Nepal - Country Commercial Guide
Market Challenges
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Nepal is a landlocked state, which makes market access a challenge.  Surface transport into and out of Nepal can be difficult.  The shortest reliable road route from India to the Kathmandu Valley is 84 miles in length and takes a minimum of five hours to traverse.  However, most cargo trucks traverse an even longer 175-mile, seven-hour route into the Kathmandu Valley.  The primary seaport for entry of goods bound for Nepal (and for exports) is Kolkata, India, about 460 miles from the Nepal-India border.  With only one international airport in the country, challenges in the air transport sector are also acute.  However, market access challenges are reducing.  As recently as 2016, political unrest and frequent general strikes added disruptions to the movement of goods in and out of Nepal, sometimes for months at a time.  Such disruptions have declined substantially with the improvement in the political environment.  Two additional international airports are being built in Bhairahawa and Pokhara, expected to become operational within the next year or so.  A larger international airport is under consideration in Nijgadh, directly south of Kathmandu.  All of these will alleviate the pressures on the existing, single international airport in Kathmandu, which itself is being upgraded.  Sea access has improved with the addition of access via Vishakhapatnam (Vizag) Port in India, the opening of an integrated checkpoint in Birgunj, and the initiation of an oil pipeline which will free up to 40% of the traffic at Birgunj.  In addition, expanded use of the inland port at Birgunj combined with the pilot roll-out of a radio frequency container tracking system between Vizag and Birgunj have drastically reduced transit times improving market access.  In April 2019, the Government of Nepal successfully negotiated and signed a Trade and Transit Protocol with its northern neighbor, China, which grants Nepal alternative access to three Chinese seaports and four dry ports.  Although the Chinese routes have yet to come into operation, their existence as alternatives and threat as potential competition has improved services at the Port of Kolkata. 

Political instability—including 26 changes of government during the past 30 years—created an uncertain environment for foreign and private investment.  With the successful conclusion of local and parliamentary elections in 2017 and a majority NCP government in place since early 2018, this environment was improving.  However, a fresh round of intra-party bickering and jostling for power within the NCP led Prime Minister K.P. Sharma Oli to dissolve Parliament in May 2021, which was reinstated by the Supreme Court in July 2021 along with the appointment of a new government under Prime Minister Deuba of the Nepali Congress, which has the mandate of holding regularly scheduled parliamentary elections in November 2022.  The new Constitution of 2015 committed Nepal to federalism with a central government based in Kathmandu, seven provincial governments, and 753 local government units.  The division of power and responsibility across these three tiers of government is being developed and implemented slowly.  This has created additional administrative and bureaucratic hurdles and delays likely to continue in coming years. 

The Government of Nepal claims to be open to FDI, but implementation of policy is often hindered by bureaucratic delays, inefficiency, and uncertainty.  Foreign investors frequently complain about complex and opaque government procedures and working-level attitudes more hostile than accommodating to the private sector.  Lack of interagency coordination is often another hurdle.  Though the Government of Nepal passed a new Foreign Investment & Technology Transfer Act (FITTA) in March 2019 to make Nepal a more attractive investment destination, in May 2019 it also increased the minimum FDI threshold ten times to nearly $500,000, which has prevented many small- and medium-sized foreign investors from entering the Nepal market.  New rules, regulations, and directives can be inconsistent with the larger, stated strategic goals of the country.     

Foreign investors must deal with a non-transparent legal system in which basic legal procedures are neither quick nor routine.  The bureaucracy is generally reluctant to apply legal precedent, and businesses are often forced to re-litigate issues that have been previously decided.  Legislation limits foreign investments in financial, legal, and accounting services, limiting potential efficiency gains and perpetuating regulatory red tape.  Legislation protecting intellectual property is under creation.  An IPR Law has been in draft since an IPR policy was created in March 2017.  Given current political uncertainties, it is unclear when this IPR Act will be introduced to Parliament for consideration and ratification.

U.S. firms and foreign investors have identified corruption as an obstacle to maintaining and expanding direct investment in Nepal.  There are frequent allegations of corruption by Government of Nepal officials in the distribution of permits and approvals, procurement of goods and services, and awards of contracts.  Nepal’s ranking on Transparency International’s Corruption Perceptions Index (CPI) slipped down to 117 in 2020 from 113 the previous year, in a ranking of 180 countries. 

Qualified workers are in short supply.  Nepal produces technical manpower, but a lack of economic opportunity and low wages compel millions of workers to seek jobs overseas.  Businesses often complain of having to constantly recruit and retrain new staff.  Rigid labor laws make it difficult to terminate employees.  Militant and highly politicized unions commonly abrogate negotiated agreements to press new demands, making it a challenge to assemble and retain qualified staff.  However, labor problems arising from trade unionism have subsided following the improvement in the political environment.  A new Labor Act was enacted in August 2017 replacing the previous one from 1998 with the aim of making the employer-laborer relationship more systematic and helping ease some of the rigidities including the ability of firms to fire workers in response to market demands.  The new Act has improved clarity on provisions related to occupational health and safety, collective bargaining, dispute resolution and reduced wages during strikes.  But this law has also added to the costs of doing business.  Many small- and medium-sized enterprises (SMEs) are struggling to meet the requirements of the new Social Security Fund introduced in 2018.

High customs tariffs imposed on most manufactured products increase the price of U.S. products in the Nepali market.  Cheap consumer goods imported from neighboring countries also present market challenges for U.S. imports.