UNIT 2:

MACRO ECONOMIC
ENVIRONMENT
Components of Economic environment
• Being an economic entity, economic environment is the most
important environmental force for a business. Components of
economic environment are:
• Economic systems
• Economic structure
• Economic policies
• Economic condition
• Economic integration
• All these economic forces provide opportunities and threats to
the manager. The general economic conditions and trends are
crucial for managers for the success of business. How the
scarce resources of land, labor, and capital are being allocated
and the manner in which they are consumed is very important
for business.
Economic systems
• Economic system is a mechanism which deals with the
production, distribution and consumption of goods and
services in a particular society and comprises of people,
institutions and their relationships. It addresses these
questions:
• What to produce? How to produce? And in what quantities
and to whom to produce?
• The economic system around the globe can be
categorized as capitalist, socialist and mixed.
• Capitalistic/ Market/ Free Economy
• Based on private ownership of the factor of production
• Under this what to produce is determined by consumers, how to produce is
determined by producers and for whom to produce is depends upon the
purchasing power of customers. The price of the product is determined by the
interaction of demand and supply.
• The role of consumer is vital
• The main motive of the businessmen is profit.
• Socialist/ Command/ Planned economy
• Government controls the economy
• The state decides the use and distribution of resources.
• The government decides what, how and for whom to produce
• Command economy has only public sector
• Mixed economy
• Combines elements of the market and command economy
• It has both public and private sectors.
• Some business are owned by private sectors while some are owned by public
sectors.
• Many economic decisions are made in the market by individuals but
government also plays role in the allocation and distribution of resources.
• It attempts to overcome the disadvantages of the market economy by using
government intervention to control different markets
• Nepal has a mixed economic system.
Dimensions of an economy
• Dimensions of an economy reflect the economic
development of a country which is determined by several
factors which collectively determine the health of an
economy. Therefore, for a proper analysis of an economy,
its four important interrelated dimensions need to be
analyzed.
1. Economic dimension
2. Socio-economic dimension
3. The industrial dimension
4. The economic development dimension
1. Economic Dimension
• Economic dimension reflects the economic performance
of a country which is indicated by the following variables:
a. Gross Domestic Product(GDP)
• Represent the monetary value of all the goods produced
within a nation over a specific period of time.
• Contribution of Agricultural sector to GDP is
31.7%(declining trend) while that of non-agriculture sector
is 68.3%(gradually increasing) in the fiscal year 2015/16
as compared to 33% and 67% for agricultural and
non-agricultural sector respectively in between FY
2011/12 and FY 2015/16.
• Low growth rate of these sectors is highly affected by
earthquake and difficult supply situation as a result of border
obstructions. The destructive earthquake and the aftershocks
has resulted in huge human, physical and natural resources
loss. It has affected 31 districts of which 14 districts are highly
affected. The government mission to attain the growth rate of
7%-8% in order to graduate from its current status of LDC to
the status of developing nation by 2022 seems almost
impossible because of devastating earthquake.
• Nepal’s per capita income is among the lowest in the world.
• Nepal’s per capita income is second lowest in south Asian
region after Afghanistan.
• There is a wide disparity in per capita income found (terai, hilly,
urban, rural income highly varies)
• Barter system still exists.
• NEPAL GDP
b. Sectors like tourism, infrastructure, real estate,
agriculture and finance have been seriously affected due
to earthquake, political instability, tarai-madhesh andolan. All
these forces are the major challenges for economy to be
more healthy.
c. Poverty: The gap between the rich and the poor has further
widened. During the last 15 years, nominal income of the
poorest 10% increased by 375% while that of the richest
10% of population by 512%. Reducing this disparity between
the poor and the rich is the bigger challenge. The
unfortunate earthquake has driven approximately 3% of the
population back to poverty.
d. Unemployment: In Nepal , 78.3% of 10 years and above
individuals are employed, 1.8% unemployed and remaining
19.9 % are economically inactive(source: Nepal Living
Standard Survey, 2010/11). Unemployment is favorable for
business firms due to lower wage cost and at the same time
it is unfavorable because there will be less demand for
goods and services.
• The Multidimensional Poverty Index looks at ten indicators,
including child mortality, years of schooling, school attendance,
nutrition, cooking fuel, improved sanitation, improved drinking
water, electricity, asset ownership and flooring and roofing. If a
Nepali is deprived in at least three of these areas, then she/he
is considered poor.
This statistic shows the unemployment rate in Nepal from 1999 to 2019. In 2018
and 2019, the unemployment rate in Nepal was around 1.35% and1.41%
respectively.(Source: Statista 2020)
e. Consumer Price Index(CPI): reflects the cost of living
or inflation. Inflation in Nepal has sored in FY 2015/16
as compared to previous year due to uncomfortable
supply situation in Nepal. Average inflation rate for the
last 5 years has been 9.3%. Maintaining inflation rate
within desired limit has remained one of the challenge.
(the inflation rate in Nepal was recorded at 6% in March,
2018, source: Trend Economics)
f. Large number of population is still far away from access
to institutional finance. Percentage of people using it
is just 40% in spite of efforts made to extend services to
remote areas by financial institutions.
g. Migration and Remittance: each year about 500,000
labor forces are entering the labor market but there is
no adequate employment opportunities within the
country. This has forces the workers to migrate for
foreign employment. It has resulted in higher remittance
inflow. However its utilization has been mostly in
unproductive sectors(spent on imported items). This has
further increased trade deficit. In addition country is
facing labor shortage for reconstruction process after
devastation.
• Remittances have become a major contributing factor to
increasing household income as well as to the national
GDP. In 2013, remittance inflows topped US$5 billion, or 25
per cent of the national GDP. This placed Nepal third among
the countries receiving the highest proportion of remittances
in terms of GDP (Source:ILO)
• More than 1,750 Nepalese leave the country daily for foreign
employment, according to a latest data available at the
Department of Foreign Employment (DoFE). A total of
639,167 aspirant migrant workers left for various countries in
the last fiscal year 2016/17, up from 418,713 in the previous
FY 2015/16. (Source: Kathmandu post, Sep 18, 2017)
• https://myrepublica.nagariknetwork.com/news/labor-migration-post-covid
-19/
2. Socio Economic Dimension
• Indicates the demographic features which affect the economy
directly or indirectly. Some of the socio economic variables are:
a. Population: most influencing socio-economic element. the size of
the population reflects the market potentiality. Population of
Nepal:
Nepal population density (no. of people per unit area)
• Nepal population density is 203 people per square kilometer as of
Oct 2020. (Source: United Nations Statistics Division)
• As per the population census 2011, CBS:
• Highest population density: Kathmandu(446 person per square
km)
• Lowest population density: Manang (3 person per square km)
• Terai region: 50.2%
• Hilly region: 43.1%
• Himalayan region: 6.7%
• Rural population: 79%(2020, worldometer)
• Urban population: 21%(2020, worldometer)
• Number of impacts like concentration of business growth of
market, lack of worker in rural area, emergence of urban teens are
• The current population of Nepal is 29,278,242 as of Saturday, October 10, 2020,
based on Worldometer elaboration of the latest United Nations data.
• Nepal 2020 population is estimated at 29,136,808 people at mid year according to
UN data.
• Nepal population is equivalent to 0.37% of the total world population.
• Nepal ranks number 49 in the list of countries by population.
• The population density in Nepal is 203 per Km2 (526 people per mi2).
• The total land area is 143,350 Km2 (55,348 sq. miles)
• 21.4 % of the population is urban (6,226,233 people in 2020)
• The median age in Nepal is 24.6 years.

(Population figures are estimates Worldometer data based on the latest United
Nations data)
Demographic figures
• As of 1 January 2018, the population of Nepal was
estimated to be 29,362,095 people.
• This is an increase of 1.18 % (343,292 people)compared
to population of 29,018,803 the year before.
• In 2017 the natural increase was positive, as the number
of births exceeded the number of deaths by 421,353.
• Due to external migration, the population declined by
78,061.
• The sex ratio of the total population was 0.980 (980 males
per 1 000 females)which is lower than global sex ratio.
The global sex ratio in the world was approximately 1016
males to 1000 females as of 2017.
Age and gender structure
• As of the beginning of 2018 according to our estimates Nepal
had the following population age distribution:
• Population under 15: 34.6%
• Population between 15 and 64 years old: 61.1%
• Population 65+: 4.4%
• The total dependency ratio of population in Nepal is 63.7 %
(This ratio shows that the pressure on productive population in Nepal is
relatively high.)
• Child(under 15) dependency ratio in Nepal is 56.6 %.
• Aged(65+) dependency ratio in Nepal is 7.1 %.

(Source: latest demographic and social statistics by United Nations Statistics

Division)
b. Employment trends:
• One of the major economic indicator
• Labor force in Nepal is gradually shifting from agricultural sector to
other sectors.
• Variables in employment trend:
i. Rural migration
ii. Increase in foreign employment
iii. Increase in skilled manpower
iv. New employment opportunities
v. Shift from traditional occupation
vi. Fair treatment
c. Labor market issues:
• Market where employees seeking job and employers interact.
• Employer compete with each other to hire the best.
• There are many issues governing labor market in Nepal:
• Employment dominated by agriculture sector
• Higher number of labor in the work force(economically active population:
12.03 millions of which 6.39 millions female and 5.65 millions male;
children working in agricultural sector, girls more than boys)
• Migration for foreign employment
• Prevalence of child labor(2.1 millions children of age 5 to 14 are
economically active of which total child population is 6.2 millions)
• High dependency on informal sector(3 quarter of the worker continue to
earn living from agriculture sector which is mostly informal, informal
foreign employment to India is also quite high)
d. Migration and foreign employment
• International migration is significant in transforming the country’s
economic, social and cultural aspects.
• Nepal has emerged as a remittance economy.
• Major destinations for foreign employment includes
Malaysia(1096073), Qatar(1096073), Saudi Arabia(720856),
U.A.E(436422) – Department of Labor 2015/16.
• There has been a huge inflow of remittance
• 3.8 million got the work permit abroad(excluding India) from
1993/94 to 2014/15 which represent 14 % of the population then.
• Remittance contributed 10.9% share of GDP in 2003/04 and 27.7%
in 2014/15
• According to the World Bank, Nepal holds the 2nd position among
the countries to receive highest proportion of remittance to GDP in
2016.
• However, the amount of remittance has decreased by 6.7% in 2016
as compared to previous year.
• Challenges for foreign employment
• Productive utilization of resources
• Use of formal remittance services
• Skill development of the migrant workers
• Safe and decent employment
• Latest IT system to maximize the effective flow of remittance(cards,
mobile telephones…)
• Legal and administrative mechanism
• Health related concerns and issues
• Social cost like family disintegration, children growing up without
proper parent care and lack of care for senior citizens.
• Absence of HR for agriculture.
3. Industrial & Agricultural Dimensions
• Industrial Sector
• Industrial sector plays prominent role in rapid economic
development in the country.
• History of modern industrialization:
• Biratnagar Jute Mill 1936
• Morang Cotton Mill 1941
• Morang Sugar Factory 1946
• Raghupati Jute Mill 1946
• Juddha Match Factory 1946
• After the establishment of democracy in 1950, the concept of
planned economic development was adopted and the pace of
industrial development is found to be accelerated in Nepal.
• Until mid-February of FY 2014/15, the total no. of industries in
Nepal reached to 6328 with employment to 5,12,159 persons.
• Structure of Nepalese Industrial sector(Industrial
Policy, 2010)
1. Classification based on nature of output and services:
a. Agro and forest based industries
• Silk production, horticulture, fruit processing, animal husbandry, agro
forestry, leasehold forest
• Timber and non-timber(medicinal herbs) products
• During Rana period timber export to India was the major source of
revenue
• Since 1985/86 it has stopped
b. Manufacturing industries
• Produce goods by utilizing raw materials, semi processed, by-products,
waste product…
• Foods, beverages, tobacco, leather, wood, chemical, rubber, plastic,
metal products, furniture, textile, printing & publishing, transport
equipment…
• The production of cardamom has increased by 25 to 30 percent this year. This
resulted in higher exports this year.
• Nepal’s exports grew 13% in first half of Fiscal Year 2017/18
• Petroleum products, semi-finished iron products and gold were the
country’s top imports in the first six months of FY2017/18
c. Export oriented industries
• Export 51% of their output
• Carpet industry(USA, Germany, UK, Canada, Italy)
• Garment Industry(…, Japan, France)
• Pashmina
• Leather & leather products(USA, japan, Pakistan, Italy, Netherlands)
• Handicraft(…, India, China, Tiwan)
d. Energy based industry
• Generating energy from resources like solar, water, wind, coal, gas,
bio-gas, natural oil
• 6000 rivers
• 45000 km long streams
• Approximately 15% population have access to electricity, in rural 5%
access
• Source of energy: 88% traditional, 12% modern
• Nepal has one of the most expensive power tariffs in the world despite
having the huge free water resources.
e. Mineral industries
• Extraction of minerals
f. Tourism industries
• Lodging, hotel, motel, restaurant, resort, travel agency, trekking,
paragliding, golf, horse riding, bungy, water rafting, canoying, bird
watching(8%)…
• Nepal remained close to outside world till 1950
• Located between two fastest growing economy. Main theorist
products: city culture, mountain environment, wildlife adventure
• Nepal is rich in Natural heritage(majestic Himalayas, bio-diversity,
national parks, lakes and glaciers…)
• 8 of the 10 tallest mountain in the world
• Mount Everest, Tilicho lake 5292 meters altitude to name few
• Nepal is rich in Cultural heritage(colorful festival, art, craft,
language, living goddess Kumari, Gurkas, Sherpas, world heritage
sites…)
• Tourism vision 2020 objective is to increase international tourist
arrival by 2 million.
• However due to 2020 pandemic, the target seems to be
too much ambitious. Like other sectors of the economy,
tourism sector is also badly affected by the situation.
 Others: 9.6%

Pilgrimage: 14.4%

Entertainment: 60%
Trekking & mountaineering: 16%
• Problems in tourism sector:
• Undesirable environmental effect
• Poor tourist safety
• Dollar spending low
• Ineffective marketing(68% come on their own initiative)
• No regional balance(benefits reaped by few urban cities and
mountaineering areas)
Nepal should establish itself as a premium and exotic tourist
destination
g. Construction industries
• Road. Bridge, ropeway, railway, trolley, tunnel, flyover, commercial and residential
complex construction.
• Construction industry is one of the important sectors in any economy.
• Its contribution to the GDP and employment is very significant and plays important
role in the development of infrastructure that is essential for the development of all
other sectors.
• In Nepal, about 10 percent of the GDP is contributed by the construction sector and
is one of the largest employers.
• It is estimated that this sector is creating employment opportunities to more than one
million people in the country.
• Nepalese Contractors are now saving a huge amount of foreign currency from its
flight to abroad by foreign contractors.
• So it is contributing as export industries to the national economy. Therefore any
enhancement made to this sector will have positive impact on the national economy.
• In developing countries about 60 percent of the national budget is allocated on
development works and significant portion of the development budget is allocated to
construction sector in Nepal.
• Access to education and health which are also the indicators of economic
development, can be vastly improved through better road, electricity,
communications, water supply, and sanitation services.
• Problems:
• Moonlighting consultants
• Excessive regulations(labor, social, pre-qualification of contractors for public works)
• Unhealthy competition
• Pollution
h. Information and Communication Industries(ICT)
• Industries involves in providing information, knowledge, communication
services by using different technology.
• The development of ICT in Nepal is said to be started establishment of
Nepal Doorsanchar Company - a government owned entity established in
early 1913
• The GSM and CDMA service was then introduced in 2003 and 2005
respectively. This lead to access of mobile phones by many of the citizens.
• In the year 2007 3G network was introduced. Nepal was very fast to
introduce 3G among the South Asian countries
• Information Technology (IT) development pace of Nepal is on rise
currently. Nepal has been able to come up a far way from 1971 when the
first computer was introduced in Nepal
• Information Technology formally started in 2002 after the establishment of
According to a study done by Nepal Telecommunication Authority the
mobile penetration ratio for Nepal is 110.25%
• A company named Merchantile Communications introduced internet to
Nepal in 1994 partnership with the then Royal Nepal Academy of Science
and Technology (RONAST)
• Currently as according to a data of 2015, the internet penetration rate is
46.64% (Nepal Telecommunications Authority, 2016).
i. Service Industries
• Printing, consultancy, construction business, public transportation,
hospital, nursing home, educational and training institutions,
insurance, financial institutions, air service…
• The service sector has been emerging as a vibrant sector in the
economy with 51 per cent contribution to the gross domestic
product (GDP). However, economists have said that service sector
growth cannot be sustained for long unless it is linked with
the manufacturing and agriculture sectors.

• Agriculture (Primary)

• Manufacturing (Secondary)

• Service (Tertiary)

Economic survey FY 2019/2020

2. Classification based on Investment
a. Micro enterprises
• Fixed capital 0.2 million except land and building, annual transaction
less than 2 millions
b. Traditional and other cottage industries
• utilizing special skill or local raw materials, labor intensive, highlight
national tradition, art and culture
c. Small industries
• Fixed assets of upto 50 millions rupees
d. Medium industries
• Fixed assets between 50 millions and 150 millions rupees
e. Large industries
• Fixed assets of more than 150 million
• Industrial Districts/ Estates in Nepal
Industrial Estates Year of Total no. of Number of
establishment employment industries in
operation
1. Balaju Industrial District 2016 B.S 3506 97
2. Hetauda Industrial District 2020 B.S 2415 63
3. Patan Industrial District 2020 B.S 1586 102
4. Nepalgunj Industrial District 2030 B.S 867 35
5. Dharan Industrial District 2029 B.S 706 24
6. Pokhara Industrial District 2031 B.S 1945 61
7. Butwal Industrial District 2032 B.S 1480 62
8. Bhaktapur Industrial District 2035 B.S 825 35
9. Birendranagar Industrial District 2038 B.S 163 22

10.Gagendranarayan Singh 2044 B.S 29 2

Industrial District
Total 13522 503
• Source: www.idm.org.np
Special Economic Zone(SEZ)
• Government of Nepal has adopted the concept of Special Economic Zone (SEZ) to
attract foreign and national investors to invest and establish industrial and business
units, which will contribute in increased promotion of export .
• Special Economic Zone (SEZ) is the advanced concept of Export Processing Zone,
and is also called the "Free Trade Zones“
• The industries in SEZ enjoys the complete service facility to produce goods of
international standard of which at least 70% has to be exported.
• SEZ has come into operation in Bhairahawa
• SEZ is underway in Simara
• SEZ feasibility studies completed in Dhangadi, Pachkhal, Jumla, Kapilvastu,
Biratnagar
• SEZ pre feasibility study completed in Nepalgunj, Nuwakot
• On-going Feasibility study but now underconsideration in Jhapa
• SEZ feasibility studies taking place in Dhanusha, Rautahat, Siraha, Gorkha,
• The main objectives of creating "Special Economic Zone (SEZ) are:
• To develop competitive capacity of export oriented goods and services in the international
market.
• To attract Foreign Direct Investment (FDI).
• To attract domestic and foreign capital and advanced state of-the-art technology by providing
appropriate facility for the industry through one door.
• To widen the export trade all over the world.
Special Economic Zone
• In FY 2018/19, the entire infrastructure work of
Bhairahawa Special Zone has been completed, and
permissions have been given to 22 industrialists. Of them,
one industry has already begun its test production, 5
industrialists have already started to construct the
physical infrastructure, and remaining others have
expressed commitment to start the work quickly.
• Infrastructure Construction work of Simara Special
Economic Zone has been geared-up.
• The process of establishing Inter-country Economic Zone
has been forwarded by forming a Joint working team.
Import substituting industries
• Substitution of foreign products by domestic supply.
• Implies three things:
• Creation of new source of supply or production capacity in
the country
• Expansion od domestic production
• Protection of domestic industries against foreign
competition
• Over the years considerable import substitution has taken
place in many important areas – pharmaceutical,
electronics, cement, paper, sugar etc.
• Pharmaceutical Industries
• Approximately 30% requirement met by domestic industries
• Balance is met mainly by India followed by USA, UK, Japan, China,
Australia
• Royal Drug Ltd is the pioneer in this field with public sector
undertaking
• At present there are 40 industrial units in Nepal manufacturing
different types of drugs.
• Electrical and Electronic Industries
• According to annual survey of manufacturing establishments,
2008/09, there were about 438 firms operating in the formal
sectors, of which 127 engaged in the production of electrical goods
and rest in the electronic business.
• Nepal holds good prospect in the development of electronic
assembly industries even catering to export markets
• Lower cost labor gives additional competitive advantage
• Other import substituting industries
• Tobacco industry(approx. 78 units operating in Nepal)
• Cement industries(two big public sector cement factories – Hetauda and
Udaypur cement)
• Industries producing chemical products(soap. Detergent, plastic, match,
fertilizers)
• Paper industry(90 units producing paper and paper products)
• Sugar industry(approx. 30 units exists producing sugar and related
products)
• Informal sector
• Comprised unorganized self employed persons.
• Easy entry-exit, low capacity required
• Example: Manufacturing(craftman, blacksmith, welders, electricians,
plumbers, food preparation)
• Services(shoe-repairing, hair cutting, conductors)
• Trade(shopkeepers, food stalls, rag pickers)
• Agriculture(small farmers, gothala-khetala)
• Construction(carpenter, porters…)
Emerging challenges in industrial
sector
1. Political instability(resulted in policy instability)
2. Government policy and regulation
• Corruption widespread
• State regulation for business is complex and costly
• Policies lack clarity, predictability and consistency
• Industrialists thinks that the income tax and vat to be unfavorable to
them.
• Smuggling of goods is widespread.
3. Lack of energy
4. Lack of security
• Crime, theft, forced donation and kidnapping are being common in Nepal
5. Quality of product
• Verification of quality is not as per international standards
6. Weak technology
• Resulting to increased cost of production
7. Low capacity utilization
• Lack of manpower, technology resulting to high cost and low capacity
utilization
8. Lack of physical infrastructure
• transportation and communication
• Existing physical infrastructure are not being fully utilized
9. Labor regulation and labor unions
• Some of the provision of labor union are perceived unfavorable by
industrialists
• Some of them are: make the worker permanent after 240 days of their
working, take prior consent of department of labor to layoff or fire
workers
• Role of labor unions are also not found to be constructive
• Industrial disputes very common
• Shut down and labor-management issue is also common
Performance of industrial sector
• Agricultural sector
• Backbone of Nepalese economy
• Major source of living for a majority of population in Nepal.
• In the 80s, it was the livelihood for more than 90% of the
population although only 20% of the land is cultivable, it
accounted for, on average, about 60% of the GDP and
approx. 75% of export then.
• The status of Nepal has changed from the net food
exporting nation to net food importing nation in last 2
decades.
• According to World Bank data only 14.75% of the land is
arable.
• Agriculture is the income generating activity for
majority(90%) of the poor.
• Major source of raw materials for agro based industries
• GDP From Agriculture in Nepal increased to 247691.48
NPR Million in 2016/2017 FY from 235330.44 NPR Million
in 2015/2016 FY.
• Contribution of Agricultural sector to GDP is 31.7% in the
FY 2015/16
• Contribution of Agricultural sector to GDP is 27% in the
FY 2016/17(est.)
• Average growth rate over the last decade has been 2.9%

Agriculture: 27%
Industry: 13.5%
Services: 51.5% (2017 est.)
Source: World factbook
• Nepal’s agriculture is dominated by food grains followed by
livestock and cash crop.
• The production of fruits, vegetables, milk, dairy products,
poultry, tea, fish and cash crops has been gradually
increasing.
• Livestock sector(important sub-sector of agriculture) has also
become an important economical component of the Nepalese
agriculture. It covers 32% of agricultural GDP. Overall growth
rate 5.3% per annum(MoA, 2012)
• Fishery is also growing as an import substituting industry in
Nepal. Its annual growth rate is 6.92% in 2015.
• Floriculture has a great commercial potential for domestic as
well as export market. Nepal export cut flowers to Japan,
Europe and middle east.
• There is increasing demand for vegetables and organic
vegetables. The production of fresh vegetables has
increased substantially over the years.
• Booming as an important cash crop.
• Nepal is one of the major country indulged in the
production of large cardamom(Queen of spice)
• Nepal is fourth largest producer of Ginger.
• Ginger and cardamom is majorly exported to India.
• Major export oriented agro-based products are: Honey, tea,
large cardamom, ginger, lentils, medicinal and essential oils.
• Medicinal oil is mainly exported to India, Europe and US.
• Similarly 20 other high value herbs including Yarsagumba are
exported in raw form.
• According to Nepal Herbs & Herbal production association,
Nepal produces 1 ton(1000 kg) of yarsagumba annually,
however, the government statistics shows output to be very
less. High grade yarsagumba sells for Rs 2 millions/kg in the
local market but prices ate 3 times higher in overseas market.
• Coffee is also making its way to international market as one of
the potential cash crop of Nepal.
• At the moment, Nepal exports coffee mostly to countries like
SK, Japan, Britain, and the US. According to BBC report Nepal
exported 400 tons of coffee beans – 30 times of what was
produces 2 decades ago.
Hindering factors for Agriculture development in
Nepal
• Urbanization
• Fertile land used for residential purpose
• Political instability
• Lack of stable government and leaders
• Poor planning
• APP in 1995 for acceleration of agriculture could not perform well,
government has now introduced Agriculture Development Strategy
as a successor of APP.
• Low investment
• Both public and private sector investment is not sufficient
• Limited HR capacity
Challenges of Agriculture development in
Nepal
1. Governance
• It means capacity of government to design, formulate and
implement policies and discharge functions. Key elements of good
governance are accountability, participation, predictability and
transparency.
2. Productivity
• Due to traditional farming system and size of land holding, labor
productivity is low. Frustrated for low productivity and living
standard, they are shifting from agricultural sector to non
agricultural sectors
• Productivity requires adaptation of new technology, effective
agricultural research and execution.
3. Commercialization
• Due to no other options for livelihood or food security, agriculture is
considered to be the source of food for the one who are involved in
it. But it should be transformed into a sector in which the vast
majority of farming is carried out for commercial purpose. Contract
farming and cooperative farming need to be practiced for better
productivity.
4. Competitiveness
• Farmers need to be competent and hardworking and determined
for competitiveness resulting to high productivity.
5. Farmer’s right
• While forming agriculture related policies, farmers should be
participated. By having their representative in institutional levels,
farmers will be able to ensure and strengthen their rights.
4. Economic Development Dimension
Economic Development Plans
• The concept of planned economic development in Nepal started in
1955 with the establishment of planning board.
• From the inception of the first five year plan in 1956, Nepal has
recently completed 13th 3 yearly plan covering the period between
2013/14 to 2015/16
• Now the 14th 3 yearly plan 2016/17 to 2018/19 has been enacted.
• Nepal has implemented eight 5 yearly plan and five three yearly
plans since the process of planned economic development began
in 1956.
• Although three-year plans provide a basis for the government to
frame the annual budget and guide development work in the
country, they are short-term in nature and thus an ad hoc scheme.
• The latest three-year plan envisages achieving an economic
growth rate of 6.5 percent in the current fiscal year, 7.2 percent in
2017-18 and 7.9 percent in 2018-19.
• However our economy has failed to achieve this target.
• Principal Economic, social and physical target of 14th plan

Indicators Position at 2016/17(%) Target of 14th

plan 2018/19(%)

Annual growth rate 0.77 7.2

Agriculture sector 1.33 4.7
Non-agri sector 0.63 8.4
Per capita GDP(‘000) 79.37 116.5
Population below poverty line 21.6 17

Human development index 0.55 0.57

Gender empowerment index 0.56 0.58

Life expectancy, years 69 72

Strategies of 14th 3-yearly plan:
• Increase output through transformation of agriculture
sector and expansion of tourism industry as well as small
and middle business.
• Building infra structure for the development of energy,
road and air transportation, information and
communication, rural-urban interconnection
• Promote high and sustainable human development by
emphasizing social development and security
• Nepal has graduated to medium human
development grouping in the United nations’
Human Development Index, indicating Nepal as
growing healthier, becoming more educated and
earning more.
• Nepal secured a score of 0.558 in 2015, as
against 0.548 in 2014, says the Human
Development Report 2016 published by the UN
Gender Gap Index
Major policy reforms
• In Nepal during last two decades the economic reforms
initiated by the government have changed the industrial
and business environment significantly.
• Opening up of market has led to intense competition and
globalization has led to easy entry of MNCs.
• Major shift have been made in industrial policy, trade
policy, policies regarding foreign investment, macro
economic adjustments through fiscal and monetary
reforms.
Industrial Policy 2010
• Old policy of 1992 has been replaced by new industrial
policy of 2010.
• The new industrial policy 2010 highlights:
• Commits state support for the development of infrastructure up to
the factory sites of priority industries and in different districts having
manufacturing and processing potential.
• Simple exit policy to promoters(freeing them from longer term labor
and other labilities)
• Special tax holidays in rural and under- industralized area
• Subcontracting of production(for creating specialization in
manufacturing process to meet international order without investing
much on production unit)
• Help backward linkages, mainly facilitating small scale industries to
incorporate in the larger one.
• Provision of differential tariff rates for raw material imports and
import of finished goods.
• Promises protection, duty and tax discount incentives to the
industries using local raw materials (giving higher value addition)
• Promotional incentive packages to export industries(exporter get
2% of the value of goods as an incentive, tax refund facility on
purchase of raw materials)
• Development of Agro-export Promotion Zone(APEZ) apart form
SEZs – industries established in those zones will be exempted from
excise duty and VAT on raw materials and packaging materials
• R & D market promotion as an integral part of industry
• Follow the no work no pay principle as provided by the labor law for
enhancement of productivity and strengthening industrial relation
• Technical and financial assistance to the industries that use
environmental friendly and energy saving technology
• Policy considers:
• High priority:
• IT, cement, hydropower, vehicle and motor parts, chemical
fertilizers, bio-tech and adventure tourism.
• Priority industry:
• Agriculture, forest based, ayurvedic and homeopathic medicine,
mineral and handicraft

Full income tax holidays for 5 years and 50% tax rebate for next year
– special manufacturing industries
Full income tax holidays for 5 years and 50% tax rebate for 3 years –
Tourism and airlines
Full income tax holidays for 7 years and 50% tax rebate for 3 years –
Hydro
Tourism Policy, 2065
• Rapid growth and tremendous potential
• Reasons: natural beauty and cultural heritage
• New tourism policy formulated in 2008/9 replaced policy of
1995
• Objectives:
• Self employment opportunities by diversifying tourism down to rural
areas(foreign currency inflow high, regional imbalances low)
• Develop Nepal as an attractive tourist destination(explore, promote and
protect cultural and natural heritages)
• Develop tourism as an important sector of national economy by
developing linkage between tourism and other sectors
• Safe and accessible network of land and air transport.
• To make sustainable use of natural resources for tourism
development(keeping in mind the adverse effect of tourism in
environment)
• Highlights of the policy:
1. Diversify Nepal’s tourism product and services.
2. Encourage rural tourism
3. Involve private sector for promotional activities in tourist
generating locations
4. Formulate new strategy to promote domestic, regional as well as
international tourism through Nepal Tourism Board.
5. Expand air service agreements with more nations.
6. Apply IT to commercialize tourism business.
7. Make Nepal secure place for tourist
Tourism vision, 2020
• Goals
1. Increase annual international arrivals to Nepal to 2
million by 2020
2. Expand economic opportunities and increase
employment in tourism sector to 1 million by 2020
Trade policy, 2015
• GoN has issued new commerce and trade policy, 2015
replacing the earlier trade policy of 2009. The policy
consist of the list of possible export items with 26 goods
and 7 services.
• Long-term vision:
• Achieve economic prosperity by enhancing commerce
sector’s contribution to national economy through export
promotion.
• Objective:
1. To enhance supply related capacity, reduce trade deficit by
increasing exports of value added and competitive goods and
services.
2. To increase access of goods, services and intellectual property
to the regional and global markets
Strategies of Trade policy, 2015
• Government shall play the role of coordinator, facilitator and
regulator to enhance active participation of private sector.
• Enhance competitive capacity of the products of comparative and
competitive advantage for export promotion.
• Reduce trade deficit by strengthening supply side capacity.
• Reduce transacting cost through trade facilitation
• Expand market and trade capacity by means of multilateral,
regional and bilateral agreements.
• Increase access of Nepalese products in world market by
protecting and promotion trade related IPR.
• Mainstream trade in order to establish it as a major component of
the economy.
Privatization Policy
• Era of privatization emerged as an alternative strategy for
public sector reforms during 1980s throughout the world.
• Strong participation of private sector in nation building by
higher efficiency and higher service to consumers.
• Divestment of the existing interest of the government.
• Privatization is the process of transferring government
owned assets to the private sector in order to increase
efficiency and productivity of the firm.
• In1989 Privatization cell created in MoF to plan and
implement t the program
• In 1991, policy paper on privatization issued.
• In 1994, privatization act came into force.
Methods of privatization:
1. Assets sales:
• Through open public auction(in competitive market)
• The production and service units and other assets of enterprises are
transferred to the private sector in return for a price.
• Example: Bhrikuti Paper Mills, Harishiddhi Bricks, Basbari Leather Shoes
2. Share sales:
• Involves the transfer of shares to the general public, through stok market and
other financial institutions all or substantial part of stock
• Example: NTC issuing IPO(8.3% share sale)
3. Management contract:
• State private parties through an open tender for transferring the management
of any of its entity for a certain period to enhance the efficiency and
productivity
• Example: Biratnagar Jute Mills
4. Leasing out:
• Alternative to management contract
• State lease out any of its entity or part of its assets.
• Private party known as contractor pays certain fee to the government against
the use of the property.
• Example: Bhaktapur Brick Factory, Lumbini Sugar factory, Nepal Rozin and
turpentine ltd.
Privatization policy and practices in
Nepal
• The Act covers the following procedure to be followed in the process of privatization of
public undertaking:
1. A privatization committee is formed under the chairmanship of MoF.
2. The committee overseas, evaluate, remove hindrances faced in privatization, formulate
privatization program and recommend the scheme to the government for execution.
3. The government can privatize any enterprise by sale of share to the general public,
employees, workers and any person or a company, interested in the management of such
enterprise.
4. The government can invite proposals relating to such organization(by publishing a notice in
a national news paper)
5. If proposal of two or more investors are found to ne identical, priority given to Nepali
investor.
6. An agreement is made between offerer and offeree(terms and conditions)
7. If any dispute arise in respect of any matter contained in the agreement, resolved through
mutual consultation.
8. The government ensures the continuity of the service of the present workers of the
enterprise to be privatized at the time of transferring the service.
9. When retrenchment is granted, government arrange for reasonable compensation or
benefit in respect of the present employees and workers being retired from the privatized
enterprise.
• 1992:
• In first 3 public enterprises were privatized through the sale of assets by public
tender
• Bhrikuti paper mills
• Harishiddhi bricks and tile factory
• Basbari leather and shoes factory
• 1993/94:
• In 2nd phase, 5 more including Balaju textile privatized
• In 3rd phase, 6 more including Bhaktapur bricks, raghupati jute mills, Nepal
bank ltd (sale of government owned shares)
• 2000:
• Again started with Tea development corporation, Butwal power, NTC, and so
on
As of economic survey 2010/11, 30 enterprises have been privatized.
By august 2014, 11 are currently operating out of whichonly 5 are making profit.
They are Butwal Hydropower, NTC, Nepal Lube Oil, Nepal Bitumin and barrel
industry, Bhaktapur bricks.
Other PEs under operation include Nepal Tea development corporation, Lumbini
sugar mills, Nepal Rojin and turpentine, NBL, Raghupati jute mills and Nepal
metal Co.
Closure of many privatized firm has created negative opinion among people
about privatization in Nepal.
Monetary Policy, 2017/18
• NRB releases the Monetary Policy for the FY 2017/18.
• It focuses on ramping up capital flow towards the productive sectors
such as agriculture, energy, tourism, small and cottage industries as
well as the deprived sectors.
• The main targets of the monetary policy 2017/18:
1. No cash for transaction above 10 lakh.
2. Target inflation below 7%.
3. 7% interest spread imposed on microfinance and halted the issuance for
MFIs
4. 20% mandatory lending for the commercial banks to the productive sectors.
5. Interest rate spread for BFIs is limited to 5%.
6. Hiked the minimum 12% of the productive sector lending on agricultural and
energy sector to 15%.
7. Policy of granting educational loan of maximum 700,000 on certificate
collateral
8. Cash reserve ratio (CRR) is kept unchanged at 6 percent for commercial
banks, 5 percent for development banks and 4 percent for finance
companies.
9. Statutory Liquidity Ratio (SLR) remains at 12 percent for commercial banks,
9 percent for development banks, 8 percent for finance companies
10. Commercial banks are required to allocate minimum 25 percent of total credit to
priority sector, which include minimum of 10 percent to agriculture, 5 percent to
hydropower, and 5 percent to tourism and remaining to other priority sectors.
However, the existing provision for development banks and finance companies
to extend minimum 15 percent and 10 percent of their total credit to the priority
sector is kept unchanged.
11. Hydropower, agriculture, tourism, exports, small and cottage industries,
pharmaceuticals, cement and garment will be defined as priority sector
12. Under this provision, commercial banks are required to extend 5 percent,
development banks 4.5 percent and finance companies 4 percent to the
deprived sector.
13. The limit for personal home loans provided by BFIs has been increased to Rs.
15 million from the existing Rs. 10 million.
14. The upper limit of consortium financing remains the same at Rs. 1 billion
15. BFIs will have to allocate at least 1% of their profit for CSR.
16. Lending to commercial real estate up to 40% of the valuation compared to prior
50% for Kathmandu valley. Such ratio for other places has been kept
unchanged at the existing 50 percent.
17. The maximum LTV ratio for residential housing loan is lowered to 50 percent for
the Kathmandu valley and such ratio has been kept unchanged at 60 percent for
other places.
18. An arrangement to provide banking service to the senior
citizens, differently-abled people and illiterate individuals
through specified counters of BFIs will be made. In addition,
necessary arrangement will be made to provide ATM
services friendly to differently-abled individuals.
19. BFIs will be required to fix the borrowing rate against the
collateral of fixed deposit receipt at the time of opening the
fixed deposit account and will not be allowed to charge
interest more than the predetermined rate.
20. The limit that Nepalese citizens, firms and institutions are
allowed to borrow from their relatives, other persons,
non-resident Nepalese or institutions abroad in order to
operate business or expand business under the specified
conditions by this Bank has been increased to USD 500,000
from USD 200,000. Such limit for borrowing from India has
been fixed at Indian Rupee 50 million. However,
pre-approval from this Bank is required for such borrowings.
21. Maintain foreign exchange reserve to cover 8 months import and
services.
22. BFIs will have to allocate 3 % of staff expenses for training and
capacity development.
23. BFIs not required to get permit from NRB to open branch in areas
except inside metropolitan, sub-metropolitan and municipality.
Liberalization of Nepalese economy
• Opening up of country to rest of the world.
• Economic liberalization is the gradual process of
lessening government regulations and restrictions in the
economy.
• Greater participation of private sector for economic
reform.
• Non-interventionist approach
• Liberalization policy is based on the assumption that
private sectors are more efficient than public sector.
• In Nepal liberalization policy were implemented from 1990
with emphasis on privatization and open market policies.
• As a part of liberalization process, different acts were
implemented
 Requirements of liberalization
1. Role of government as facilitator not a regulator
• Supporting private sector with facilitating policies and necessary
infrastructure.
2. Increased role of Private sector
• With the assumption that they have better managerial and decision
making capabilities.
3. Abolishing license requirement
• The industrial enterprise Act, has specified only some industries
requiring permission.
• They are industries related to securities, currency, tobacco. Most of
the other do not require license.
4. Freedom in business decision
• Regarding expansion and contraction
• Price is determined based on principle of demand and supply
5. Removal of restrictions
• On movement of goods within and between countries
• It requires elimination of tariff, para-tariff and non-tariff barriers
6. Reduction of tax rate
• To encourage private investment
7. Simplification of foreign trade
• Procedural simplification
8. Facilitate FDI and technology transfer
• In Nepal we have Foreign Investment and Technology Transfer
Act, 2015 facilitation FDI and Tech. transfer
9. Current account and capital account reform
• Current account reform includes making the foreign exchange
convertible
• Capital account reform involves maintaining account in convertible
currency.
Internal/ external liberalization
Internal liberalization
1. Financial sector reform
• Banking sector is opened for foreign investment
• Commercial banks are allowed to accept current and fixed deposits in
foreign currency
• Restructuring of Nepal Bank Ltd. and RBB Ltd.
• Enactment of NRB Act 2002, Debt recovery Act 2002, BFI Act 2006
• Deregulation of investment rate regime in which commercial banks are
allowed to fix their interest rate.
2. Fiscal reforms
• Introduction of VAT
• Private sectors allowed to borrow money from foreign sources
• Introduction of export duty drawback scheme and bonded warehouse
• Provision of open general license
3. Monetary policy
4. One window policy
• Provide quick and efficient way of approvals, facilities and other
administrative services
5. Removal of subsidies
• Gradual reduction in subsidies in various sectors
6. Public sector reform
• Government has the policy of not setting up new public
enterprises
7. Insurance sector reform
• Private sectors allowed to open insurance business
8. Capital market reform
• Foreigners are allowed to invest in the stock exchange. The
security exchange is in the process of privatization.
• There will not be any regulatory intervention in pricing of
IPO(depends on how much investors desire to pay)
• Fully automated system at NEPSE for trading and settlement
• External Liberalization
a. Reforms in trade sector
• Promoted by Industrial Act, 1992 & Foreign Investment &
Technology Transfer Act, 1992
• Restrictive barriers were rationalized
b. Reforms in foreign exchange
• It includes current account reform and capital account
reform
 Factors contributing to competitive business
environment in Nepal
1. Increased private investment in core businesses
• Core businesses are those businesses that require heavy investment and
high level of managerial capability.
• Electricity, communication, transportation
• Business environment has become more competitive with private
investment in these sectors.
2. Rise of financial institution
• The first commercial bank – NBL in 1937
• NRB established after 19 years
• A decade after RBB established
• Government emphasized the role of private sector investment in financial
sector
• With this first joint venture, Nabil Bank Ltd. Was established in 1984.
• During two decades, tremendous increment in the number of financial
institution is seen.
• Due to rise in financial institutions, the business sector has better access
to capital, improves risk management and low transaction cost resulting to
competitive business environment
3. Increase in FDI
• FDI is opened for accountancy firm, law firm, engineering and many
more which were not allowed initially
• Investment in listed securities is opened
• With the significance presence of FDI, business environment in Nepal is
turning competitive.
4. Rise of MNCs
• With the liberalization of economy, MNCs are coming to Nepal with
collaboration with Nepalese.
• Good source of Technology transfer and FDI
• Progress in industrial culture and employment generation.
• All these are changing competitive landscape of Nepalese business
environment.
5. Development of capital market
• Nepal stock exchange is involved in OTC market of security, due to
this, the business have better access on capital which eventually
increases the level of competitiveness among enterprises.
6. Changing role of government
• Changing from regulator to facilitator
• Government is responsible to infrastructure development
• Various policy reforms have been made for economic progress
facilitating private sector.
 7. Changing market place scenario
• The products which were once considered luxurious are now taken as
essentials. Such as mobiles, TV, two wheelers, vacuum cleaner…this
way Nepalese market is becoming more competitive over the years.
8. Growing urban population
• As this occurs, spending also increases. Most businesses targeting to
this population leads to higher competition.
9. Use of modern technology
• The manufacturing industries like cement, iron, steel, food industries
have started using modern computer based technology. Service sectors
like education, hospitals and banks are also using latest technology.
• Business compete with each other on efficiency and effectiveness.
10. Integration of the world economy
• With Nepal’s membership in regional organizations like SAARC,
BIMSTEC and WTO, Nepalese organizations are likely to face severe
competition from foreign companies with open and liberal market.