Guidance

Overseas business risk: Nepal

Published 28 February 2022

Information on key security and political risks which UK businesses may face when operating in Nepal.

1. Political and Economic Overview

Located between India and China, Nepal is the 49th most populous country in the world. The Nepalese economy was ranked 97th globally in size in 2020. The World Bank put Nepal’s GDP at

$33.66 billion in 2020. As a result of the impact of Covid19, the economy contracted by about 2% in 2020 with severe impact in the tourism sector. Growth recovered in 2021 growing by about 4% and is projected to grow at 4-5% in 2022. The growth rate in 2019 (pre-Covid19) was 7%.

Nepal’s ten-year armed conflict ended in 2006 with the Comprehensive Peace Accord. This led to the monarchy being abolished and the Maoist Party joining the mainstream politics in a multiparty political system. Elections for a Constituent Assembly to draft a new constitution for Nepal were held in 2008. After four changes of government, the Constituent Assembly was dissolved in May 2012 having failed to agree a new constitution. Fresh elections were held in November 2013 for the second Constitution Assembly. The second Constitution Assembly promulgated the constitution in September 2015. Since September 2015 there have been five changes in Government. The current government is led by the Nepali Congress forging an alliance with the Communist Party of Nepal (Maoist-Centre), CPN (Unified Socialist), Janata Samajbadi Party and Rastriya Janamorcha Party. Deuba led his five-party coalition came into office on 13 July 2021 after the Supreme Court reinstated the Lower House and appointed Deuba as PM that was dissolved by his predecessor K P Oli. Out of the seven provinces, the Congress, the Maoist Centre and the CPN (Unified Socialist) lead two each while the Janata Samajbadi Party heads Province 2.

Nepal’s economy is predominantly based on agriculture which contributes to 23% of GDP and about 63% of employment. Industrial sector is in decline and accounts for 13.7% while services account for 58.1% of GDP. Remittances from foreign employment provide critical foreign reserves to pay for the widening trade deficit (38% of GDP in 2021) and is the primary driver of the services sector. According to the World Bank, personal remittances received accounted for 24% of GDP in 2020, the highest in South Asia. In the first six months of Nepal FY 20/21, remittances were up by 6.7% despite a prediction of steep decrease due to worldwide effects of Covid19. In recent months (post July 2021), remittances have been declining for several months in a row and has put pressure on forex reserves. Nepal government’s 2021/2022 budget was revised to ~£10 billion of which 64.4% is to be financed by revenue collection, 17.4% from foreign loans, 14.6%% from domestic loans, and 3.6% from foreign grants.

Infrastructure in Nepal is poorly built and maintained, with weak coverage across all sectors. As Nepal rapidly urbanises, the scale of investment required in basic services cannot keep up with the increased demand. Most construction projects face severe delays. 24.2% households in Nepal live more than 2 hours away from all- weather road, according to Nepal’s most recent Living Standard (Nepal Living Standards Survey III).

Nepal’s theoretical potential in hydropower is estimated at about 83,000 MW and its economically feasible potential of about 42,000MW respectively ^{[footnote 1]}, but current installed hydropower capacity is only 2,036MW against peak electricity demand of 1,600MW. In addition to hydropower potential, Nepal has abundant resources of other renewable energy sources such as solar power, wind power, biomass that can be commercially harnessed. 34% of total sold electricity is owned by state owned Nepal Electricity Authority, 29% by the private sector and remaining 38% is fulfilled by importing electricity from India as of 2019. With increased generation, Nepal is power surplus at least in the wet months and expected to be have large surplus hydro energy in the near future. Expanding domestic demand and finding market for surplus power is an economic imperative.

Although certain sectors (such as certain services, primary agriculture, poultry) are closed off to FDI and there is a minimum investment threshold (half a million dollars) for FDI, investment opportunities exist in various sectors, including infrastructure, energy, tourism, construction, and ICT. However, FDI approval process is bureaucratic and foreign investors also complain of delays and difficulties in repatriation of profits and their investment money when winding down business in Nepal. Nepal has signed a Power Trade Agreement with India and has MoUs with Bangladesh and China for Power sector cooperation all targeted towards export of surplus electricity from Nepal along with support for power generation and transmission. Nepal has preferential trade agreements in place with both India and China.

Localised strikes and general shutdowns (‘bandhs’) have become less common among agitating political parties in recent years, although there are still some instances across the country. Projects are often politically motivated, with a lack of transparency around deals made, and used as opportunities for rent seeking. Policies prohibit the private sector, and government agencies lack resources and capacity to progress investments.

2. Human Rights

Nepal has signed or ratified all major international human rights treaties and conventions. The protection and promotion of human rights is written into Nepal’s Constitution. Nepal is a broadly free and open society. There are some human rights concerns in Nepal, including discrimination, violence against women, and legacy issues from the 1996-2006 conflict.

Nepal has ratified 7 out of the 8 International Labour Organization’s (ILO) fundamental conventions that safeguard rights at work. Labour rights are enshrined in various acts, including the Labour Act (2017), Trade Union Act (1992), Bonus Act (1973), Foreign Employment Act (2007), Child Labour (Prohibition and Regulation) Act (2000) and The Country Penal Code (2017). Despite regulatory frameworks, child labour is still a very common practice. Human trafficking and other forms of forced labour are also a concern.

3. Bribery and Corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.

In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.

Transparency International’s Corruption Perceptions Index (CPI) remained unchanged for Nepal in 2021 with a ranking of 117th out of 180 countries with a score of 33/100. This puts Nepal behind Bhutan, India and Sri Lanka and Maldives while ahead of Pakistan, Bangladesh and Afghanistan in South Asia. Nepal ratified the UN Convention against Corruption in 2011. The Prevention of Corruption Act and Public Procurement Act 2007 and Anti-Money Laundering Act 2008 are the key elements of the legal framework criminalising corruption. The Commission for the Investigation of Abuse of Authority (CIAA) is tasked with investigating and prosecuting corruption in the bureaucracy. To meet the requirements of the Financial Action Task Force (FATF), Nepal adopted additional measures to tackle money laundering and counter terrorist financing in 2013.

4. Terrorism Threat

Please visit the terrorism section for more information.

5. Protective Security Advice

The Centre for the Protection of National Infrastructure also provides protective security advice to businesses.

6. Contact

For further information regarding doing business with Nepal, please contact the Department for Business and Trade team in Nepal.

1. National Energy Strategy of Nepal (2013), WECS ↩