With a trade to GDP ratio of about 38 percent, an average tariff of 11 percent, and virtually no quantitative restrictions, Nepal is among South Asia’s most open and trade-dependent economies. Exports have been growing over the 1990s – though with some volatility – and there seems to be a potential for further growth.
Prospects for further growth are affected by two recent major developments. First, Nepal completed its accession to the WTO and became the 147th member in April 2004. Being the first LDC to become a member of the multilateral trading regime, Nepal faces considerable opportunities as well as challenges in enhancing its capacity and competitiveness. The most notable ingredients of Nepal’s accession package are: (i) agreement to bind other duties and charges at zero and phase them out within 10 years; (ii) agreement to bind average tariff at 42 percent for the agricultural products and 24 percent for all other products, and; (iii) agreement to allow up to 80 percent foreign equity participation in 70 services sub-sectors spanning distribution, retail and wholesale services and audio-visual. Second, the rescinding of Multi-Fiber Agreement quotas at the end of 2004 has dramatically changed prospects for Nepal’s garment industry – that accounted for 18 percent of total exports in FY 2003/04 – and exports in the sector have already plummeted by 40 percent in the first ten months of 2005 compared to same period of 2004.
These two issues accentuate the need for trade policy reforms to relieve critical behind-the-border constraints and improve the overall climate for investment. First, despite significant improvements in customs administration, significant work remains to be done to improve duty drawback, trade facilitation, standards and quality, infrastructure and transport, and provide business support services. Second, the competitiveness of the country hinges critically on reforms in labor and financial markets with a view to facilitate efficient use of resources and eliminate barriers to entry . Finally, the existing anti-export bias inherent in the cascading structure of tariffs should be adjusted carefully.
Against this background the World Bank is currently supporting a number of reforms geared towards trade facilitation and liberalization in Nepal through various instruments. Nepal’s PRSP (its Tenth Plan), supported by ongoing PRSC dialogue, plans to remove critical behind the border constraints on trade, notably through customs administration modernization, simplification and automation of customs procedures, creation of scientific customs valuation procedures, reduction in transit costs, reduction in the cost of power and telecom services, and reforms in the labor market. Concurrently, the World Banks has also been supporting HMGN with technical assistance towards the setting up of an Apex Trade Body that will coordinate policies and the overall national effort towards trade facilitation, negotiation, and harmonization of standards and practices.
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