Nepal WT/TPR/S/257/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Nepal is a landlocked least developed country  (LDC) with a predominantly rural population 
of around 30 million.  It is bordered by China to th e north and by India to the south, west and east.  
Structural reforms began in 1985 to diversify and develop its economy, and Ne pal started to liberalize 
its trade regime unilaterally in 1992:  licence and quota requirements on imports were removed and 
tariffs reduced.  Nepal also liberalized its investment  laws, restructured its tax system, and started to 
privatize a number of state-owned enterprises, which were performing poor ly.  In 2004, Nepal 
acceded to the WTO (Chapter II(4)(i)). 
2. However, trade and investment policy reforms a nd privatization have not resulted in strong 
economic development.  Nepal remains one of the poorest countries in South Asia, with about 25% of 
the population living below poverty line (less than  US$1 a day).  Following its internal conflict 
between 1996 and 2006, Nepal changed from a monarchy to a republic in 2008 (Chapter II(1)).  Key 
factors impeding economic growth are:  political instability (due to the post-conflict transition 
process) and poor governance, as well as supply-side constraints (e.g. energy shortages, poor infrastructure, and labour strikes).  These factor s limited the performance of a number of traditional 
Nepalese exports, especially semi-processed and pr ocessed goods, such as clothing, which are highly 
dependent on tariff preferences a nd require access to an organized  labour force, steady supply of 
energy, and reliable transport.  Nepal's traditional agricultural exports face t echnical barriers to trade 
in the global market due to its weak standard ization and conformity assessment infrastructure. 
(2) T
RADE AND ECONOMIC DEVELOPMENTS  
(i) Main economic developments 
3. The Government has realized that, as a sma ll economy, Nepal cannot achieve its economic 
goal in isolation from the global rules of trade, wh en more than 90% of global trade is governed by 
trade rules under the framework of the WTO.1  Nepal acceded to the WTO in April 2004.  
4. Between 2003/04 and 2010/11, annual real GDP growth averaged 4.2%, and per capita GDP 
increased from US$293 to US$642 (Table I.1).  Nepa l's fiscal management remains prudent.  The 
ratio of government revenue to GDP increased from 11.6% in 2003/04 to 15.3%  in 2010/11, owing to 
revenue administration reforms, and strong cust oms and VAT collection (high remittances raised 
consumption).  Public expenditure  increased rapidly, financed by increased revenue and foreign aid.  
As a result, the public debt to GDP ratio declined from 59.4% in 2003/04 to 32% in 2010/11. 
5. Nepal has close trade and economic inter-linkag es with India, and the Nepali rupee is pegged 
to the Indian currency.  Consequently, prices in Nepa l are greatly influenced by inflation in India.  
Moreover, between 2008 and 2010 inflation in Nepal remained in double digits, mainly due to supply 
disruptions i.e. general strikes, road closur es, and cartelizing of essential goods and supplies, 
including food items.2  The authorities considered that industry closures, and increased consumption 
(pushed by high remittances), also c ontributed to double-digit inflation. 
6. Nepal's economy is very vulnerable to global economic shocks, because of the lack of 
diversity of its exports, and its heavy depe ndence on remittances from abroad.  Its economy 
performed well before the global economic crisis;  real GDP growth reached 6.1% in 2007/08.  
Subsequently, the real GDP growth rate was lower.  Real GDP is estimated to grow at 3.5% 
                                                      
1 Ojha et al (2010). 
2 World Bank (2010). WT/TPR/S/257/Rev.1 Trade Policy Review 
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in 2010/11, down from 4.6% in 2009/10.  Addressi ng Nepal's "supply-side constraints" so as to 
expand trade is imperative for achieving the desired economic growth through exports.  
Table I.1  
Selected economic indicators, 2003-11 
  2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10  2010/11a 
A.  National accounts         
GDP per capita (US$) 293  328 350 390 464 465  556  642 
GDP growth (%, constant 2000/01 
prices) 4.7 3.5 3.4 3.4 6.1 4.4 4.6 3.5 
   Consumption 1.8  4.3 4.9 3.6 1.5 6.1  18.5  5.4 
Government consumption 8.8  1.2 0.8 7.2 3.3 9.7  8.4  10.6 
Private consumption 0.7  4.9 5.4 3.0 1.3 5.7  20.1  4.9 
Non-profit institutions serving 
households 14.7  -2.9 7.9 13.6 2.0 2.8  4.5  0.9 
   Gross fixed capital formation 3.3  0.5 11.1 5.3 1.9 0.5  5.3  -10.4 
   Exports of goods and services  12.3 -3.0 -1.3 -0.9 0.7 3.9 -13.7 -3.3 
   Imports of goods and services  8.5 6.9 6.5 2.9 8.2 12.6 26.7 -3.5 
B.   Prices and interest rates         
Inflation (CPIb, % change) 4.0  4.5 8.0 6.4 7.7 13.2  10.5  9.6 
Saving deposit rate (%, end-period) 2-5  1.75-5  2-5  2-5  2-6.5  2-7.5   2-12  2-12 
Lending rates (%, end-period)         
   Industry  8.5-13.5  8.25-13.5  8-13.5  8-13.5  7-13  8-13.5   8-13.5  8-13.5 
   Agriculture  10.5-13   10-13  9.5-13  9.5-13  9.5-12  9.5-12   9.5-13  9.5-13.2 
   Export bills  4-11.5   4-12  5-11.5  5- 11.5  5-11.5  6.5- 11   4-18  4-15.5 
   Commercial loans  9-14.5   8-14  8-14  8-14  8-13.5  8-14   8-14  8-14 
   Overdrafts  10-16   5-14.5  6.5-14.5  6-14.5  6.5-13.5  6.5-13.5   7-18  7-18 
C.  Government finance (% of 
GDP)          
Total revenue 11.6  11.9 11.1 12.1 13.2 14.5  15.4  15.3 
   Tax revenue 9.0  9.2 8.8 9.8 10.4 11.8  13.3  13.1 
Total expenditure 16.7  17.4 17.0 18.4 19.8 22.2  22.2  23.0 
Overall balance before grants -5.1  -5.5 -5.9 -6.3 -6.6 -7.7  -6.8  -7.7 
   Foreign grants 2.1  2.4 2.1 2.2 2.5 2.7  3.3  3.7 
Overall balance after grants -2.9  -3.1 -3.8 -4.1 -4.1 -5.0  -3.5  -3.8 
Public debt 59.4  52.1 50.3 44 44.9 40.3  34.5  32.0 
   Foreign  43.4  37.3 35.8 29.8 30.6 27.9  21.9  19.0 
D. Consumption, savings and 
investment (% of GDP)         
Gross consumption 88.3 88.4 91 90.2 90.2 90.6 92.6 93.3 
Gross national savings 27.3 28.4 29.0 28.6 33.2 35.9 32.3 30.9 
Gross domestic investment 24.5 26.5 26.9 28.7 30.3 31.7 35.0 30.2 
Savings investment gap 2.8 1.9 2.1 -0.1 2.9 4.2 -2.7 0.7 
E.  Memorandum items         
Current GDP (Nr billion) 536.7  589.4 654.1 727.8 815.7 988.1  1,171.9  1,346.8 
Current GDP (US$ million) 7,274  8, 179 9,044 10,325 12,545 12, 849  15,730 18,636 
Nr/US$ (annual average) 73.8  72.1 72.3 70.5 65.0 76.9  74.5  72.4 
Population (million) 24. 7  25.3 25.9 26.4 27. 0 27.6  28.3  28.9 
a Estimates. 
b Base year 2005/06. 
Note:  Nepalese fiscal year runs from 16 July to 15 July. 
Source:  Ministry of Finance (2011b), Economic Survey Fiscal Year 2010/11 , Vol. I, Table Macro Economic Indicators;  
and information provided by Nepal Rastra Bank. Nepal WT/TPR/S/257/Rev.1 
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(ii) Trade performance  
7. Trade (exports and imports, of goods and ser vices) accounted for 41% of GDP in 2010/11.3  
In 2010, Nepal ranked 123rd among world merchandise exporters, and 87th among importers 
(considering the countries of the EU together and ex cluding intra-EU trade).  In services trade, Nepal 
ranked 103rd among exporters and 106th among importers.4  
8. Nepal's merchandise exports  have been rather unstable and w eak.  Its export basket is narrow, 
and its export markets are concentrated in a fe w countries, making exports susceptible to global 
economic volatility.  Major export ite ms have undergone sharp declin es, while imports have been 
rising quickly, thereby steadily increasing the trade de ficit.  Merchandise imports are typically valued 
at three, four or even six times the value of merchandise exports.  Betwee n 2003/04 and 2010/11,  the 
value of Nepal's total imports almost tripled, from Nr 133 billion to Nr 388 billion, while its exports 
rose from Nr 55 billion to Nr 69 billion (25% increase over seven years). 
9. The rapid increase of imports is largely due to thriving consumption, which accounts for more 
than 90% of GDP.  This strong consumption w as made possible mainly by high remittances.  
Workers' remittances in Nepal are relatively large in comparison to GDP and exports – equivalent to 
about 20% of GDP, and more than three times the total export value in 2010/11 – constitute a 
relatively stable source of foreign exchange inflow s (Table I.2).  High remittances have resulted in 
rising reserves despite the underperforming export activiti es.  Nepal has had a persistent trade deficit;  
however, mainly because of the remittances, the curre nt account showed a surplus for many years.   
Table I.2 
Balance of payments, 2003-11 
(Nr million) 
 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 
A:  Current account 14,598 11,544 14,225 -902 23,680 41,436 -28,135 -11,906 
Merchandise trade balance -77,682 -85,762 -110,058 -128,949 -155,991 -209,321 -303,515 -318,742 
   Exports (f.o.b.) 55,228 59,956 61,482 61,488 61,971 69,907 63,178 68,873 
   Imports (f.o.b.) -132,910 -145,718 -171,541 -190,437 -217,963 -279,228 -366,693 -387,615 
Services (net) 9,075 -2,034 -6,818 -8,377 -11,092 -10,478 -16,385 -8,572 
   Receipts 34,316 26,002 26,470 32,079 4,2236 52,830  51,121 53,013 
   Payments -25,241 -28,036 -33,288 -40,456 -53,328 -63,308 -67,506 -61,585 
Balance on goods and services -68,607 -87,796 -116,877 -137,326 -167,084 -219,799 -319,900 -327,314 
Income (net) -1,684 1,637 4,956 7,432 7,947 11,750 9,117 7,549 
   Credit 3,842 7,752 11,432 14,501 13,448 16,507 14,918 17,504 
   Debit -5,525 -6,115 -6,477 -7,069 -5,501 -4,757 -5,801 -9,955 
Balance on goods, services, 
and income -70,291 -86,160 -111,921 -129,894 -159,137 -208,050 -310,783 -319,765 
Current transfers          
   Credit, of which: 89,162 101,310 130,862 133,197 185,463 257,461 287,771 311,157 
      Workers remittances 58,588 65,541 97,689 100,145 142,683 209,699 231,725 253,552 
   Debit -4,273 -3,606 -4,716 -4,205 -2,646 -7,975 -5,123 -3,298 
B:  Capital account 1,452 1,574 3,107 4,450 7,913 6,231 12,578 15,906 
C:  Financial account -21,540 -25,537 -1,325 -2,362 11,033 18,050 5,898 2,257 
   Direct investment 0 136 -470 362 294 1,829 2,852 6,437 
   Other investment:  assets -32,591 -21,863 -14,009 -10,690 -11,396 -17,675 -18,254 -25,762 
   Other investment:  liabilities 11,051 -3 ,810 13,154 7, 966 22,135 33,896  21,300 21,582 
Table I.2 (cont'd) 
                                                      
3 Ministry of Finance (2011b), Table 1.12. 
4 WTO Statistics database, "Trade Profiles: Nepal".  Viewed at:  http://stat.wto.org/CountryProfiles/ 
NP_E.htm [24/10/11]. WT/TPR/S/257/Rev.1 Trade Policy Review 
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 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 
D:  Miscellaneous items, net 25,591 18,096 12,985 9,501 -6,690 -7,198 3,049 -2,909 
Total Group A through D 20,101 5,677 28,992 10,687 35,934 58,520 -6,610 3,348 
E:  Reserves and related items -20,101 -5,677 -28,992 -10,687 -35,934 -58,520 6,610 -3,348 
Change in Net Foreign Assets 
(-Increase) -16,005 -5,742 -25,598 -5,904 -29,675 -41,280 3,631 -2,925 
Gross foreign exchange 
reserve 130,205 129,896 165,033 165,126 212,624 286,535 268,907 263,130 
Months of import covered 11.5 10.4 11.4 10.2 11.5 12.3 8.7 8.4 
Memorandum items  (% of GDP, unless otherwise indicated)  
Current account  2.7 2.0 2.2 -0.1 2.9 4.2 -2.8 -0.4 
Net merchandise trade   -14.5 -14.6 -16.8 -17.7 -19.1 -21.2 -25.9 -23.7 
   Exports 10.3 10.2 9.4 8.4 7.6 7.1 5.4 5.1 
   Imports -24.8 -24.7 -26.2 -26.2 -26.7 -28.3 -31.3 -28.8 
Services balance 1.7 -0.3 -1.0 -1.2 -1.4 -1.1 -1.4 -0.6 
   Services exports 6.4 4.4 4.0 4.4 5.2 5.3 4.4 3.9 
   Services imports -4.7 -4.8 -5.1 -5.6 -6.5 -6.4 -5.8 -4.6 
Remittances 10.9 11.1 14.9 13.8 17.5 21.2 19.8 18.8 
Exports ( annual % change) 8.8 8.6 2.5 0 0.8 12.8 -9.6 9.0 
Imports (annual % change) 9.8 9.6 17.7 11 14.5 28.1 31.8 5.7 
Services exports (annual % 
change) 29.4 -24.2 1.8 21.2 31.7 25.1 -3.2 3.7 
Services imports (annual % 
change) 29.6 11.1 18.7 21.5 31.8 18.7 6.6 -8.8 
Total external debt stocks 
(US$ million;  end-period ) 3,356.8 3,179.6 3,392.3 3,602.3 3,685.2 3,506 3,456 3,594 
Debt service (% of current 
account receipts) 5.6 4.6 5 4.5 3.6 3.0 2.9 .. 
.. Not available. 
Source: Ministry of Finance (2011b),  Economic Survey Fiscal Year 2010/11 , Vol. I, Table Macro Economic Indicators, 
and Statistical Tables Vol. II, Table 6.9 (B);  and information provided by Nepal Rastra Bank. 
10. Through its effect on Nepal's exports and remitta nces, the global crisis has had a substantial, 
albeit delayed, impact on Nepal's economy.  It led to lower demand for Nepal's exports and to 
Nepalese workers leaving to work abroad, and con sequently the growth of remittances declined.  In 
2009/10, Nepal's current account changed from a surplus to a deficit, although it improved slightly in 
2010/11. 
(a) Composition of trade 
11. The composition of Nepal's export basket has changed in the past decade.  Many traditional 
Nepalese exports lost market share;  for exampl e, between 2004 and 2008, the export value of honey 
declined, on average, by 27% per year.  Following  the termination of the Agreement on Textiles and 
Clothing in 2005, the share of clothing exports in total merchandise exports fell rapidly.  Overall, the 
share of merchandise exports in GDP declined from 10% in 2003/04 to 5% in 2009/10. 
12. While Nepal's traditional exports performed  poorly, some new goods export sectors have 
emerged.  Exports of iron and steel products as well as textiles have increased rapidly (Chart I.1).  
Other rapidly increasing export products include:  te a, ginger, essential oils n.e.s., instant noodles, 
medicinal herbs, large cardamom, and wool products.5 
                                                      
5 Ministry of Commerce and Supplies (2010). Nepal WT/TPR/S/257/Rev.1 
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Chart I.1
Composition of merchandise trade, 2003 and 2010
2003 2010
(a)    Exports (f.o.b.)
Other manufactures
5.7
Manufactures
74.0
Total:   US$652.7 million Total:  US$834.0 million  
(b)    Imports (c.i.f.)
Iron & steel
6.2Chemicals
10.2Transport equip.  
5.5
Manufactures
57.4Electrical
machines  
6.7Textiles & clothing
10.5
Other mining
3.9Fuels
15.6
Non-electrical
machinery
7.5Gold, non-monetary
11.1
Electrical 
machines
9.1Food
17.3
Other semi-
manufactures
7.3Transport equip.  
7.8
Chemicals
9.3Manufactures
56.5Textiles & clothing
3.3
Total:   US$1,801.6 million Total:   US$5,127.5 million Per cent
Manufactures
72.2Textiles
30.8Other 
agriculture
3.9
Iron & steel
5.0
Other  manufactures
3.8Other
1.2Food
19.1
Mining
4.3
Textiles
16.4
Other 
agriculture
4.6Other semi-
manufactures
6.1Mining
4.7Agriculture
23.0
Non-electrical 
machinery
3.8
Source :  UNSD, Comtrade database (SITC Rev.3).Other 
manufactures
6.5
Mining
18.9Other manufactures
7.1
Other 
agriculture
1.4Other semi-manufactures
5.6
Other semi-
manufactures
8.0Other agriculture
1.1Food
20.6
Agriculture
13.4Agriculture
21.9
Mining
19.5
Iron & steel
8.4Food
12.1Iron & steel
14.6Chemicals  
6.8
Chemicals  
4.6
Other mining
3.2Fuels
15.7Clothing
9.0
Clothing
34.6Agriculture
21.7
 WT/TPR/S/257/Rev.1 Trade Policy Review 
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13. The composition of merchandise imports has also changed.  The share of agricultural imports 
fell, mainly due to a lower share of food imports, as did the share of textiles and clothing.  However, 
the shares of transport equipment, electrical and non-electrical machinery, and iron and steel increased;  and imports of gold rose from 0.1% in 2003 to 11.1% of total imports in 2010.  Gold 
imports began to rise after India raised its import tariff;  this tariff increase may have encouraged 
Nepal to import gold from third countries and trade with India.
6  In value terms, petroleum products, 
vehicles, machines, and iron and steel are Nepal's main imports.   
(b) Direction of trade 
14. India is by far Nepal's biggest trade partner.  Under the Nepal-India Trade Treaty, most 
recently renewed in October 2009, both countries agree to exempt primary products originating in the 
other country from tariffs.  India also agrees, on a non-reciprocal basis, to exempt industrial products 
manufactured in Nepal from customs duties.7  In 2010, 65% of Nepalese exports went to India (up 
from 52.4% in 2003), and 57% of Nepalese imports were from India (up from 53%).  However, these 
shares underestimate the reality as there are large am ounts of informal ("unrecorded") trade between 
Nepal and India (to, inter alia , avoid bureaucracy).  According to the authorities, some private-sector 
studies indicate significant informal trade between Nepal and India over the years;  however, it is 
difficult to specify the quantity and value of this in formal trade due to lack of reliable and detailed 
data. 
15. Changes in the export/import basket have been accompanied by changes in the direction of 
trade.  Alongside India's increasing shares as Ne pal's main trading partner, the share of the 
United States as an export des tination has fallen (Chart I.2 ), perhaps reflecting the sharp decline of 
Nepalese garment exports following the termination of the Agreement on Textiles and Clothing.  On 
the other hand, Nepal's exports to some SAARC (S outh Asian Association for Regional Cooperation) 
members, such as Bangladesh and Bhutan have incr eased rapidly, reflecting the influence of the 
SAFTA (South Asian Free-Trade Area) Agreement (Chapter II(4)(ii)(a)), and consequently the 
growing importance of new markets.  The share of Nepal's traditional trade partner – the EU – as an 
import source, has declined, while the shares of the Middle East countries, in particular the UAE, 
have increased rapidly. 
(iii) Supply-side constraints as reflected in sectoral performance 
16. To realize the full potential of internationa l trade, Nepal must address its supply-side 
constraints, and overcome other problems including high transit costs.  
17. As a landlocked economy, trading costs are high.  Nepal is located between India and China.  
To the north, trade with China is obstructed physi cally by the Himalaya mountains.  To the south, 
there are only two main roads connecting India an d Kathmandu, and railway links are negligible 
(Chapter IV(3)(iv)(c)).  The transiting of goods through India to international markets imposes 
significant shipping costs and delays on Nepalese e xporters.  In addition, competing firms in India 
have greater economies of scale and competitiveness, putting Nepalese firms at a disadvantage.   
18. Nepal's weak export performance is also due to su pply-side constraints, which affect its trade 
and economic development, as reflected in  the development of various sectors. 
 
                                                      
6 World Bank (2010). 
7 The Nepal-India Trade Treaty was most recently extended in October 2009. Nepal WT/TPR/S/257/Rev.1 
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Chart I.2
Direction of merchandise trade, 2003 and 2010
2003 2010
(a)    Exports (f.o.b.)
Other Asia  
3.3Asia
59.1
Total:   US$652.7 million Total:  US$834.0 million
(b)    Imports (c.i.f.)
Other Asia  
10.1
EU27
6.4EU27
4.1
China
10.5India
57.0
Americas  3.2
Total:   US$1,801.6 million Total:   US$5,127.5 millionPer cent
Asia
78.8Other Asia  
5.2India
52.4
China
8.4United States
29.1
Other Asia  
9.3United States
6.3
Source :  UNSD, Comtrade database.Thailand
2.0EU27
11.1
Asia
80.9Asia
87.2
Thailand
2.8EU27
9.6India
65.5
Singapore 
6.3China
3.4Bangladesh
5.5
India
53.0
Other  2.8Indonesia 
2.2Indonesia 
3.3
Malaysia
3.3Other   
3.8Other 
2.2Bhutan
2.6
Other  3.3
United Arab 
Emirates
8.9Americas  3.2
 WT/TPR/S/257/Rev.1 Trade Policy Review 
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19. The Nepalese economy has changed considerab ly since 1980.  Agri culture has declined 
significantly as a component of GDP, while services output  has expanded.  In 2008 (the latest year for 
which employment data are available), agriculture  provides employment to about 74% of the labour 
force, and contributes to around 33% of GDP (Chart I.3), indicating a very low productivity level.  
This low productivity can be partly attributed to the internal conflict between 1996 and 2006, as well 
as small-size farming, limited agricultural mechanizat ion, little specialization, and lack of investment 
(Chapter IV(1)(i)).  Lack of access to, and low investment in modern technology, means that 
agricultural production in Nepal is mostly at subsis tence level (Chapter IV).  In addition, due to 
inadequate laboratory capacity and lack of an a ccreditation system to meet the SPS requirements of 
importing countries, Nepal's agricultural exports, such  as ginger, honey, and le ntils, have been banned 
for various periods in India, the EU, and some other key markets.8 
01020304050607080
Agriculture and
forestryMining and
quarryingManufacturing Electricity, gas and
waterConstruction Services
Source:     Nepal Labour Force Survey, Central Bureau of Statistics.Chart I.3
Sectoral performance, 2008
Share in GDP and total employment (%)
Share of total employment
Share of GDP
 
20. The services sector is less affected by political instability, and has been the main driver of 
economic growth in Nepal (Table I.3).  In 2008, a bout 15% of the total employed workforce in Nepal 
was engaged in the services sector, and another 3% in  construction services.  Most jobs in the services 
sector (6%) were in the wholesale and retail trade.  The services sector is now the largest sector in the 
economy in terms of share in GDP, pushed by rapid growth in telecommunications, tourism, and financial services.  Between 2006 and 2009, ser vices imports and exports increased rapidly. 
21. However, industrial growth has been slow, and ne gative in some years.  In 2008, 6.6% of the 
total workforce was employed in the manufacturing sector, which accounted for about 6.8% of GDP.  
The share of manufacturing to GDP is not only sma ll but also declining consistently.  The acute 
power shortages, frequent strikes, transport disrupt ions, and labour disputes, all disrupt industrial 
production.  Hence raising industr ial output and employment, by creating an investment-friendly 
atmosphere, has become a big challenge. 
                                                      
8 Ministry of Commerce and Supplies (2010). Nepal WT/TPR/S/257/Rev.1 
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Table I.3 
Sectoral performance, 2003-11 
    2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11a 
 Annual % change 
GDP growth by economic activity  
(at constant 2000/01 prices)         
Agriculture and forestry 4.7 3.4 1.7 0.9 5.8 3.0 1.2 4.1 
Fishery 12.2 7.1 9.9 3.0 7.3 5.3 3.9 6.8 
Mining and quarrying -0.4 6.8 8.3 1.5 5.5 0.7 3.1 2.1 
Manufacturing 2.2 2.6 2.0 2.6 -0.9 -2.8 1.2 1.5 
Electricity, gas, and water 4.1 4.0 4.0 13.0 1.1 -3.4 5.4 -4.0 
Construction -0.3 2.9 7.7 2.5 5.1 1.0 5.0 3.3 
Services 6.8 3.3 5.6 4.5 7.3 6.0 6.0 3.6 
 Wholesale and retail sale 10.8 -6.2 3.7 -5.6 4.2 5.3 6.7 -0.2 
 Hotels and restaurants 12.7 -5.4 6.3 3.5 6.9 2.3 7.2 7.4 
 Transport, storage, and 
communication 7.5 6.4 2.5 5.0 9.4 7.0 6.1 7.1 
 Financial intermediation 6.2 24.3 24.4 11.4 9.2 2.0 2.8 3.9 
 Real estate, renting and business 
activities -2.1 10.0 6.3 11.8 10.4 1.9 3.6 2.6 
 Public administration and defence -0.6 6.6 6.9 1.3 0.6 7.4 4.4 3.0 
 Education 5.1 9.8 3.7 7.3 6.4 10.8 7.3 2.9 
 Health and social work 6.1 11.3 5.9 6.5 8.5 9.6 4.3 5.9 
 Other community, social and 
personal service activities 13.4 -3.4 3.3 19.5 9.4 12.7 11.8 8.6 
  % 
Composition of GDP by ISIC division         
Agriculture and forestry 35.4 34.7 33.1 32.1 31.2 32.5 34.6 35.3 
Fishery 0.5 0.5 0.5 0.5 0.5 0.4 0.4 0.4 
Mining and quarrying 0.5 0.5 0.5 0.5 0.6 0.5 0.5 0.5 
Manufacturing 8.0 7.9 7.6 7.5 7.3 7.0 6.4 6.1 
Electricity, gas, and water 2.3 2.3 2.1 2.1 2.0 1.6 1.5 1.2 
Construction 6.4 6.5 6.5 6.5 6.9 6.8 6.5 6.8 
Services 46.8 47.7 49.7 50.9 51.5 51.2 50.1 49.8 
 Wholesale and retail sale 15.3 14.1 14.3 13.3 13.5 13.2 13.3 13.8 
 Hotels and restaurants 1.7 1.6 1.5 1.4 1.5 1.5 1.6 1.7 
 Transport, storage, and 
communication 8.9 9.1 9.7 10.0 9.9 9.9 8.7 8.2 
 Financial intermediation 2.7 3.1 3.5 4.1 4.3 4.2 4.2 4.4 
 Real estate, renting and business 
activities 7.7 8.7 9.5 10.2 9.4 8.7 8.3 8.2 
 Public administration and defenc e 1.5 1.7 1.7 1.8 1.8 2.0 2.0 1.9 
 Education 5.1 5.6 5.6 5.9 6.3 6.7 6.8 6.4 
 Health and social work 1.1 1.2 1.2 1.2 1.4 1.5 1.4 1.3 
 Other community, social and 
personal service activities 2.7 2.7 2.7 3.1 3.4 3.6 3.8 3.8 
a Estimates. 
Source:  Ministry of Finance (2011b), Economic Survey Fiscal Year 2010/11 , Statistical Tables Vol. II, Tables 1.4 and 1.5;  
and information provided by Nepal Rastra Bank. 
22. A major challenge for the economy is its en ergy crisis.  Nepal has abundant hydropower 
resources but has been unable to use them.  Electrici ty shortages affect all sectors of the economy, and 
have led to the deterioration of Ne pal's overall productivity.  The Gove rnment's current priority is to WT/TPR/S/257/Rev.1 Trade Policy Review 
Page 10 
  
produce and supply enough electricity to meet demand,  by increasing the level of investment in this 
area and rapidly developing hydropower. 
23. Despite these obstacles, the ongoing restructur ing process continues to seek to reduce the 
country's reliance on agricultural output in favour of production in both industry and services.  The 
Government adopted measures to liberalize Nepal' s investment regime to  create a better business 
environment (Chapter II). 
(iv) Investment 
24. Nepal's FDI inflows have been very limited (Tab le I.4), mainly due to political instability and 
the related weak infrastructure, power shortages, poor labour relations, and the relatively high cost of 
doing business.  As a result, Nepal ranked 133rd out of 141 economies in 2009 (136th in 2008) in 
UNCTAD's Inward FDI Performance Index ;  and 140th in the Inward FDI Potential Index  in 2008 
(139th in 2007).9   
Table I.4 
Overview of foreign direct investment, selected years 
(US$ million and %) 
 1995-2004 
(annual 
average) 2005-2007 
(annual 
average) 2008 2009 2010 (%) of gross fixed capital 
formation 
1995-2004 2010 
FDI flows inward 9 1 1 39 39 0.8 1.0 
 1995 2000 2008 2009 2010 (%) of GDP 
1995 2010 
FDI stocks inward 14 72 127 166 205 0.3 1.3 
Source:  UNCTAD (2011), World Investment Report 2011, Country Fact Sheets – Nepal,  New York and Geneva. 
25. Doing business in Nepal is relativel y difficult, and Nepal ranks 116th (out of 178 economies) 
in the World Bank's Ease of Doing Business 2011 Index  (112th in 2010).  It takes on average 31 days 
to start a business, 424 days to obtain construction permits, 735 days to enforce a contract, and 5 years 
to close a business.  The costs of key inputs, such as telecommunication and transportation costs 
(Chapter IV) are also high.  On the other hand, Nepal's performance is moderate in areas such as 
protecting investors (74th), and getting credit (89th), and ranks quite high in registering property 
(25th out of 178 economies).10 
(3) OUTLOOK  
26. According to the IMF, Nepal's real GDP grow th rate is expected to be 3.5% for 2011 
(compared with 4.6% for 2010), with an inflation ra te of 9.5%, and a current account deficit of 0.9% 
of GDP.11  The Government estimated a real GDP growth  rate of 3.5% for FY2010/11, and the Asian 
Development Bank (ADB) estimated real GDP grow th for FY2011 at 3.8%, to increase to 4.0% in 
FY2012.  The ADB attributes the lower growth rate in FY2011 mainly to the protracted post-conflict 
transition process, but a modest pickup is for eseen in FY2012, supported by tourism and a more 
active construction sector.12 
                                                      
9 UNCTAD (2010). 
10 World Bank and IFC (2011).  
11 IMF (2011). 
12 ADB online information.  Viewed at:  http ://www.adb.org/documents/ books/ado/2011/ado2011-
nep.pdf [19/10/2011]. Nepal WT/TPR/S/257/Rev.1 
 Page 11 
 
 
27. Recognizing the role of trade in economic gr owth, the Government released a new trade 
policy in 2009 and a new industrial policy in 2010.   The new trade policy aims at making exports 
competitive, pursuing product development, export promotion, and trade facilitation measures.  The 
new industrial policy aims at promoting industrial activity and increasing its contribution to GDP, by 
improving Nepal's investment e nvironment and promoting SMEs (Chapter IV(2)(ii)).  The 
Government believes that trade can generate positive effects on resource mobilization, economic 
development, and poverty reduction.  However, wh ether Nepal can achieve these objectives, depends 
to a large extent on its political situation and whether the Government can handle the domestic 
supply-side constraints.  With continued law a nd order problems, strikes, and uncertainty about 
private property, business confidence is expected to  remain low, and infrastructure bottlenecks will 
remain.  The authorities state that, as a country under transition, the Government is trying to address 
these issues, and to complete the transition process as soon as possible.