further development. Norway has a long tradition in
successfully developing large-scale fish farming, and key technologies could turn existing small-
scale fish farming in Nepal into a commercialized industry guaranteeing employment, income
generation and food security among poor rural communities.
The return on investment for this sector stands at 41%.
Strengths Weaknesses
Abundant but under-utilized fresh water
resources that could be used for fish farming.
Good prospects of running water fish farming
for many species of trout.
High export potential and as well as high
domestic demand of fish.
High availability of skilled labour that have
been involved in the fishing occupation for
generations.
Labour cost advantage in comparison to other
South-Asian countries.
This sector is less affected by political
issues.
Lack of commercial scale production and
infrastructure that enable large-scale
production.
Inadequate hatchery to produce enough
fingerlings.
Lack of feed production for large-scale fish
production.
Absence of fishery laws and poor enforcement
of existing laws.
Lack of scientific and technological innovations
in the sector of aquaculture.
FDI is limited to feed production, hatchery and
fingerlings.
18
Opportunities Threats
The sector represents a big domestic market
opportunity. Demand for fish within the
country is growing.
Fish farming provides potential for
diversification of agriculture practices.
Fish farming communities in Nepal are usually
poor. There is therefore a good potential for
improving livelihoods in local communities.
Potential for ecosystem rehabilitation of
overexploited fish species.
Different environmental effects resulting from
aquatic pollution and habitat degradation.
Although the aquaculture sector is FDI restricted, foreign investments are allowed in areas of
feed production, hatchery, and fingerlings. Norwegian companies may also play a role in
developing facilities to produce feed for fish production. Current demand is largely met by
imported dried freshwater shrimp from India which is pounded into shrimp meal in Nepal. The
supply of these products have been inconsistent and of varying quality. There is therefore
potential for investment and development of this sector.
With Norway having successfully developed large-scale fish farming, sharing of aquacultural
practices, technology transfer, and investment could largely help in turning existing small-scale
fish farming in Nepal into a commercialized industry guaranteeing employment, income
generation and food security among poor rural communities. With Norway’s extensive
experience and expertise in the industry, there is therefore a great scope for furthering greater
business collaboration.
Tourism
Nepal is well known for its exotic, serene and adventurous image all around the world. With the
highest and most famous mountain peaks in the world, unique landscapes and important religious
and cultural sites, Nepal attracts a growing number of tourists every year. Tourism is therefore
widely known as a sector with comparative advantage and high potential growth.
In FY 2012/2013, Nepal saw an influx of 803,142 tourists, an increase of 20.6% compared to FY
2011/2012.31 In FY 2013/14, the tourist inflow was estimated to be at 861,000, an increase of 7.9%
compared to the previous year. Tourism is also the second largest employment-generating sector
after agriculture, contributing 8.2% to direct and indirect job creation (1.2 million jobs). This
figure is expected to rise by 7.1% to 1.34 million jobs by 2023. Tourism is one of the highest
contributors towards foreign exchange after remittances, with its total contribution to GDP
standing at USD 1.5 billion (8.2% of GDP) in 2013. The estimated growth in contribution for 2014
is at 8.6%.32
In order to promote the image of Nepal in the international market, a Nepal Tourism Vision 2020
was recently introduced. In addition, the government also adopted a Nepal Tourism Policy in
2009, which emphasises the importance of rural tourism, community-based tourism and
31 Nepal Tourism Board (NTB), Tourism Stats 2012 32 Travel and Tourism Economic Impact Nepal 2014, World Tourism and Travel Council
19
homestays. The policy is closely integrated with the poverty alleviation policy and economic and
social development, as it aims to increase employment levels.
The government aims to double its earnings on tourism and has channelled significant
investments into the aviation sector in particular. The sector is growing both in terms of number
of tourists and spending. The daily expenditure of tourists was at a three year high of USD 42.80
in 2013, an increase of 18% compared to the previous year. However, the size of Nepal’s tourism
cluster is still small relative to other peer countries such as India and Bhutan and the industry is
increasingly showing signs of a slide towards a “low-value, high volume” model. There is
however great scope for further development of high-value services that can be established
around already existing products such as trekking services to religious and recreational purposes
to Mustang and Muktinath.
Although there are promising actions by the government to promote the tourism sector in Nepal,
there are a few hurdles that need to be addressed. There is little reliable information on the
structure of the tourism industry in Nepal, or analysis of the key players in the market. The
number of travel and trekking agencies has grown rapidly and is dominated by micro enterprises,
and there is still an over-capacity of tourist accommodations.
Norwegians are currently ranked as the longest-staying visitors to Nepal, with an average stay of
25 days. 3,280 Norwegian tourists came to Nepal in 2012, among whom 2,369 were first-time
visitors. Trekking, mountaineering and adventure tourism are important markets to Norwegian
visitors. There is therefore good potential for more collaboration between the tourism industry
in Nepal and Norwegian tour operators. The potential to engage in a diverse set of activities is an
attraction in itself, and also means that there is potential for developing a number of subsectors
within the industry.
The return on investment for this sector stands at 17%.
Strengths Weaknesses
Nepal ranks 14th out of 184 countries in growth
of tourism sector in 2014 as compared to 25th
the previous year. An improved political
situation and a more favourable business
climate have contributed to this increase in
growth of tourism.
Recently, the Government of Nepal opened up
104 unexplored peaks and new trekking
routes for commercial purposes to boost
tourism in the trekking sector.
A combination of courteous people,
adventurous trekking areas for tourist with
scenic natural beauty and rich cultural
heritage is an advantage to attract foreign
tourists.
Nepal offers a variety of tourism products.
Nepal is a relatively affordable place to visit in
terms of value per dollar spending.
Increased air connectivity to Europe through
Middle East hubs such as Dubai, Abu Dhabi
The tour operators in Nepal lack efficient
promotion in packaging of tourism products.
Lack of proper hotel and medical facilities
offered in rural areas with high tourist inflow.
Most of the popular tourist destinations are
situated in rural areas where basic necessities
such as sanitation, hygiene, drinking water may
be a major problem.
Lack of infrastructure, in particular electricity
and roads, which raises the cost of tourist
operators.
Shortage of professional and skilled human
resources.
Lack of innovation in introducing new tourism
products and packages.
Inadequate avenues for training manpower to
cater for the increasing tourist demand.
20
and, more recently, a direct connection to
Europe through Istanbul.
There has been an increase in domestic
tourism, in particular within adventure sports
such as rafting and trekking.
Avoidance of double tax through Double
Taxation Avoidance Agreement with Norway.
Opportunities Threats
Inadequate promotion of regional tourism in
South Asian countries and other continents.
Big potential of religious, adventure and rural
tourism.
Opening of new mountains, new trekking
routes and restricted areas especially in
Western Nepal. For example, Guerrilla Trek
was introduced as a war tourism route for the
trekkers to see the routes and hideouts used
by the Maoist guerrillas.
Possibility of expanding the tourism network
through travel agencies and bilateral tourism
development.
Construction of an international airport in
Bhairahawa to be completed by 2017.
Immense possibility of developing adventure
tourism in the mountains and rivers of Nepal.
Growth in tourist arrivals.
Brain drain of qualified human resources.
Inadequate tourism infrastructure which is a
discouragement to visit Nepal.
Militancy of trade unions has created havoc for
the overall business climate of the country.
The constant demand for increased benefits
from labour unions coupled with their attitude
towards work means that foreign investors
would most likely invest in neighbouring
countries such as India and Bhutan, where they
can lead a comfortable life as well as earn a
reasonable amount of profit.
Industrial Sector
The iron and steel sector is an important one in Nepal because of its prominence as supplier of
much in demand steel products. Iron and steel industry has witnessed an investment endowment
of USD 100 million till date. With around 50 plants running with a cumulative capacity of 2 million
tons, Nepal is able to cater to the relatively vast needs of a domestic market, while still allocating
the output of around ten of its biggest plants to India (equivalent to USD 147,983,000 in 2008) and
Bhutan (equivalent to USD 285,000 in 2008.) The production of these steel products is dependent
on the import of MS billets, hot-rolled coil, steel coils, steel sheets, zinc, sponge iron, and wires,
among several others. Most of these raw materials are imported from India. As Nepal does not
manufacture its own (steel) raw material, the added value of the production is relatively low,
although still greater in absolute terms when compared to other industries within the nation.33
Nepal’s most prominent export destinations are India, Bhutan, Egypt, Japan and Tanzania. The
first ten months of the current fiscal year has seen a 2.1% increase in the value of iron and steel
exports from the 2012/13 period procuring USD 103 million (NPR 10.11 billion,) establishing iron
and steel the number one export item.34 The export value within this industry has tripled since
2004, however this change is mainly due to the rise in prices rather than an increase in quantity
(as industry production has not increased significantly), especially due to the appreciation of the
dollar.35 The most essential import of raw materials of the industry, which constitute roughly 75%
33 “Nepal Trade Integration Strategy 2010,” Government of Nepal Ministry of Commerce and Supplies, Kathmandu, 2010. 34 “Iron and steel products tops export list,” Republica, June 18, 2014. 35 In July 2008, 1 USD = NPR 70, in July, 2014 1 USD = NPR 97. “Current and Historical Rate Tables,” XE.com.
21
to 83% of total production costs, is transported from exporters in South Korea (Posco) Japan
(Nippon Steel) and India (TATA Steel and Hindustan Zinc Ltd.). Thus far, USD 537 million (NPR
52.43 billion) worth of MS Blades, one of the top import products of the sector, have been
imported into the country. 20% of the total cost of the industry has been identified as the value
added in Nepal.36
Despite the effect of changing prices (because of dollar appreciation), Iron and steel products,
which have experienced increase in export performance, from USD 55.16 million in 2004 to USD
149.43 million in 2008, still demonstrate high export potential. The socioeconomic impact of the
sector is deemed to be good, as it creates employment and job opportunities for more than 15,000
workers in Nepal, 5% of which comprise of women. The industry has relatively little negative
impact on the environment in its production of goods (in terms of emissions).37 A majority of
production units are located in urban areas (of Terai) rather than rural regions.
Due to a large number of growing infrastructure projects and a burgeoning real estate industry
in the domestic Nepali economy, there are great investment opportunities in the steel and iron
sector of the country.
The return on investment for this sector stands at 15%.
Strengths Weaknesses
Private sector has significant investments in
this sector.
Latest technology to support products of high
quality and steel products produced in
companies with improved training for
workers and ISO 9001 certification that meet
international standards. Several of these
companies have been approved by Nepal
Standard which in turn has been qualified by
The Government of India and Power Grid
Corporation of India.
Geographic advantage that affords Nepal an
ideal location for trade with India, China,
Bhutan, Bangladesh, and Pakistan. Production
of iron and steel is competitive in the region
due to close proximity to nearby markets and
Nepal has competitive product price (relative
to those in the Indian market) due to cheap
labour in Nepal.
Good reputation of Nepali producers for timely
deliveries of specified quantities and ability to
fine-tune their products and engage in
customization according to the preference of
their customers.
Support from Hindustan Zinc Ltd in supplying
zinc to Nepal.
A high degree of reliance on Indian companies for
transport of raw materials.
Low levels of labour productivity and weak
labour relations.
Large pre-shipment financing cost.
Presence of non-tariff barriers from the Indian
market that has imposed additional duties and
various discriminatory practices like
compulsory registration with the Bureau of
Indian Standards, and a discouraging quota
system for Nepali exporters.
Customs procedure takes a whole day to
complete valuation of imported cargoes.
Tedious and time consuming customs
procedure involving valuation of imported
cargoes; difference in the exchange rate used
during the procurement of cargo and during the
customs clearance.
Opportunities Threats
36 “Nepal Trade Integration Strategy 2010,” Government of Nepal Ministry of Commerce and Supplies, Kathmandu, 2010. 37 Ibid.
22
Duty-free access to Indian market made
possible by the Nepal-India Trade Treaty.
Growing demand for steel and iron products
in (domestic) Nepali economy due to more
infrastructure products, growing real estate
scene, and demand for hydroelectricity
infrastructure.
Supply lags behind the demand created by
development projects in the domestic
markets of India and Bhutan: opportunity for
Nepali exporters to provide their products.
Decreasing tariffs in various regional markets
like Bhutan and Bangladesh.
Constantly fluctuating exchange rate.
Dependence on India for the supply of raw
materials to produce finished goods.
Power-intensive steel processing combined
with an unreliable and often restrained supply of
electricity, which pushes most companies to fall
back on diesel generators (which impose a high
operating cost of NPR 20 per kWh as compared
to the initial NPR 6 – 7 per kWh) or more recently,
gasification plants under biomass power; drive
up production costs.
Despite the Nepali labour cost advantage, the
presence of political unrest/disturbances related
to general strikes, labour laws that are being
viewed as discriminatory, and demand for
bribes, threaten to undermine this promise of
progress and create an atmosphere of
insecurity.
Incentives from Bihar State Government that
include subsidies on plant/machinery
procurements and tax holidays of up to 20%,
likely to pose competition for Nepali suppliers.
Volatile and constantly changing Indian trade
policies as well as details of Nepal-India Trade
and Transit Treaty.
Compared to the rest of the South Asian countries, the share of industry in Nepal as a component
of GDP is very low (about 15%). One key sector with huge demand for iron and steel is
hydroelectricity. In the hydropower industry, there is a growing demand for high-quality turbines.
The feasibility of future hydropower developments largely depends on technological
advancements in mechanical equipment in order to prevent erosion to turbines by sediments.
Nepal however is not involved in manufacturing of large (above 100kW) hydro-mechanical
equipment. There is, therefore, a need for developing domestic competence in the designing and
manufacturing of electro-mechanical components required for hydropower projects. A Turbine
Testing Lab has also been established at Kathmandu University, with assistance from NORAD,
NTNU and Nepali industries.
Low speed number Francis turbines with unit 1-5 are in high demand for immediate constructions,
while larger turbines with unit size up to 25 MW will be in increasing demand in near future. At
present, Nepal is only able to produce Francis turbines up to 5MW to meet the immediate need
of the domestic market. More than 50% of turbines needed for the power plants under
construction falls under unit size of 1-5 MW.
Most of the turbines runners installed in Nepalese Hydropower projects are imported from
European manufacturers. Korean and Chinese runners are also operating in some of power plants.
Due to low cost, Chinese runners are more popular in small power plants. There are 27
manufacturing companies developing micro hydro turbines, and some of these have the capacity
to manufacture turbines up to 5MW size.
In terms of opportunities for Norwegian companies, there is a great potential for commercial
enterprises offering turbines and turn-key solutions for the hydropower sector. In the case of big-
band turbines (5-25 MW and above), these must be custom-designed to each individual flow of
23
water. Additionally, with supply lagging behind the demand created by development projects in
the domestic markets of India (which has a forecasted annual construction growth rate of around
10%) and Bhutan, there is greater room and scope for Nepali exporters and potential investors
who are looking to boost the activity of these exporters.
Energy
Nepal is heavily dependent on traditional energy resources including fuel wood, animal and
agricultural residues. Fuel wood from the forest is the largest indigenous energy resource
available. Growing concern over deforestation, indoor air pollution, use of valuable forest
products and diverted use of fertilizer (cattle dung) makes it necessary to slowly replace this
resource with other sources of energy. The most environment friendly energy resources available
in Nepal are solar energy, wind energy, and hydro energy. Each of these sub sectors have sizable
potential, therefore, the sub sectors have been classified and evaluated individually below.
The average return on investment for the energy sector stands at 18%.
Solar Energy
Solar energy in Nepal is thought to have been initiated in the mid-1970s by Nepal
Telecommunication Corporation (NTC). The organization used solar to power its high frequency
communication transceiver in locations without electricity supplied by the national grid. Since
then the usage of solar energy technology has been increasing and has become one of the most
popular renewable energy technologies in Nepal.
The solar radiation that Nepal receives is considered very favourable. If the average daily
insulation is 4.7 kWh/m2 and the gross available area for potential PV uses would be 75,477 km2,38
considering only 1% of this area available for PV, the available areas would be 754 x106 m2.
Accordingly the potentiality of solar PV would be 62.5 x 103 MWp. As per the report published
by (Alternate Energy Promotion Centre) AEPC in 2008 the commercial potential of solar power
for grid connection is 2,100 MW.39 Similarly, the total installed capacity of solar power is 5.17 MW.
Of the installed capacity most power is transmitted off grid. At present it is estimated that there
are 3 million off-grid households, approximately 97% of which is in the rural areas. The solar off
grid lighting has been dominated by Solar Home System (SHS) with 3 Wp to 5 Wp solar panels.40
The current policy regarding solar energy is in place and is favourable to investors. The
Renewable energy policy encourages investment from private and foreign investors along with
technology transfer. The Renewable energy subsidy policy has provision for installation of small
scale solar project but not for large commercial scale solar energy generation.
Solar Potential of Nepal
Using PV module of 12% efficiency, total energy generated will be 0.12* 4.5 * 147,181*10^6 = 80,000GWh/day = 17.7 TW (assuming peak sun to be 4.5 hours).
38The total surface area of Nepal is 147,181 sq.km. Out of this 4000 sq.km is water area. Around 25% is covered with forest and arable land share is around 21%. The available area (147181-4000-147181*25%-147181*21%) for potential PV uses would be 75,477 sq.km. Now considering only 1% of this surface area appropriate for PV, the available area would be 754 *106sq.m). Using PV module having 12% conversion efficiency and average sunshine hours of 6.8/day, the potentiality of solar PV would be 62.5 x 103MWp 39 Energy Sector Vision 2050 A.D., Government of Nepal, Water and Energy Commission Secretariat 40 Lighting Asia: Solar off-grid Lightning, IFC
24
This energy generated is more than the energy required for fulfilling the whole energy demand of the world. The total estimated world energy demand at present is about 13 TW. If we use just 0.01% of the total area of Nepal, we can generate solar electricity of 8 GWh/day that is 2920 GWh/year (which is more than the energy generated by NEA in the year 2003 amounting at 2261 GWh/year). According AEPC, in 2010 the total installed capacity of solar power was 5.17 MW.
Regardless of the existing policy, NEA remains the key institution for mobilization of energy and
has a monopoly as a buyer in Nepali electricity market. Energy generated by the public or the
private sector needs to go through negotiation with NEA regarding pricing and transmission lines.
NEA has been often blamed for prioritizing construction of transmission lines in projects where
it is involved while ignoring project build by private and foreign investors.
Previously the Government of Nepal was reluctant and had negative attitudes towards solar
power but in late 2012 Nepal Electricity Authority (NEA) signed a Power Purchase Agreement
(PPA) and connected 680.4 Kilowatt solar plant to the national grid.41 The government has also
stated that it will purchase solar power generated by the private sector at a competitive rate and
will soon be framing a policy for solar power from the private sector.42
Strengths Weaknesses
100% FDI is allowed in this sector through equity
shares.
There are many potential solar energy areas
where generation of a good amount of solar
energy is feasible.
Installation of solar energy system is quick in
comparison to hydropower. It is estimated that
a solar plant can be set up within 9 months.
Solar energy plants can be set up and supplied at
a fraction of the cost than hydropower.
Nepal has large number of
qualified/knowledgeable engineers/highly
skilled manpower that is relatively economical
in comparison to other South Asian countries.
The Government of Nepal is supportive of
developing alternative forms of energy.
Therefore, positive support from the government
might be expected in solar energy generation.
Rural Energy Program, a Norwegian assistance
in electrification of rural villages by installing
solar panel, was a success.
Substantial investments are required to install solar power plants. This will lead to production cost per megawatt to be high. Therefore, it might have difficulty competing with traditional forms of energy on the basis of price.
Solar plant might not be able to supply power during the peak hour, which is usually in the evenings.
There has been relatively little research conducted on solar energy in Nepal and as a result there is little information available on the same,
Poor infrastructure at the site of potential solar energy generation and lack of transmission lines
Solar energy is a relatively new concept in Nepal. Rural parts of Nepal have seen development of solar energy in small scale. However, the concept of large scale solar energy production has not been conceptualized and is conceived as an intermittent source of energy.
Production of solar energy requires huge area of flat lands which have high agricultural value. However potential areas in Nepal are mostly situated in hilly or mountainous regions.
Opportunities Threats
There is a chronic electricity supply shortage in
Nepal. Solar energy could play a major role in
There are existing competitors in the solar
industry that are planning to expand their
41 “Nepal electricity authority to install 20 MW Solar Plant in Trishuli of Nuwakot” assessed on 7/12/2014, cignepal.org.np, http://cignepal.org.np/news/nepal-electricity-authority-install-20-mw-solar-plan-trishuli-nuwakot 42“Government to purchase solar power from private sector”, Accessed on 7/12/2014, July 2014 Ekanitpur, http://www.ekantipur.com/the-kathmandu-post/2014/07/04/money/govt-to-purchase-solar-power-from-pvt-sector/264656.html
25
meeting Nepal’s growing power need in rural as
well as urban areas.
At present, the energy situation of Nepal is
challenging. Despite the huge hydro potential,
hydro energy production has been disappointing
and there is desperate need for alternative forms
of energy. This therefore creates space for the
introduction of solar energy as a feasible/viable
option in Nepal.
Ministry of Energy is preparing a plan to install
large-scale solar plants under public private
partnership.
Chance of exploiting major solar potential areas
in different parts of Nepal.
Solar electrification is at an infant stage in Nepal
and there is therefore the possibility of reaping
the benefits of a first mover advantage.
capacity to locations that have high potential
for solar energy.
Other forms of renewable energy sources
such as wind power and hydroelectricity
might be cheaper in price in comparison to
solar energy.
After analysing the solar sector of Nepal, there are two possibilities for the investor. Selling solar
PV in the Nepali market or establishing solar power plant and selling the energy to national grid.
Selling of solar PV in Nepali market has become competitive as there are over 40 companies
currently in operation. Some of these companies are selling solar PV’s manufactured in different
countries including Norway. An option may be to sell to the trading companies rather than to the
retail customers.
Norway houses some of the leading companies in solar industry in the world that have expertise
in production and innovation of solar products. There are therefore good prospects for
generating energy on a large scale and technology transfer. The Government of Nepal is keen to
solve the power crisis that exists in Nepal and has shown some interest by signing a Power
Purchase Agreement (PPA) and adding solar energy to the national grid.
Wind Energy
Wind energy is the least harnessed energy resource in Nepal. The involvement of Nepal in
harnessing energy from wind is a comparatively new technology in comparison to hydropower,
solar, and biomass. Small scale, non-commercial use of wind to generate power has been
successfully implemented in 7 different locations of Nepal.
An attempt, in 1989, had been made to harness the wind energy on a large scale. Kagbeni Wind
Power Project with wind turbine generators of 20 kW was implemented but the project came to
a halt due to poor design and structural failures. In recent years the Government of Nepal as well
as the private sector has reconsidered the potential of wind electricity generation. The Solar and
Wind Energy Resource Assessment (SWERA) project executed by Alternative Energy Promotion
Centre (AEPC) has shown good prospects of wind energy development in Nepal. The outcome
of this project indicates that the potential area of wind power in the country is about 6074 km2
with wind power density greater than 300 watt/m2. From the total area of 6074 km2 only 10% has
been analysed, and it has been found that more than 3,000 MW of electricity could be generated
with consideration of the installed capacity of 5 MW per km2. The study also shows that the most
potential areas lie in the high and middle mountains of the country where basic infrastructures
26
are unavailable. Therefore, the commercially viable wind potential of the country is estimated to
be only about 448 MW. 43
Wind Energy Development in Nepal
Charus Development Nepal Pvt. Ltd and two international companies, viz., Suzlon Energy Limited (India) and AGA Middle East Pvt. Ltd Singapore/Hong Kong have submitted proposals to the Government of Nepal for generating more than 200 MW wind energy. Charus Development Nepal Pvt. Ltd has already obtained from the Ministry of Environment, Science and Technology for survey license to carry out detail feasibility study in Annapurna areas for generating 400 MW of electricity. In addition, Suzlon Energy Limited (India) has planned to install wind mast of more than 30 meters high in Kagbeni, Mustang District to measure wind data for further detail study.
The current policy regarding wind energy is in place and is favourable to investors. The
Renewable energy policy encourages investment and technology transfer from private and
foreign investors. Renewable energy subsidy policy mentions that the subsidy will be provided to
wind energy project operating in area where there is no electricity supply and to projects up to
100 kW capacities.
Similar to solar energy, regardless of the existing policy, NEA remains the key institution for
mobilization of energy and has a monopoly as a buyer in Nepali Electricity market. Energy
generated by the public or the private sector needs to go through negotiation with NEA regarding
pricing and transmission lines. NEA has been often blamed for prioritizing construction of
transmission lines in projects where it is involved while ignoring projects built by private and
foreign investors. Therefore, there is a chance that NEA might delay the project to come into
operation.
Strengths Weaknesses
100% FDI allowed in this sector.
Wind energy is yet to be explored. There are
potential benefits of a first-mover advantage.
The Solar and Wind Energy Resource
Assessment (SWERA) project executed by
AEPC has shown good prospects for wind
energy development.
In comparison to other form of energy, wind
power requires less investment and
construction, whereas installation of wind
turbines is much faster.
Government of Nepal is positive on
developing and exploring wind energy in
Nepal.
There has not been adequate research and development in wind energy generation. Wind data needed for assessing commercial viability of wind power plant is not available.
Poor infrastructure at the site of potential wind energy generation and lack of transmission lines.
Energy buyer monopoly by NEA has created unfavourable investment environment with no encouragement for private sector investment in wind power.
Wind energy is another alternative to hydropower but lack of investment and interested investor has left wind energy generation unexplored.
Opportunities Threats
Demand for energy is high and energy from
wind can be used to fill the gap between
demand and supply of energy in Nepal.
Policy shifts that might make generation of
wind energy less viable.
43 SWERA report 2008, AEPC
27
Currently there is low quality of domestic
wind energy investment. A proper investment
with the aim of generating wind energy is
needed.
High wind potential areas have not been
utilized for production of wind energy.
The government is slowly leaning toward
developing wind energy as research indicates
good wind energy potential.
Competition among wind energy developers
might create a shortage of potential wind
energy development locations.
Hydropower
The steep gradient of Nepal’s topography makes the country one of the most promising for
hydropower development. Nepal has more than 6,000 rivers and rivulets with an overall average
annual run of 225 billion cubic meters of water flowing to the south. The country possesses 2.2%
of the world water resources and about 6000 rivers with an annual discharge of 174 billion cubic
meters. Sources of water include glaciers, snowmelt from the Himalayas, rainfall and ground
water. The current state of hydropower-generated electricity production is only about 700 MW,
while the theoretical potential is about 83,000 MW. It is estimated that the economically viable
hydro-electricity generation of Nepal is 42,000 MW.
Nepal has currently one of the lowest energy consumptions in the world. The population is largely
dependent on traditional sources of energy, such as fuel wood, agricultural waste and animal
dung (about 85% of all energy consumption). The heavy reliance on traditional energy sources
provides limited opportunities for economic development in the rural area but contributes to
environmental degradation and negative health impacts. Commercial sources of energy include
petroleum products (about 9%), coal (about 3%), electricity (“on- grid”, about 2%) and renewable
energy (about 1 %). The use of petroleum products is on the rise, accounting for 19.14% of total
imports during FY 2012-13. Nepal itself has no production of crude oil and is increasingly
dependent on imports for the supply of petroleum products to meet a rapidly growing national
demand.
The unstable political situation over many years has impeded foreign investments in the sector,
leading to the current experiences of power shortages and a growing petroleum dependency.
Availability of electricity is highly seasonal, with daily power outages (“load shedding”) taking
place up to 16 hours a day during winter. The situation improves during the summer with the
monsoon and the melting of ice. Approximately 70 % of Nepal's households have access to
electricity (96 % in urban areas and 63 % in rural areas, which includes about 10% from off-grid
sources). Most of the beneficiaries of grid electrification are located around the greater
Kathmandu Valley. Demand for electricity is increasing at 7-9% per year, and according to NEA’s
forecast, demand for electricity will reach 3600 MW by 2027. There will also be a sharp increase
in demand for electricity in the larger South Asia region.
Nepal is dependent on private sector investments in meeting the country’s energy needs.
Concerning the establishment of new power plants, the sector is open for private development,
including foreign ownership. The Ministry of Energy has announced a new Hydropower License
Management Procedure for projects above 10 MW, but investors must be prepared for a
cumbersome process in obtaining these. There are also certain challenges in the operation and
maintenance of hydropower plants. One of the major causes of financial losses is the erosion of
28
turbine parts due to high amounts of sediments present in rivers. Technological advancements
are needed to improve the feasibility of future hydropower development, and in particular,
turbines need to be designed according to the specific sedimentary composition in the river.
Currently, with more than 10 major hydropower stations and more than 80 small scale
hydropower stations, the supply of hydro-electricity by domestic generation remains at 3467.93
GWh, 83% of the total supply. The remaining 17%, 792.5 GWh, hydro-electricity is supplied by
India. Domestic supply includes 1,175.97 GWh (34%) from Independent Power Producers (IPPs)
while the remaining 2,291.96 GWh (66%) is supplied by the Nepal Electricity Authority (NEA)
power stations.44
Strengths Weaknesses
Huge hydropower potential due to availability of vast water resources.
Suitable geographic conditions for hydropower projects as well as favourable hydropower policy regarding hydro electricity generation for private and foreign investors
100% FDI allowed in this sector through equity shares. Hydropower industry is comparatively more organized then other investment potential sector with laws and regulation in place.
Government of Nepal is planning to introduce cash incentives of up to NPR 10 million on every megawatt of hydroelectricity generated to lure investors towards power sector.
Problem of power distribution due to lack of transmission lines.
Lack of political will and policy inconsistencies have led to sluggish growth of hydropower development.
PPA rates offered by NEA are very low.
Monopoly of NEA over the electricity market and transmission lines.
Default risk due to high operational losses incurred by the only off-taker.
Absence of power trading market where electricity can be traded as a commodity leading to market risks.
Absence of a power trading mechanism with India.
There is no clarity on how to address foreign exchange risk in PPAs. Khimti hydropower project, a Norwegian FDI project, faced controversial foreign exchange rate issue when NEA revised and increased the PPA rate from what was previously agreed.
Social obstruction and demand might delay the construction and operation of the project for a long period.
Opportunities Threats
Significant export potential and thus huge opportunity to balance present trade imbalances with neighbouring countries.
Huge energy demand and supply gap in Nepal as well as in India.
Uplifting the society at site of hydropower construction by social inclusion.
Lack of political stability, good governance and law and order issues.
Excessive local demands at construction sites pose as a major hindrance.
Potential environmental and sociological impact of building dams and reservoirs.
Climate change may affect the availability of water resources. Currently, water availability in dry seasons is getting worse, whereas availability is rising in wet seasons.
Hydropower has been identified as the one of the most lucrative areas for foreign investment in
Nepal. Although there is already significant FDI in hydropower more is expected as there is huge
electricity demand in the domestic market as well as export market.
44 NEA annual Report 2013.
29
Overall, there is a great scope for private investments in the energy sector by Norwegian
companies. As one of the world’s largest producers of hydropower energy, Norway possesses the
insight and expertise needed for successful investments in the sector. In particular, Norway has
significant technological and regulatory experience with small scale hydropower which is
relevant to Nepal. Good relations have already been established between Norway and Nepal in
the sector. Many Nepalese engineers have studied at NTNU in Trondheim, and Kathmandu
University has a close cooperation with NTNU and SINTEF Energy Research. Norwegian-funded
hydropower and turbine laboratories have also contributed to capacity building.
Energy is a priority sector in bilateral relations between Norway and Nepal. The Embassy in
Kathmandu is currently managing a diverse energy portfolio amounting to about USD 11 million
in annual disbursements. Nepal is also one of the main partner countries for bilateral energy
collaboration within the framework of the Clean Energy Programme.
Health Sector
The health care sector in Nepal consists of publicly and privately run hospitals primarily in urban
areas, and health care centres in rural locations. There are 123 public hospitals, 366 private health
institutions, and 205 primary health care centres currently operating in Nepal. In recent years,
the trend of health spending by Nepalis has been increasing. The spending increased by 25% -
29% in the year 2007/08 and 2009/10. In the year 2010/11 the growth slowed to 12%. The
contribution of health services to GDP in 2012/13 was 6.95%, with CAGR of 2% in the last decade.
Nepal is known for its gynaecology services, cardiac care, and orthopaedic surgery, which are
considered on par with international standards. For example, eye care treatment in Nepal has
been gaining popularity in other South Asian countries, particularly India. Patients are attracted
by the affordability and high quality of eye treatment in Nepal. It is estimated that annually more
than 200,000 Indian patients visit Nepal for eye surgery and more than 1.5 million for eye
treatments. Also, with the advent of partnerships between Nepali and Indian hospitals, Nepal has
benefited from technology transfer as well. For instance Norvic hospital in Nepal and Medanta
Medicity in India have entered into an agreement for technology transfer in health care services.
Despite these positive developments, there are still significant challenges to be addressed in the
sector.
The return on investment for this sector stands at 17%
Strengths Weaknesses
Services, particularly eye care is priced
considerably lower than neighbouring
countries, leading to a people from India
seeking health assistance in Nepal.
Some areas of healthcare like eye care and
orthopaedic care have shown vast
improvement, living up to the standard of
Western health care. Potential of developing
Ayurvedic health care service due to
availability of medicinal herbal plants and
good market demand for ayurvedic treatment.
Lack of a clear regulatory framework with regards to the ease of entry of foreign medical practitioners and investors.
No international recognition of healthcare facilities.
Lack of doctors willing to venture in the rural areas where the need for health care is highest.
Migration has led to few number of doctors in the country.
Lack of adequate government policies regarding health standards.
30
Ayurvedic treatment is very popular in India,
Sri Lanka, and Nepal.
Increasing number of health institutions
where teaching, research, training and health
care is provided along with production of
medical equipment.
The sector has attracted significant FDI from
Indian health care providers such as Escorts
Fortis.
Willingness of the government to improve the
healthcare provided to the people, especially
those from marginalized communities.
Different health related development
plan/programs has been carried out in the
rural areas regarding drinking water,
sanitation, and nutrition.
100% FDI is permissible in the health sector.
Hospitals and other medical services,
recreational health services (a treatment,
service designed to restore, remediate, and
rehabilitate a patients level of functioning and
independence in life activities) and
pharmaceutical and chemical industries fall
under the health sector.
Lack of a proper R&D-based industry that aims to improve the health and well-being of patients by developing new method of detection, prevention, and better treatment strategies.
Lack of promotion and facilities have not been able to draw attention of possible patients.
Opportunities Threats
Potential linkage of the health care industry
with tourism (medical tourism). Medical
tourism refers to travelling across
international boarder for the purpose of
obtaining health care.
Potential of providing healthcare
administration service to existing hospitals.
Potential of establishing medical college,
research and development centre and
Ayurvedic drug development centre.
Innovation has been witnessed in the form of
mobile health care in rural parts of the
country.
Skilled human resources may find better
opportunities in other countries because of
good salary, job benefits, better working
environment and living conditions.
Probability of illegitimate and politically
influenced labour demand by the unions.
Norway has a strong expertise in health care which combined with Nepali health care service can
provide economically sound partnerships. Following are areas within the health sector that can
be further explored through Norway-Nepal partnerships:
Providing better administrative support by collaborating with existing hospitals in Nepal.
Facilitate technology transfer in the field of scientific discovery, particularly in the
treatment of cancer.
Investment in developing Ayurvedic based drugs by combining Nepali herbs and
Norwegian expertise in pharmaceutical sector.
Financial Services
The financial sector of Nepal may be broadly categorized into a regulated and an unregulated
sector. The regulated sector includes commercial banks, development banks and finance
31
corporations (regulated by NRB, the central bank of Nepal); Nepal Stock Exchange (NEPSE)
(regulated by Securities Exchange Board of Nepal (SEBON); and life and non-life insurance
industry (regulated by the Insurance Board).
The financial sector is dominated by the banking sector, particularly commercial banks. Total
deposit of commercial banks amounted to 64.7% of the GDP in the FY 2013/14 whereas the
deposits of development banks and financial corporations amounted to 10.3% and 4.2%
respectively. Similarly, total credit to GDP amounted to 48.8% for commercial banks; 8.7% for
development banks; and 4% for financial institutions respectively. In terms of the relative size of
financial sector, total assets and liability amounted to 125% of the GDP.45
Because of a large number of Banks and Financial Institutions (BFIs), there is cut throat
competition in this sector. As a result, a few BFIs have undergone mergers to meet capital
requirements, as stipulated both by the Central Bank and international directives such as Basel
III, and build synergies between them. The Central Bank has also been actively advocating
mergers and acquisitions between existing institutions. This was borne out of some financial
institutions almost reaching insolvency due to a cocktail of bad corporate governance, over
exposure to single sector and liquidity issues.
Quantity, sadly, has not led to quality in banking services. Inefficient management, unhealthy
competition among banks, low turnover and highly volatile financial markets characterises the
financial sector. The financial environment is therefore considered to be relatively weak. Similarly,
access to finance to the micro-, small-, and medium-sized enterprises, which make up a large bulk
of the economy, is relatively low. The banking sector also lacks creative product development
with most banks limited to basic deposit and lending banking services.
Despite such issues, major Commercial Banks are some of the most profitable organisations in
the country. BFIs form the major portion of the Nepal Stock Exchange. The banking sector is
slowly regaining investor confidence in the domestic market which has helped NEPSE index
cross the 1000-point mark for the first time in six years this July. The recent positive performance
of the commercial banks along with their compliance to capital regulations has led to this rise in
Banking and NEPSE indices. It has also led to increased investor interest in the sector.
Recently the Central Bank issued directives to non-BFI foreign companies to divest their holdings
in Nepali BFIs by mid July 2015. As per the current Banking and Financial Institutions Act
(BAFIA), only foreign Banking and Financial Institutions (BFIs) are allowed to invest in Nepali
BFIs. There are a couple of commercial banks in Nepal that have non-BFI foreign investment,
namely NB International’s 50% holding in Nabil Bank and investment by Yong Lian Realty, a
Malaysian company, with a 12.9% stake in NMB Bank. While there are other BFIs with foreign
BFI investments, a significant one is Standard Chartered Bank, which has 75% foreign ownership.
The BFI sector in Nepal has immense prospects given its present state. There are prospects of
SME lending as existing lending practices pose unsupportive lending environment for SMEs.
The associated could be mitigated by introducing innovative products and instruments while
curbing risk-taking behaviour amongst the players in the financial services sector. Nepal has
skipped over the credit card generation and is fertile ground for mobile-based banking using data
and/ or NFC technologies.
45 Banking Supervision Report, NRB.
32
The return on investment for this sector is above 15%
Strengths Weaknesses
The financial sector is expanding and has
potential for more growth particularly in
investment banking, SME funds, and other
financing channels for SMEs.
Notable changes in the regulatory framework
have helped strengthen the sector such as
Merger Bylaws introduced by the Central Bank.
Extensive growing number of bank branches
and ATMs.
The corruption watchdog, The Commission for
Investigation of Abuse of Authority (CIAA)’s
increased vigilance in the financial sector to
tackle financial irregularities may provide the
foreign investors an investment friendly
financial services sector by increasing
transparency in this sector.
The Central bank had made it mandatory for
commercial banks to undergo stress testing to
determine the robustness of the bank and
whether it will be able to withstand
unfavourable economic scenario.
The central bank has prepared a standard
module to carry out stress test of the banks
based on the framework of International
Monetary Fund (IMF) and Basel Committee on
Banking Supervision, which ensures banks are
complying with international financial
guidelines.
The banking sector is highly concentrated with
commercial banks dominating the scene (in
2013, 73% of total assets and liabilities.)
Political unrest and times of conflict have left
financial institutions with no choice but to shut
down branches in rural areas.
Several restraints to the supply of financial
services including: requirement of four
documents, which are difficult to produce due
to informal procedures in Nepal.
Speed of loan processing is average.
The smaller the firm the greater the barrier to
access financial services.
Banking Sector requires collateral against
lending which makes cash flow based lending
impossible.
Opportunities Threats
The implementation of better Credit Rating and
Credit Information system will make
background check on lenders effective.
Most rural areas do not have access to banking
facilities.
The Norwegian banking has a long tradition of
working together on IT solutions for processing
both payments and information. Hence, this
could prove as an opportunity for Norwegian
companies to exploit in the financial services
industry.
Banks with international reach such as
Himalayan Bank, Standard Chartered Bank can
tap into the remittance market. The banks can
operate a dedicated remittance service, which
can compete with the local companies
providing the same service whilst charging
less to customers.
According to Nepal’s commitment to
liberalization, it is now open to foreign banks.
By opening the Financial Service Sector (FSS) as
Large firms fail to identify access to finance as
a significant determinant of success
suggesting they are not engaging in adequate
growth that – if it were occurring would call to
attention to such a factor.
The collateral requirements at 260% of loan
value is too high and discourages borrowing.
81% of firms have conveyed a requisite of
collateral to secure a loan.
Failure of some weak banks in the past have
threatened the stability of the financial
system.
The CIAA’s intervention in the banking sector
has not proved popular amongst the bankers,
which might cause a tussle between the
financial services sector and the regulator.
Unorganised unregulated market, which is
prevalent in rural areas, is not under
supervision, hence, adversely affecting the
poor population.
33
a member of WTO, Nepal has allowed foreign
banks to initially carry out wholesale banking.
Nepal has made 12 major commitments in the
opening of financial services for foreign
investment during the WTO accession
negotiations. The opening includes the
acceptance of deposits and other repayable
funds from the public and lending of all types
(including consumer credit, mortgage credit,
factoring and financing of commercial
transactions) and financial leasing and all
payment and money transmission services are
opened.46
Norwegian financial institutions have a progressive mind-set. They are geared to introduce
innovative new products and services to make banking services easily accessible to customers.
Nepal lags behind in technological advancement in banking sector. Hence, Norwegian expertise
in the financial services sectors would provide a competitive advantage to the stagnant financial
services industry. Although most commercial banks have introduced mobile and Internet
banking, there is much room for improvement.
As technology in banking is relatively nascent in Nepal, there is lack of product innovation. This
could prove an opportunity for Norwegian companies to explore in the Nepali financial services
industry. The development of new products offered to customers should require considerable
investment and expertise, and there must be sufficient willingness to make the necessary
investment. Hence, concentration on both an organization and a commercial orientation that give
a financial institution scope to make a profit on its services must be a priority.
Within the financial services, the SME banking industry has a huge market potential. A study
done by IFC estimates that there is a USD 2.5 billion worth of untapped market for SME lending
in Nepal. SME lending can be a good opportunity for Norwegian investors to step into the
financial services in Nepal. Moreover, Norwegian businesses can leverage their expertise of
investing in SME business in many developing countries.
46 Foreign Direct Investment in Financial Services: Impact on Nepalese Economy, Centre for Economic Development and Administration (CEDA).
34
Doing Business
This section provides a brief overview of some of the more practical aspects of doing business in
Nepal. It is important to emphasise that the information provided here is only meant to give an
indication of the prevailing business conditions. Potential Norwegian investors and companies
looking to establish themselves in Nepal should conduct a thorough feasibility study before
entering the market.
It is also helpful to consult the following reports from the Government of Nepal, World Bank, the
U.S. Embassy in Kathmandu and World Economic Forum:
Foreign Investment Opportunities in Nepal is a publication by the Ministry of Industry,
UNCTAD and the International Chamber of Commerce. It provides a comprehensive
overview of the Nepali economy, business environment and investment procedures.
http://www.theiguides.org/public-docs/guides/nepal
World Bank and the International Finance Corporation’s Doing Business 2014: Nepal
contains several quantitative measures of regulations for issues such as starting a
business, dealing with construction permits, employing workers, registering property,
getting credit, protecting investors, trading across borders, enforcing contracts, getting
an electricity connection and closing a business.
http://www.doingbusiness.org/data/exploreeconomies/nepal/
U.S Embassy in Kathmandu’s 2012 Country Commercial Guide for U.S. Companies
presents a comprehensive look at Nepal’s business environment, using economic,
political and market analysis.
http://photos.state.gov/libraries/nepal/391216/Misc_%20PDF/2012CCG_FINAL_.pdf
World Economic Forum Global Competitiveness Report 2013 – 2014 measures the
microeconomic and macroeconomic foundations of national competitiveness. It is a useful
complement to the Doing Business ratings, as it gauges several other factors important
for business as infrastructural quality, labour qualifications, and private sector
development.
http://www.weforum.org/reports/global-competitiveness-report-2013-2014
Table 2: Global Competitiveness Index for Nepal47
Rank (out of 148) Score (1-7)
GCI (2013-2014) 117 3.7
Basic requirements (60.0%) 105 4.0
Institutions 127 3.2
Infrastructure 144 1.9
Macroeconomic environment 41 5.3
Health and primary education 88 5.4
47 World Economic Forum Global Competitiveness Report 2013 – 2014
35
Efficiency enhancers (35.0%) 128 3.2
Higher education and training 130 2.7
Goods market efficiency 127 3.7
Labour market efficiency 133 3.7
Financial market development 95 3.8
Technological readiness 133 2.6
Market size 100 3.1
Innovation and sophistication factors (5%) 132 2.9
Business sophistication 129 3.3
Innovation 129 2.6
The business environment in Nepal remains difficult, even if it has generally improved over the
last few years. Notably, the country is ranked above the regional average for South Asia on the
ease of doing business (see figure 1). The World Bank has identified factor markets
(infrastructure, access to finance, labour regulations and low-skilled work force, little innovation
and inadequate technology) and governance (political instability, corruption and crime,
regulations, taxes and business licensing) as the main impediments to private sector
development in Nepal.48
Potential investors and exporters need to be aware of a number of Nepali regulations, customs
and standards on doing business in the country. These may include import tariffs, entry
requirements, labelling and marketing requirements, prohibited or restricted imports, customs
regulations and product standards. Nepal’s labour laws generally favour employees and strong
unions often make it difficult to terminate workers. Investors should be aware that strong foreign
capital enterprises are often seen as “soft targets”.
Insufficient electricity provision and poor infrastructure are two longer term issues that will pose
challenges to most businesses for years to come. In order to successfully engage in Nepal,
Norwegian companies should therefore commit sufficient financial and human resources as well
as a dedication to long term engagement.
Establishing a Business
According to the Doing Business Index 2014 for Nepal, published by the World Bank and
International Finance Corporation, potential investors have to complete seven procedures and
spend 17 days to register their company before starting a business. This is the same as the
average for other countries in South Asia (17.2 days).
Close cooperation with reliable local partners will facilitate the process of establishing a business.
Particularly useful are partners with a wide network of contacts and knowledge of local
investment conditions. It is recommended to include an arbitration clause when entering into
48 Afram, G. G., and Del Pero, A. S. Nepal’s Investment Climate: Leveraging the Private Sector for Job Creation and Growth. World Bank Publications, 2012.
36
such agreements, as well as having good legal representation. In the case of a dispute, brokering
will often lead to a better and more effective solution than taking the case to the Nepalese
judiciary system. Potential investors and business partners are usually granted a six-month visa
to conduct research and feasibility studies.
Some companies engage accountants and lawyers to work on registration, licenses, permits,
taxes and auditing. It is recommended to hire an international accounting firm with thorough
knowledge of local conditions. It is important to keep in mind that Norwegian and Nepali business
culture differs in many respects. Inter-personal relationships matter more in Nepal, than in a
Norwegian context. It is therefore necessary to make use of local representatives when entering
the market. It is also important to always seek detailed clarification of any agreement reached.
Financing, Risk Mitigation and Advisory Services
There are a number of support schemes in place for Norwegian companies looking to invest in
Nepal:
The Information Office for Private Sector Development in Developing Countries
(Veiledningskontoret) provides specialist advice and guidance, particularly in relation to financing,
risk mitigation and advisory services for businesses that plan to invest in or trade with developing
countries.
NORAD provides support for businesses that are considering establishing operations in
developing countries. The objective of the support scheme is to reduce risk and intensify the local
development effects of the investment. Businesses can apply for support for feasibility studies,
including pilot studies and test production, training of local employees upon start-up, necessary
infrastructure investments linked to establishment of the business, environment, health and
safety measures, and measures to strengthen compliance with CSR. Applicants must be able to
prove a high development impact of their projects.
Innovation Norway has a regional office in New Delhi, India that may offer advice on business
activities in Nepal. They offer offers business financing, advisory services, networks assistance,
competence-building and marketing.
Norwegian Guarantee Institute for Export Credits (GIEK) can issue guarantees covering political
risks for investments in developing countries. These risks may include losses due to
expropriation or confiscation, acts of war, revolution or civil unrest, moratoriums, payment
prohibitions or currency restrictions, or Norwegian or international boycotts or sanctions. A
guarantee may cover investments in the form of capital, production equipment or other financial
payments in connection with establishment abroad. The maximum rate of coverage in respect of
political risk is 100%, but normally a smaller percentage is covered. GIEK does not cover any
commercial investment risks.
FK Norway (Fredskorpset) provides funding for mutual exchange of personnel between
companies in Norway and Africa, Asia and Latin America. Exchange can be a good tool to raise
companies’ expertise, better communication flow with international partners and improve
knowledge about new markets. FK Norway also offers financial support to feasibility studies for
companies looking to explore the possibility of exchange with one or more partners. In Nepal,
37
there is currently an exchange in place between Multiconsult and Hydro Consult Engineering
Limited (HCEL).
Nopef (Nordic Project Fund) offers financing for feasibility studies within the fields of the
environment, climate and green growth. The feasibility studies should contribute to direct or
indirect environmental improvements and increased environmental consciousness in the project
countries. Nopef may also be able to engage in risk sharing in connection with the feasibility
study.
Corporate Social Responsibility
Norway is one of the first countries to develop a comprehensive policy on corporate social
responsibility (CSR) and Norwegian businesses are expected to be at the forefront in this area.49
The term CSR is used to describe a wide range of economic, social and environmental initiatives
by enterprises that go beyond legal requirements and are voluntary in nature. It means a
commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce, their families as well as society at large.
Corruption is generally perceived as a challenge for foreign investors. In particular, the extensive
use of subcontractors in joint arrangements may pose challenges to foreign investors because it
hampers the use of control mechanisms and monitoring requirements. In 2012, Nepal acceded
to the United Nations Convention against Corruption. This, together with the country’s Anti-
Corruption Strategy and Work Plan from 2008 forms the legal and institutional basis for anti-
corruption work. However, there is still a wide gap between official legislation and actual
implementation. For example, the tax system is complex and contains many exceptions that
contribute to corruption. In Transparency International’s Corruption Perceptions Index for 2013
Nepal ranks 116th, with 31 points on a scale where 0 denotes the most corrupt and 100 the least.
Both “speed-money” and grand-scale corruption are common. Understanding the local culture as
well as the political and economic context is crucial for exercising CRS in Nepal. The Embassy in
Kathmandu is able to assist Norwegian companies on these matters.
Further information:
Corruption and Anti-Corruption in Nepal: Lessons Learned and Possible Future Initiatives by
NORAD uses a political economy methodology to analyse the context in which corruption is
taking place in Nepal, and the dominant formal and informal institutions and actors relevant for
strengthening integrity in Nepal’s development.
http://www.norad.no/en/tools-and-publications/publications/publication?key=382812
The 2013 Corruption Perceptions Index measures the perceived levels of public sector corruption
in 177 countries and territories around the world, including Nepal.
http://www.transparency.org/cpi2012/
OECD Guidelines for Multinational Enterprises are the most comprehensive set of government-
backed recommendations on responsible business conduct in existence today. The governments
49 See Norwegian Ministry of Foreign Affairs. Report No. 10 (2008–2009) to the Storting: Corporate Social Responsibility in a Global Economy. URL: http://www.regjeringen.no/pages/2203320/PDFS/STM200820090010000EN_PDFS.pdf
38
adhering to the Guidelines aim to encourage and maximise the positive impact MNEs can make
to sustainable development and enduring social progress.
http://mneguidelines.oecd.org/
CSR Risk Check is a free tool provided by CSR Netherlands which processes over 400 data sources
to identify risks and recommendations for countries and products.
http://www.mvorisicochecker.nl/en
39
Appendix 1: Methodology
In order to complete the activities described in the aforementioned Scope of Work, the study
adopted the following research methodology:
Literature Review
A literature review of relevant and existing documentation was conducted. Some of these
documents include:
Guides and manuals providing information on the investment climate and procedures of
Nepal
Nepal Trade and Integration Strategy, 2010
Economic Surveys, Ministry of Finance
Macroeconomic Situation, Nepal Rastra Bank
Doing Business in Nepal, World Bank
Private Sector Development and Prospects for Norwegian Trade and Investment Interests in
Nepal, NORAD
Consultative Meetings
Consultative meetings were organized with key stakeholders such as foreign investors,
consultants and lawyers to gain insights into private sector development, and issues faced by
concerned stakeholders including foreign investors in Nepal.
Comparative Analysis
A comparative analysis was done between sectors that Norwegian companies have an expertise
in, priority sectors identified through the Nepal Trade and Integration Strategy (NTIS), 2010 and
Nepal’s sunrise sector.50 This was done to evaluate the synergies and complementarities, and to
eventually identify two additional sectors, keeping in mind the potential of these sectors to
facilitate employment generation, improvements in living and working conditions and poverty
reduction among women, youth and marginalized groups.
Calculation of Return on Investment
The average Return on Investment (ROI) for each sector has been calculated by considering the
financial statements of a few, randomly selected companies operating in each sector. For each
company, a three year average was calculated.
50 Sectors that show potential through their increasing contributions to the GDP and FDI inflows
40
Appendix 2: References
Relevant Laws and Acts
Foreign Investment and Technology Transfer Act
http://www.moics.gov.np/act_regulations/FITTA/FITTA_%201992.pdf
Foreign Exchange Regulation Act, 2009
http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=startd
own&id=636&lang=en
Asset or Money Laundering Prevention Act, 2011
http://www.nrb.org.np/fiu/pdffiles/AML-CFT_Act_2008_(English)_20690118.pdf
Income Tax Act, 2011
http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=startd
own&id=1008&lang=en
Bank and Financial Institutions Act, 2006
http://www.mocs.gov.np/uploads/Act%20list%20English/banks-and-financial-institutions-
act.pdf
Company Act. 2006
http://www.nrb.org.np/lgd/acts_ordinances/Company%20Act,%202063_Nepali.pdf
Competition Promotion and Market Protection Act, 2007
http://www.mocs.gov.np/uploads/Act%20list%20English/competition-promotion-and-market-
protection-act.pdf
Consumer Protection Act, 1999
http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=fileinf
o&id=292&lang=en
Contract Act amended in 2006
http://www.mocs.gov.np/uploads/Act%20list%20English/contract-act.pdf
Copyright Act 2002
http://www.mocs.gov.np/uploads/Act%20list%20English/the-copyright-act.pdf
Environment Protection Act, 1997
http://www.lawcommission.gov.np/site/en/content/environment-protection-act-2053-1997
Electricity Act 1992
http://www.doed.gov.np/policy/Electricity_Act_2049-english.pdf
Insurance Act, 1992
http://www.bsib.org.np/images/download/7972_insurance-act.pdf
Investment Board Act, 2010
41
http://www.lawcommission.gov.np/site/en/content/investment-board-act-2068-2010
Labour Act, 1992
http://www.dol.gov.np/uploads/acts%20english/labor-act.pdf
Major Foreign Investment Related Policies
Foreign Investment and One Window Policy, 1992
http://www.nepalchamber.com.np/policies/foreign.php
Nepal Trade and Integration Strategy, 2010
http://www.mocs.gov.np/uploads/NTIS%202010%20exe%20sum%20160610.pdf
Industrial Policy, 2010
http://www.lawcommission.gov.np/index.php?option=com_remository&Itemid=2&func=fileinf
o&id=1509&lang=en
Labour and Employment Policy, 2005
Land Use Policy, 2012
http://www.investnepal.gov.np/portal/index.php?p1=downloadlist&p2=2
Trade policy 2009
http://www.tepc.gov.np/uploads/files/Trade%20policy%20English%20latest,%2020091818.pdf
Monetary Policy 2013-14
http://www.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_English)--2013-
14_(Full__Text)-new.pdf
Treaties and Agreements
Double Taxation Avoidance Agreements
http://www.ird.gov.np/ird/index/document-30.html
Bilateral Investment Promotion and Protection Agreement (BIPPA)
http://www.fncci.org/downloads/nepal_india_bipa_agreement.pdf
Agreement on the South Asian Free Trade Area (SAFTA)
http://www.saarc-sec.org/userfiles/saftaagreement.pdf
Major Surveys and Studies
World Bank and the International Finance Corporation’s Doing Business 2014: Nepal
http://www.doingbusiness.org/data/exploreeconomies/nepal/
U.S Embassy in Kathmandu’s 2012 Country Commercial Guide for U.S. Companies
http://photos.state.gov/libraries/nepal/391216/Misc_%20PDF/2012CCG_FINAL_.pdf
42
Government of Nepal, Ministry of Industry and Ministry of Commerce and Supplies: Foreign
Investment Opportunities in Nepal
http://www.mocs.gov.np/uploads/Publication/foreign_investment_opportunities_09.pdf
Doing Business in Nepal: A Guide to Indian Investors
http://www.nicci.org/pdf/i-guide/i-guide.pdf
Study on Private Sector Development and Prospects for Norwegian Trade and Investment
Interests in Nepal (NORAD, 2003)
http://www.norad.no/no/resultater/publikasjoner/norads-
rapportserie/publikasjon?key=109444
Investment Guide to Nepal (UNCTAD, 2003)
http://unctad.org/en/docs/iteiia20032_en.pdf
U.S. Embassy in Kathmandu 2013 Investment Climate Statement
http://www.state.gov/e/eb/rls/othr/ics/2013/204702.htm
Industrial Statistics, Ministry of Industry
http://www.doind.gov.np/documents/pdf/industrial_statistics_2067-68.pdf
Nepal Labor Force Survey, 2008
http://cbs.gov.np/wp-content/uploads/2012/02/NLFS-2008%20Report.pdf
Economic Survey, Ministry of Finance
http://www.mof.gov.np/en/archive-documents/economic-survey-21.html
Nepal Living Standards Survey, 2010-11
http://cbs.gov.np/nada/index.php/catalog/37
Doing Business in Nepal, World Bank
http://www.doingbusiness.org/data/exploreeconomies/nepal/
Private Sector Development and Prospects for Norwegian Trade and Investment Interests in
Nepal, NORAD
http://www.norad.no/en/tools-and-publications/publications/publication?key=109444
Doing Business in Nepal, beed management, March 2013
http://www.beed.com.np/publications-detail-2.php
Foreign Direct Investment in Nepal, Nefsearch Issue 05, January 2013,
http://nepaleconomicforum.org/publications/detail.php?id=29&cn=nefsearch
Financial Frauds, Mitigating Risks, Nefsearch Issue 06, July 2013,
http://nepaleconomicforum.org/publications/detail.php?id=32&cn=nefsearch
Where are the banks heading?, Nefsearch Issue 02, January 2012,
http://nepaleconomicforum.org/publications/detail.php?id=19&cn=nefsearch
43
Unleashing Nepal’s Hydropower Potential, Nefsearch Issue 01, December 2011,
http://nepaleconomicforum.org/publications/detail.php?id=18&cn=nefsearch
Review and Rationalization of the Number of Public Holidays in Nepal, June 2013
http://issuu.com/suman417/docs/public-holidays
Regulation and Supervision of Financial Cooperatives, June 2013
http://issuu.com/suman417/docs/cooperatives
Alignment of Corporate Taxation of BFIs and Insurance Companies to that of Other Companies,
June 2013
http://issuu.com/suman417/docs/tax_parity
Creating a Stronger Regulatory Framework for the Insurance Sector, June 2013
http://issuu.com/suman417/docs/insurance
Business Opportunities Profile, January 2013
http://nepal.um.dk/en/~/media/Nepal/Documents/BUSINESS%20OPPORTUNITY%20PROF
ILE.pdf
Corruption and Anti-Corruption in Nepal
http://www.norad.no/en/tools-and-publications/publications/publication?key=382812
U.S Embassy in Kathmandu’s 2012 Country Commercial Guide for U.S. Companies
http://photos.state.gov/libraries/nepal/391216/Misc_%20PDF/2012CCG_FINAL_.pdf
Doing Business in Nepal: A Guide to Indian Investors
http://www.nicci.org/pdf/i-guide/i-guide.pdf
Investment Guide to Nepal (UNCTAD, 2003)
http://unctad.org/en/docs/iteiia20032_en.pdf
Foreign Investment and Investment Procedures in Nepal
http://www.investnepal.gov.np/portal/index.php?p1=content&p2=9#.U7zA4pSSxh5
Investment Climate in Nepal
http://www.investnepal.gov.np/portal/index.php?p1=content&p2=8&mid=16#.U8TrQJSSxh4
Investment Board of Nepal
http://www.investmentboard.gov.np/
Norwegian Support Schemes
The Information Office for Private Sector Development in Developing Countries
(Veiledningskontoret)
http://www.veiledningskontoret.no
Norwegian Agency for Development Cooperation (NORAD)
http://www.norad.no/no/tilskudd
44
Innovation Norway Regional Office in New Delhi
http://www.innovasjonnorge.no/no/kontorer-i-utlandet/india
Norwegian Guarantee Institute for Export Credits (GIEK)
http://www.giek.no
FK Norway (Fredskorpset)
http://www.fredskorpset.no
Nopef (Nordic Project Fund)
http://www.nopef.com
Business Creates Development. What the Norwegian Authorities are doing to Promote Private
Investment in Developing Countries (Norwegian Ministry of Foreign Affairs, 2012)
http://www.regjeringen.no/upload/UD/Vedlegg/Utvikling/Business_development_E899E.pdf
Chambers of Commerce and Industry Associations
Confederation of Nepalese Industries
http://www.cnind.org/
Federation of Nepalese Chambers of Commerce and Industry (FNCCI)
http://www.fncci.org/
Nepal Chamber of Commerce
http://www.nepalchamber.org
Government of Nepal Trade Trade and Export Promotion Centre
http://www.tepc.gov.np/
Nepal-India Chamber of Commerce and Industry
http://www.nicci.org/
Nepal Business Forum
http://www.nepalbusinessforum.org/
Information about Nepal
Royal Norwegian Embassy Kathmandu
http://www.norway.org.np
United Nations Nepal Information Platform
http://www.un.org.np
World Bank Nepal
http://www.worldbank.org/en/country/nepal
Asian Development Bank Nepal
45
http://www.adb.org/nepal
The Norway-Nepal Association
http://norgenepalforeningen.wordpress.com/