Economic liberalization in Nepal

The meaning of liberalization is to liberate the economy form the clutch of the government and
provide the platform for the enhance role of the private sector in economic activities. Liberalization
seeks to see the transformed role of the government from ruler to facilitator in order to strengthen
the market forces in resource allocation. It refers to the opposite of economic regulation by the state
and includes deregulation of markets, deregulation of prices, privatization of PEs, delicensing and
removal of quota system in foreign trade.
According to World Bank, “Economic liberalization means freeing of prices, trade and entry to
markets from state control while stabilizing the economy”. It is the tool for non-interventionist
approach to development. And it is pursued through reducing public expenditures, privatizing
government owned-enterprises, deregulation and delicensing and curtailing grant and subsidy
provided by the government to different sectors of the economy.

Nepal and economic liberalization

The rapid process of liberalization began in Nepal when for the first time she faced the problem of
BOP deficit in 1982/83 due to the excessive liquidity pumped into the economy by the then
government in order to win the referendum. It devalued the Nepalese currency vis-à-vis to US dollar
by 14.7 percentage point in 1985 in order to overcome to BOP deficit problem. But it could not
solved the problem, therefore, the government approached to the IMF and World Bank for their
assistance in order to absorb the excess liquidity and for that matter 18th month stand-by
arrangement program was implemented as a tool of stabilization. From 1987, Nepal entered into the
W/B and IMF initiated reform programs named under Structural Adjustment Facility – SAF and
Structural Adjustment Program – SAP in order to break the supply side bottlenecks.

The W/B defines SAF as non-project lending to support programs of policy and institutional change
to modify the structure of the economy so that it can maintain both its growth rate and viability of its
balance of payment in the medium term. The loans are geared to seven main areas:
1.supply side reforms: Improving the efficiency with which market operates
2.price reforms
3.changing the price of tradable goods relative to the non-traders
4.getting the correct terms of trade between agriculture goods and industrial goods
5.reducing the size of the public sector
6.financial reforms
7.tax reforms

Types of liberalization
•internal liberalization: Real/fiscal and Financial sector liberalization
•External Liberalization: Trade and Exchange rate liberalization

External Liberalization:
The external liberalization encompasses the liberalization of current and capital account. The current
account liberalization works particularly through trade liberalization, which is advocated for
accelerating growth through specialization. The external trade, as it is argued, pierces the problem of
narrow domestic market and thereby leads to generation of larger employment and higher income
than it would otherwise be. The external trade, then, is envisaged as the outlet to break the vicious
circle of low income, low demand, low production, low employment and low income.

Reforms in trade sector:

•Since the inception of plan development concept in 1960s Nepal adopted the Import Substitution
Industrialization (ISI) trade policy and accordingly foreign exchange rate policies were pursued. In
the period, the nature of the trade was dichotomous- more or less free with India and controlled with
the rest of the world. In other words, imports form overseas countries were controlled through tariff
and non tariff barriers and exports were more or less freed.
•In the early period of 1990, trade policy had been changed from ISI policy to export led economic
growth strategy. Stringent restrictive barriers in the form of high tariff wall and quantitative
restrictions were rationalized. Imports were freed to assist export. The reforms in the trade sector
were sought to put in place through the enhancement of Industrial Policy, 1992 and Foreign
Investment and Technology Transfer Act, 1992. These two acts fully made current account
convertible and capital account partially convertible. The major reforms undertaken in the trade
sector were as follows:

Reforms in Import Regime

a.Reforms in non-tariff barrier front
•Open General License (OGL) system replaced the quantitative restrictions. Prior to the OGL, Nepal
had followed quantitative restriction (QR) policy in order to protect the domestic industries from the
foreign industries, facilitate import of raw materials and intermediate inputs required for domestic
production by local and export – oriented industries, conserve the foreign exchange and discourage
the deflection of good to India.
•But this QR policy was not favored by multinationals such as W/B and IMF. So, when Nepal
approached for their help in order to overcome the excess liquidity problem in mid 1980s, they
pressurized to give up QR policy for liberal trade policy.
•An import Auction License System (IALS) replaced the administrative quota system in July 1986 for
88 commodities and later on, with the successful conclusion of stand-by arrangement program, SAL
and SAP, entire import goods except some contraband items were put under the OGL umbrella in
July 1993.

b.Reforms in tariff front

•With the replacement of quota system by auction system and later one by OGL system, Nepal had
only one tariff measure left in her hand in order to curb the import in the trade regime. Nepal had
imposed high custom tariffs in order to preserve the competitive capacity of the domestic industries
on the one hand and on the other, a. raise revenue, b. curtail luxury consumption, and c. preserve
foreign reserves and thereby maintain BOP equilibrium at satisfactory level. But advocates of free
trade opine that these objectives are better realized through income tax and subsidy for domestic
production than through custom tax.
•Both tariff rates and slabs have been slashed down. Maximum tariff rate has been reduced to 80%
from 300% and tax slabs have been curtailed to 6 categories i.e. 5, 10, 20, 30, 40, and 80
percentage.

Reforms in Export
•In the past Nepal has followed export promotion strategy such as export subsidy, dual exchange
rate, bonus system etc. Though these measures are beet effective to diversify Nepalese trade, they
are discriminatory and proved beneficial to business house rather than common mass.
•Thus with implementation of adjustment programs bonus and subsidy facilities were replaced by
Bonded Warehouse, and duty draw back system. Exports are tax exempted except 0.5 percent.
•Sales tax is replaced by VAT which does not tax export.
•Introduced new Trade Policy 1992.

Reforms in Foreign Exchange

Current Account Reform
•With effect form March 1992 foreign exchange is made partially convertible. From 1993 it made fully
convertible.
•The foreign exchange market is converted to floating system but it is still pegged with Indian
currency.
•Commercial banks are allowed to keep their balance abroad.

Capital Account Reform

•Effective from 1991, Nepalese working in international agencies based in Nepal can keep there
account in convertible currencies if they receive salary in such currency similarly Nepalese working
abroad also can keep there account in convertible currency in local bank.
•Commercial Banks can provide loan to exporters (related to trade finance) in foreign exchange and
central bank started to refinance area to commercial bank in US currency from 1998.