Dissecting Nepal’s Trade: Trends, Challenges, and Future Potentials by Nepal Economic Forum

DISSECTING NEPAL’S TRADE: TRENDS, CHALLENGES, AND FUTURE POTENTIALS

Nepal Economic Forum (NEF) is a not-for-profit organization aiming to be Nepal’s premier private sector-led economic policy and research institution. We are an impact-driven economic and development think tank that seeks to redefine Nepal’s development discourse by analyzing, facilitating and disseminating contemporary issues on society and the economy. Please write to info@nepaleconomicforum.org, if you have questions or comments with respect to the document. What is a Nefsearch? Nefsearch is an academic research paper published by Nepal Economic Forum that aims to create a platform for cutting-edge and robust economic research. NEF has earned a worldwide reputation for conducting theoretical, high quality and evidence-based research studies with Nepal at the core. The aim of the nefsearch is to draw attention towards contemporary issues that are important and relevant for economic development and societal growth of Nepal. The collaborative nature of the research paper allows authors to explore novel methodologies and models to dissect the empirical aspects of economics, financial and developmental economics.

Title Dissecting Nepal’s Trade: Trends, Challenges, and Future Potentials Author - Pooja Suwal, Pratisha Lakhey and Sagar Jung Karki Pooja Suwal is a research enthusiast, having interests in political and developmental economics, economic policy, and impact analysis. Previously, she worked as a beed in beed Management. Pratisha Lakhey is an undergraduate student in Economics from Kathmandu University School of Arts. Her interest lies in development economics, public policy and microeconomics. She is currently working as an intern at NEF. Sagar Jung Karki is an Aspiring beed at beed management where he is engaged in assignments including management consulting, development consultations, sectoral studies, economic policy, and development research for the private sector and development partners. Designed by - Sudiksha Tuladhar, Aspiring beed at beed Management

Published by Nepal Economic Forum, December 2023

Table of Contents Pages

Abbreviations and Acronyms

Abstract

Trade in Nepal

2-3

Objectives, Methodology, and Limitations

Literature Review

5-7

Trends in Nepal’s trade

8-15

Current Challenges

16-18

Regulatory Provisions

19-21

Export Potential and NTIS

22-23

Recommendations

24-27

Conclusion

Works Cited

29-35

Abbreviations and Acronyms BBIN

Bangladesh, Bhutan, India, Nepal

BIMSTEC

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation

DOC

Department of Customs

GSP

Generalized System of Preferences

ITC

International Trade Center

NRB

Nepal Rastra Bank

SAFTA

South Asia Free Trade Agreement

TEPC

Trade and Export Promotion Center

UNCTAD

United Nations Conference on Trade and Development

USD

United States Dollar

WTO

World Trade Organization

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Dissecting Nepal’s Trade: Trends, Challenges, and Future Potentials by Pooja Suwal, Pratisha Lakhey and Sagar Jung Karki

Abstract Nepal, a land of rich cultural legacy and natural beauty, lies between the economic giants of India and China. Nepal's trading history has played an essential part in establishing its economic landscape and worldwide linkages. Nepal's trade dynamics have developed from the historic crossroads between its neighbors to the present era of globalization, having a tremendous impact on the lives of its people and economy. Nepal has seen various frictions during the last thirteen years including the declaration of a Republic, a mega earthquake, and the Coronavirus pandemic. This Nefsearch report tries to uncover the historical trade trends in Nepal, identify current challenges, and its future perspectives.

Key words Nepal, historical trade, challenges, export potential

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Trade in Nepal Trade now occupies more than half of the global GDP making it a crucial force for economic development. 1 The Sustainable Development Agenda 2030 has identified international trade as “an engine for inclusive economic growth and poverty reduction that contributes to promoting sustainable development”.2 In the context of Nepal trade now accounts for around 49% of the total GDP as of 2022 and can be a force for drastic economic transformation while catering to its sustainable development needs. 3 The past couple of decades have seen historical change in Nepal with the declaration of a democratic republic abolishing the centuries-old monarchy.4 In the aftermath of a decade-long civil war, Nepal led to a fresh start in 2008 with a new form of government and socio-economic environment. Two other major events that substantially affected Nepal during this period were the mega earthquake in 2015 and the coronavirus pandemic in 2020. From an import of NPR 339.61 billion (USD 2.56 billion) and an export of NPR 64.69 billion (USD 488.54 million) in 2009, the nation has seen tremendous growth in trade with an import of NPR 1.72 trillion (USD 13.44 billion) and an export of NPR 163.16 billion (USD 1.23 billion) in 2022.5 This represents a whopping 407% increase in imports

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and a nearly 152% surge in exports in Nepal.6 There is also a noticeable trend seen in the changes in trade partners, trade products, and services. The trade deficit has long been synonymous with international trade in Nepal throughout these years. The trade journey of Nepal is still facing several daunting challenges that have impeded it from realizing its full potential. Historical trade in Nepal started with the advent of Newar traders of the Kathmandu Valley trading between Tibet and India. 7 During the Lichchhavi and Malla kingdoms, Nepal facilitated trade and transit routes between India and Tibet. Nepal opened up beyond its immediate neighboring countries after the treaty of friendship with the British in 1923 and with India in 1950. Subsequently, Nepal signed bilateral trade agreements with fifteen countries 8 including the US from 1947 to 1992. In 2008 Nepal became a member of the WTO and is also a member of regional trade blocs such as the South Asia Free Trade Agreement (SAFTA), The Bangladesh, Bhutan, India, Nepal (BBIN) Initiative, and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Area. Furthermore, Nepal has been a beneficiary of the Generalized System of Preferences (GSP) as a Least

Developed Country (LDC) since 1971.9 However, Nepal will subsequently lose the preferential trade tariffs once it graduates from LDC status to a middleincome country by 2026. Dissecting Nepal’s Trade presents a comprehensive view of Nepal’s trade achievements as well as the impediments to reaching its full potential. The report introspects Nepal’s trade landscape during the last decades and positively inspires to achieve sustainable and inclusive trade. This study primarily targets government officials, policymakers, development partners, and businesses, since they play a critical role in the country's trade. It also appeals to a secondary audience, which includes researchers, think tanks, NGOs, INGOs, and other players in the development sector.

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Objectives, Methodology and Limitations The objectives of this study are listed below: To find insights from the pattern and trend of international trade in Nepal after 2009 To identify challenges faced by Nepal in enhancing exports and overall trade To suggest future pathways for enhancing the trade potentials of Nepal

Limitations As in any research, this study has limitations about the exploratory nature and secondary sources used. The research may lack sufficient depth due to time constraints and limited use of quantitative research tools. Furthermore, there might be some subjective biases inherent in the authors’ perception and understanding of the topic.

Methodology The study utilizes several secondary sources to uncover data and information on trade for the last fifteen years after the declaration of the republic from 2009 to 2022. The publications of the World Trade Organization (WTO), United Nations Conference on Trade and Development (UNCTAD), International Trade Center (ITC), the World Bank, Trade and Export Promotion Center (TEPC), and Department of Customs (DOC) were utilized for the research. This exploratory study uses charts, graphs, and tables to represent data. All the sources used have been cited and credited accordingly. This Nefsearch tries to portray the insights so that it is comprehensible and accessible to the wider public.

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Literature Review For the literature review, topics of trending academic research published on the trade sector in Nepal are taken for the past five years from 2018 to 2022 which are listed in the following table followed by description: Table 1: Academic Research on Trade in Nepal in the last five years SN

Trending research Titles

Findings

Illicit Wildlife Trade

Trends, patterns, and networks of illicit wildlife trade in Nepal: A national synthesis (2020)

Illegal wildlife trade is threatening conservation in the transboundary landscape of Western Himalaya(2021)

Journal/Source

Conservation Science and Practice- A Journal of the Society for Conservation Biology

Wildlife trade is on the rise, except rhinoceros, and there are indications of extensive international networks centered around trade points in districts adjacent to China and India.

Journal for Nature Conservation

The primary reasons behind illegal wildlife trafficking include a strong demand for wildlife products, particularly in China, a lack of alternative livelihood options for local communities, easily accessible or poorly controlled borders, insufficient patrolling due to resource constraints, and ineffective enforcement of wildlife protection laws.

Cross Border Energy Trade

Cross Border Energy Trade between Nepal and India: Assessment of Trading Opportunities (2019)

US Department of Energy, Office of Science and Technical Information

Nepal could increase annual exports to India by expanding its domestic hydropower capacity to 4500 megawatts. However, the economic feasibility of such exports would be compromised if current market inefficiencies between the two countries persist.

The role of hydropower in South Asia’s energy future (2021)

International Journal OF Water Resources Development

The future of hydropower hinges on effective policy management, wellfunctioning financial markets, and the promotion of equitable and amicable cross-border electricity trade.

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Agricultural Products in Foreign Trade

Role of Agricultural product in Foreign Trade of Nepal (2019)

India’s Foreign Trade Relationship Between Nepal- With Special Reference to Agricultural Products

International Journal of Agricultural System

International Journal of Advance and Innovative Research

In the past 5 years, the trending themes for academic research on trade in Nepal have been illicit wildlife trade, crossborder energy trade, and agricultural product in foreign trade. In the case of illicit wildlife trade, the studies on the devastating consequences of illicit wildlife seizures and arrests for trade, among wildlife populations in Nepal are 10 given importance. Whereas the crossborder energy trade study gives importance to the exploration of potential hydropower trading opportunities with India and other South 11 Asian countries. Moreover, in terms of agricultural products in foreign trade study, priority has been given to addressing the export-import imbalance for Nepal as imports are much higher than exports. The focus has been on the development of the agricultural field regarding revising policy and programs on patterns of trade and reformation through diversification and 12 modernization.

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Nepal should reform its foreign trade by modernizing and diversifying its agriculture to reduce the trade deficit and achieve a better balance.

Under SAARC regulations, India is compelled to export products to Nepal, irrespective of their profitability, and this study underscores that the export of agricultural products to Nepal has affected India’s economy.

Moreover, the World Bank publication,’ Trade Policy Reforms for the TwentyFirst Century: The Case of Nepal (2017)’, examined how Nepal could move forward in reforming its trade policies to make it competitive rather than just relying on the remittance-driven growth model.13 Additionally, the Asian Development Bank published the report ‘Trade and Transport Facilitation Monitoring Mechanism in Nepal’ which aimed to lay a foundation to establish long-term sustainable trade facilitation and monitoring in Nepal and for future studies on it as well. The major finding was that the policymakers from both Nepal and India need to discuss methods to review each procedure and remove any procedure that does not add value to import or export. 14

Similarly, in 2021 Nepal Rastra Bank issued an economic review paper on ‘Nepal’s Trade Sector: Review, Repercussions and Recommendations’ which emphasized the problems of the trade sector in attaining sustainable economic growth along with policy measures to prioritize multilateral trade negotiations and upgrading technology, infrastructure investment, adoption of appropriate legal framework compatible with regional as well as multilateral 15 agreements and more. There have been academic studies from the Central Department of Economics, Tribhuvan University on Nepal’s exports and WTO: Position and Priorities which focused on reassessing the trade policies with the changing global trade order.16 The Journal of Economic Concerns published a paper in 2021, that analyzed the trend of foreign trade and economic growth of Nepal which found that the exports have been smaller than imports and priority is given 17 to export-led policy implications. Recently, the Ministry of Industries, Commerce, and Supplies (MoICS) launched its fourth Nepal Trade Integration Strategy (NTIS) 2023 which is going to be implemented for five years 18 starting from 2023 to 2028 AD. Nepal is going to graduate from LDC to a middleincome country by 2026 for which this strategy is developed. For the implementation of NTIS 2023, a total budget of NPR 40 million (USD 303 thousand) has been allocated through government commitment for FY 2023/24 and the estimated budget for this strategy implementation is NPR 46.32

billion (USD 349.62 million). It has focused on key priority areas like trade infrastructure development and trade facilitation, inclusion of women in the trade labor force and promoting social cohesion, ensuring of food and agricultural commodities infrastructure and quality along with priorities on exports and use of fourth and fifth industrial revolution for enhancement of trade. 19

In summary, the recently published studies have focused on the broad themes of illicit wildlife trade, crossborder energy trade, and agricultural products in foreign trade. Multilateral organizations like the World Bank and Asian Development Bank have focused on the reformation of trade policies and the establishment of long-term sustainable trade and transport facilitation monitoring mechanisms. Moreover, government organizations like Nepal Rastra Bank and universities have been focusing on research papers on Nepal’s trade position and priorities. To achieve the priorities, MoICS has launched the strategic trade policy document called NTIS 2023 which focuses on trade infrastructure development, the inclusion of women in trade, and improvement in export volume. This literature review has uncovered numerous researches done on the trade in Nepal however, this Nefsearch will focus on Nepal’s trade with the latest data particularly in the thirteen years after 2009 that can be both informative and insightful for readers.

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Trends in Nepal’s Trade Between 2009 and 2022, there were numerous changes in Nepal’s trade landscape including the trade volume, trade partners, products, and services. The international trade trends in Nepal have evolved with the changing political and socioeconomic aspirations. The most noticeable change has occurred in the massive surge in trade volume. However, there have not been a lot of changes in the trading products. The major trading partners have seen some diversification except neighboring countries of India and China. Some of the key and noticeable trends have been discussed below.

Trading partners In 2009 Nepal’s top importing partners were mainly concentrated in the Asian countries of India, China, Saudi Arabia, Indonesia, and Singapore while in 2022 we can observe the diversification of the market into countries of America, Europe, and Australia. This shows the enhanced desire and capability of Nepalis for products from other parts of the globe. Similarly, the trend of diversification is also seen in exporting partners except India and China as the most favored ones.

Figure 1: Top five importing countries of Nepal in 2009 Source: Nepal Trade Integration Strategy

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Figure 2: Top five exporting countries from Nepal in 2009 Source: Nepal Trade Integration Strategy

Figure 3: Top five importing countries from Nepal in 2022 Source: Nepal Trade Information Portal

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Figure 4: Top five exporting countries from Nepal in 2022 Source: Nepal Trade Information Portal As depicted in the figures above depict the current top ten trading partners of Nepal as of 2022. It is obvious that most of the trade partners of Nepal both in terms of import and export were from the Asia Pacific. The ongoing trade ties with close neighbors like China and India demonstrate the region's proximity to one another and its intertwined economy. Due to their shared boundaries, common history, and mutually beneficial commercial demands, these two nations are significant trading partners for Nepal. The European nations of France, the UK, and Italy were on the list of top exporting countries from Nepal while importing from Europe did not occupy a significant position except Ukraine. American countries the US and Canada were in the top ten exporting countries while Argentina was in the top ten importing countries of Nepal.

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Figure 5: Worldwide share of Nepal’s import in 2022 Source: Trade Map, International Trade Centre

Figure 5: Worldwide share of Nepal’s export in 2022 Source: Trade Map, International Trade Centre

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The trade maps shown previously depict the diversification in the trading partners of Nepal worldwide. Nonetheless, there are still many countries in Africa that Nepal does not trade. It is seen in the map that Nepal exported to more countries than it imported. However, the volume and value of exports are far less than that of imports. Trade Volume The trade volume has been the most significant indicator of the rise of trade in Nepal over the last thirteen years. The figure below presents the import of goods and services in Nepal from 2009 until 2021. It is noticeable that the import of goods has been rising steadily for a brief fall in 2015 due to the earthquake, the Indian blockade, and the coronavirus pandemic in 2020. On the other hand, the export of services has been continuously descending during the specified period.

Figure 6: Total imports of goods and services from 2009 to 2021 Source: Nepal Trade Information Portal

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In the figure below the export of goods and services in Nepal are represented from 2009 until 2021. It is interesting to observe the contrast in the export of goods and services throughout the last thirteen years. COVID-19 had a detrimental impact on 20 the trade of Nepal with a negative impact on both imports and exports of Nepal. The imports were mostly affected due to a seven-month-long import ban imposed by the government on ten luxury items such as automobiles, mobile phones, liquor, and 21 heavy motorbikes.

Figure 7: Total exports of goods and services from 2009 to 2021 Source: Nepal Trade Information Portal

Figure 8: Total Export, Import and Trade Deficit from 2009 to 2022 Source: Nepal Trade Information Portal

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Figure 8 illustrates the combined line graph for exports, imports, and trade deficits from 2009 to 2022. The data is sourced from the Nepal Trade Information Portal. All the figures are represented in NPR. The trend in the line graph shows the trade deficit to be negative throughout the review period. The import has been rising at a rapid pace mainly fueled by the remittance causing a long-lasting Dutch disease phenomenon in Nepal.22 On the other hand, we can notice the exports to be minuscule when compared with the imports. Weak internal production and export revenue have made remittance the only source of foreign reserves in Nepal to support imports as well as maintain a favorable balance of payments.23 In the last fiscal year 2022/23 (FY 2079/80 BS) Nepal's total imports were NPR 1.611 trillion (USD 12.121

billion) while exports were only NPR 157.14 billion (USD 1.818 billion) with a massive trade deficit of NPR 1.454 trillion (USD 10.93 billion). 24 Trading products and services The figure below depicts the top ten import items of Nepal in FY 2022/23. Their import values include petroleum products, cooking gas, gold, iron, soya bean oil, coal, crude palm oil, medicine, smartphones, iron, and urea fertilizer. Similarly, as shown in the figure below the top ten export items in FY 2022/23 were carpets, palm olein, soybean oil, black cardamom, palm oil, felt, fruit juice, wool threads, zinc sheets, and polyester thread. The exported products have not changed significantly from 2009 which were lentils, carpets, woven fabrics, and 25 steel. Similarly, in 2009 the main imports were petroleum products, gold,

Figure 10: Top ten import items in FY 2022/23 26 Source: Department of Customs

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Figure 11: Top ten export items in FY 2022/23 27 Source: Department of Customs

iron, cooking and petroleum gases, and 28 crude soybean oil. It is noticeable that most of the export products are primary commodities with re-exports products like palm oil and soybean oil which are imported from Indonesia and Malaysia.29

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Current Challenges Physical infrastructure: Nepal's trade growth is hindered by poor infrastructure, particularly in terms of connectivity, standardization of highways, warehouse storage, and border checkpoints. The country's challenging geographic location has hindered trade expansion over the past decade. Poor road conditions also prevent Nepal from using large transport vehicles, resulting in no economies of scale. In Nepal, national highways make up around 40% of all roadways, and 77% of those are in bad shape. Additionally, 82% of the feeder roads are also in poor condition, which raises the cost, duration, and fuel 30 consumption of operating a vehicle. Trade through air cannot benefit from economies of scale due to a small 31 international airport. Large planes cannot land or take off at Tribhuvan International Airport due to insufficient infrastructure, which raises the cost of transportation. Trade via train is only possible in India, but poor road conditions cause delays and extra costs. The quality of infrastructure is crucial for landlocked nations like Nepal, where transferring goods from air or sea to roads is essential. Transport is the most expensive component of trade logistics, and enough infrastructure is necessary to make transport possible.32 There is a lack of digitalization, inter-governmental, and inter–agency coordination in the

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formulation, development, operation, and monitoring of infrastructure plans related to trade and transportation, lack of logistics data systems, internal and international coordination, and data sharing mechanisms in the cross-border customs process.33 Poor infrastructure quality in Nepal has significantly impacted logistics and, in turn, trade.34 Although the export of IT services presents many prospects for development, income, and employment, several gaps and problems must be addressed. Nepal faces various challenges in the export of the IT sector such as unreliable internet, electricity, and lack of data centers.35 Bureaucratic burden Some trade impediments are caused by the Department of Customs' bureaucratic load on Nepali exporters. Regulations from the importing nation also increase the obstacles at the border at the same time. The area of trade facilitation that significantly boosts trade flows for low-income countries is the standardization and simplicity of 36 paperwork. A crucial element of trade facilitation that can alter the scope of trade in Nepal is the simplification of procedures and documentation. Time lags, bureaucratic harassment, and informal payments to lessen the time lag and end harassment are all aspects of

the bureaucratic load that exporters must deal with. The burden of bureaucracy is primarily experienced at the Department of Customs (DOC) in Nepal, while in the exporting nation, traders frequently confront issues with regulations and rejection to enter goods 37 through customs. As a newly federalized nation, the division of power and responsibility across tiers of government is being developed and implemented slowly. This has created additional administrative and bureaucratic hurdles and delays, likely to continue in the 38 coming years. Lack of enabling business environment Nepal placed 118th out of 125 nations in the 2016 Global Enabling Trade Report. This highlights the significant challenges the country faces in creating an environment that is beneficial to trade 39 and economic growth. It concisely describes the challenging regulatory environment and serious physical security issues that undermine efforts to promote commerce and advance the 40 economy as a whole. Paying huge taxes is another demotivating, timeconsuming, and stressful activity that entrepreneurs face in Nepal. Entrepreneurs are required to make 46 different payments per year which takes around 377 hours, whereas in Bhutan only 18 payments are required per year, which 41 takes only around 52 hours to complete. Therefore, this is a major challenge for the promotion of trade. Other Non-tariff barriers, such as sanitary and

phytosanitary (SPS) regulations and technical trade barriers (TBT), have been proven to be significant obstacles to Nepal's exports. According to the International Trade Center (ITC), the challenges posed by SPS and TBT standards are much more challenging than those associated with origin regulations, partner country preshipment and border clearance 42 procedures, and quantitative constraints. It is essential to make modifications to the system and policy to meet the SPS standards as Nepal's current SPS system does not comply with WTO requirements, which will prevent Nepali exporters from experiencing issues while attempting to sell to a new potential market. It is argued that the lack of recognition of test certificates and excessive testing requirements created 43 significant impediments to trade. Because there aren't any testing facilities in the nation, traders must send their samples outside to obtain the necessary test certificates. Significant trade barriers have been formed as a result of 44 delays in acquiring testing certifications. Political instability and lack of good governance Political instability in Nepal significantly impacts trade and international relations. Frequent policy changes and administration changes undermine company confidence, impeding trade continuity and foreign direct investment. This complexity makes it difficult for businesses to make informed decisions.

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The lack of stability hinders long-term development objectives and trade infrastructure. 26 changes of government during the past 30 years—created an uncertain environment for foreign and 45 private investment. Addressing this challenge requires institutional reforms, transparency, and governance. For instance, the launch of NTIS 2023 was delayed by seven years due to political instability.46 According to a business survey, the most difficult aspect of 17 doing business in Nepal is government instability. It is followed by ineffective government bureaucracy, policy instability, corruption, insufficient infrastructure supply, and restrictive labor legislation, among other things. All of these issues have an impact on both exports and imports.47 Foreign and American businesses have noted corruption as a barrier to sustaining and growing direct investment in Nepal. In the granting of licenses and approvals, purchasing products and services, and awarding contracts, government officials in Nepal are frequently accused of corruption.In a study of 180 nations, Nepal's position on Transparency International's Corruption Perceptions Index (CPI) dropped from 113 in 2019 to 48 117 in 2020. Nepal is transitioning from least developed country (LDC) to developing nation status by 2026. In the past, Nepal has benefited from favorable trading practices from its trading partners, but starting in 2026, it will lose the preferential tariffs provided by trading partners such as the EU and the 49 US.

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Regulatory Provisions Relevant Acts and Policies 50

Trade Policy, 2015

The overall guiding document for imports and exports of Nepal

NTIS 2023

The overall guiding document for imports and exports of Nepal

Export and Import (Control) Act, 1957

To prevent the international trade of illegal items

Export and Import Rules, 1978

Regarding the rules and regulations of import and export

Industrial Enterprise Act, 2073 (2016)

To register and operate an industry

National Policies

Export and licensing

Seeds Act, 2045 (1988)

Plants Protection Act, 2007

To regulate the sale, distribution, and trade of seeds

Aims to prevent pests from introducing, establishing, and spreading in the import and export of plants and plant products, promoting trade through effective control measures.

Sanitary and Phytosanitary measures

Plants Protection Rules, 2010

Assist in phytosanitary measures and plant protection-related activities, implement phytosanitary measures to reduce risks associated with the importation of living or genetically modified organisms in plants or plant products, enforce internal quarantines to control the movement of plant or plant products carrying quarantine pests within the country.

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Food Act, 1966

Sanitary and Phytosanitary measures

Technical barriers to trade

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To ensure the proper standardization and prevention of adulteration, reducing natural quality or utility of foodstuffs for public health and convenience.

Feed Act (Animal Concentrates), 1976

To maintain the quality and standards of the feed

Animal Health and Livestock Services Act, 1998

Provide necessary arrangements relating to Animal Health and Livestock Services.

Food Regulation, 1970

Analyzing food samples for inspection, conducting research, and providing training

Nepal Standards (Certification Mark) Act, 2037 (1980)

Regarding the use, permission, and control of certification marks

Nepal Standards (Certification Mark) Regulations, 1982 (as amended)

For determining the standard and certification mark

Food Packing and Labelling Regulation, 2073 (2016)

Regarding the proper label and package of products made in Nepal

Drugs Act,1978 (as amended in 2000)

To make provisions relating to drugs

Drug Registration Rules, 1981 (as amended in 2001)

Regarding the rules and regulations on drug registration

Competition Promotion and Market Protection Act, 2007

For the promotion of competition and protection of the market

Privatization

Privatization Act

To formulate programs, evaluate enterprises, coordinate and remove obstacles, follow decisions and agreements, form sub-committees, and perform or require additional work for privatization.

Investment

Foreign Investment and Technology Transfer Act, 1992

Relating to foreign investment and technology transfer

Government procurement

Public Procurement Act, 2007

The aim is to improve governance by enhancing public entities' procurement capacity, ensuring equal opportunity for producers, sellers, suppliers, and service providers in procurement processes.

Patent, Design, and Trade Mark Act, 1965

To regulate patent, design, and trademark

Legal provisions relating to copyright

Competition policies

Trade-related intellectual property rights

To perform necessary work regarding protecting copyrights Copyright Regulations, 2004

To register copyright and maintain the details thereof up-to-date to inspect and direct the body if any weaknesses are found in businesses.

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Nepal’s Export Potentials & NTIS Being an LDC country, Nepal has not been able to fully harness its export potential for almost every product and service. The export potential map developed by the International Trade Centre (ITC) can be used to find out the unrealized export value and markets. The tool is used by policymakers, companies, and trade specialists to better assess market potential and trade opportunities for specific products in different foreign markets. 51 Countries with the most export potential As per the export potential map, the top five export potential markets for Nepal’s exports are India, the United States, Germany, Turkey, and the United Kingdom. India has the greatest absolute difference in value between potential and actual exports of USD 257 million (NPR 34.16 billion). 52 According to the export potential map, Nepal has a total unrealized export potential of USD 485 million (NPR 63 53 billion). The figure above depicts that soya-bean oil (excluding crude) and fractions, cardamoms, and palm oil (excluding crude) and fractions as Nepal's most promising export items to the world market. Among them, Soyabean oil (excluding crude) and fractions have the largest value gap between its

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export potential and actual exports, presenting a possibility to achieve an additional USD 201 million (NPR 26 billion) 54 in exports. This tool only identifies export potential for products but not for services. Nepal Trade Integration Strategy (NTIS) 2023 The NTIS 2023 recognizes a list of 32 products and services with high potential for exports. The strategy identifies India, the United States, the European Union, the United Kingdom, and Turkey as countries with the largest export potential from Nepal. The five-year strategy came out after a seven-year gap due to political instability. NTIS 2023 is a five-year plan that runs from 2023 (FY 2079/80 BS) to 2028 (FY 2074/75 55 BS). This strategy was established in light of the country's anticipated transition from LDC to middle-income developing country status in 2026. There has been an addition of new products such as lentils, jute, vegetables, fruits, spices, coffee, iron, steel, cement, jewelry, pasta, Himalayan drinking water, honey, dog chew, handmade paper, and felt. Similarly, in the services of skilled and semi-skilled professionals in remittancegenerating services, IT and business process outsourcing (BPO) have been 56 incorporated. Although there has been an increase in the list of promising export

products and services, there are numerous challenges such as insufficient infrastructure, low productivity, political instability, and upcoming LDC graduation to realize the export potential of the given products.

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Recommendations Export Diversification Diversification of Nepal's exports has long been a stated policy goal of Nepal. However, no significant action in export patterns has been observed in recent years, recognizing government shortcomings in directing new product categories in export markets. Export expansion, including market diversification and higher-value products, should be a significant focus of 57 the trade strategy. Nepal should prioritize commodities over which it has a comparative and competitive 58 advantage. Nepal has launched the Nepal Trade Integrated Strategy (NTIS) 2023, increasing the number of promising export items and services from 12 to 32, considering the approaching graduation from LDC status to a middle-income developing country 59 in 2026. The strategy has successfully pinpointed new priority products and services that possess a distinct comparative advantage for export potential. As a result, it has significantly broadened the previously limited list from just 12 to an impressive 32 items.60 It is estimated that Nepal's untapped export potential or missing exports is equivalent to 12 times its actual annual merchandise exports. Nepalese enterprises could create an additional 223,000 jobs in export-related

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industries if their exports matched their 61 potential. Therefore, since Nepal has huge export potential, if we work on improving our exports, we may achieve trade growth and increased job opportunities. Promoting Tourism Tourism holds significant potential benefits for an economy. Specifically, it is widely acknowledged that tourism can bolster foreign exchange earnings, providing valuable resources for financing imports. Additionally, it fosters an environment conducive to investment and motivates local enterprises to enhance their efficiency levels, driven by heightened competition. Furthermore, tourism plays a pivotal role in alleviating unemployment, as it heavily relies on a skilled workforce. Lastly, it contributes to positive economies of scale, thereby reducing production costs for local businesses. 62 Developing high-value tourism and recruiting FDI are crucial areas for accelerating recovery. The government should explore working with the private sector to foster market analysis and development, as well as investing in and implementing policies 63 that promote green tourism. The government can help to protect the interests of businesses, consumers, and the environment by formulating

comprehensive development plans and establishing the required tourist 64 infrastructure. The government should modernize key business laws and regulations affecting foreign and domestic private investment, and clarify and simplify Protected Areas (PA) and Community Forests (CF) regulations and policies to improve the overall tourism business environment. Similarly, to improve connectivity, Nepal must focus on improving road access to core destinations and upgrading air transport 65 infrastructure and regulations. Harnessing Agricultural Potential Nepal is an agricultural and highly laborintensive country and if supported and prioritized, this sector can have a comparative advantage in trade. The nation should make efforts to optimize agriculture, which will reduce costs and increase production. The government should encourage the agricultural sector by offering adequate subsidies and lowinterest credit availability that keeps farmers engaged even in uncertain times.66 The Nepali government and private sector should collaborate to improve agro-product output in markets beyond neighboring countries. They should focus on breeding high-quality seeds and distributing them to farmers, thereby increasing productivity. Additionally, they should educate farmers on Good Agriculture Practices (GAP) and work on product diversification, grading, sorting, packaging, labeling, branding, and quality testing facilities. 67 Nepal must commercialize its agriculture sector to boost export trade. 68

Nepal should establish an Agricultural Export Diversification Program to boost its export growth rate and reduce volatility, focusing on private sector entrepreneurship, improved export facilitation, and enhanced agricultural 69 health and food safety services. To ensure that its products meet the numerous sanitary and phytosanitary standards (SPS) demanded by both national and international export markets, Nepal needs to invest in infrastructure, equipment, and human 70 resources. Major steps should be taken to upgrade existing infrastructure and establish new laboratories. A full mapping of all SPS and TBT-related infrastructure, describing the nature and dimensions of all testing facilities, as well as logistics information useful to the private sector, should be carried out. This type of indepth research will help potential publicprivate partnerships understand where the gaps are and where future investment is likely to be sustainable.71 Investment in infrastructure and energy Infrastructure refers to the essential physical and organizational structures, facilities, systems, and assets required for a society, economy, or organization to function. The most significant barrier to trade in Nepal is a lack of basic infrastructure, such as adequate energy and road access. As a result, the primary focus must be on increasing electricity generation and developing the road network, both of which are essential factors in boosting trade.72To make the most of the potential opportunities,

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several policy reforms, particularly on Public-Private Partnership law, improved megaproject management, improved coordination among government agencies concerned and stakeholders, and public participation and support are 73 required. The government should develop a hassle-free customs-clearing environment for the exporter to cut transportation costs to lessen the 74 burden on the exporter. 10,000 MW of electricity is being exported to India in 10 years under the long-term power trade 75 agreement. To make hydropower a source of trade deficit reduction, passable foreign direct investment (FDI) is necessary. Enhancing Nepal's overall infrastructure is key to bolstering trade with other nations and fostering robust economic growth. Trade Agreements and FDI Nepal has signed bilateral trade agreements and treaties with seventeen countries, including the United States, United Kingdom, Yugoslavia, India, Russia, the Republic of Korea, North Korea, Egypt, Bangladesh, Sri Lanka, Bulgaria, China, Czech Republic, Pakistan, Romania, Mongolia, and Poland. The treaty Nepal signed with India in 1996 and amended in 2009 is its most important in terms of trade volume. Except for some items under quantitative restrictions, the trade treaty puts Nepal in a unilateral duty-free trade regime with India, which accounted for more than 60 percent of Nepal’s total 76 trade in FY 2019/20. Nepal has not taken advantage of foreign direct investment (FDI) to boost exports and productivity.

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Policies promoting FDI should clearly define desired areas, revise the Foreign Investment and Technology Transfer Act, address peace and stability, and foster collaboration between private and public 77 sectors for confidence building. According to estimates, just 13% of all problems encountered by exporters are 78 caused by overly rigid laws. Nepal's economic growth has been hindered by inconsistent trade policy and development strategies, necessitating the coordination of trade and 79 development policies and processes. FDI is increasing in Nepal, but the country is still plagued by corruption, political instability, bureaucracy, poor infrastructure, unskilled labor, and a lack of transparency in legal and regulatory processes. These barriers to FDI should be actively enforced and regulated to boost merchandise exports.80 Nepal should diversify trade partners, focus on regional integration, streamline customs procedures, and prioritize trade in services to harness economic growth through effective trade agreements. Information Technology (IT) and Services trade The Information Technology (IT) sector plays a vital and multifaceted role in today's global economy and society. Nepal's IT service export business is worth around USD 515 million, with over 106 IT service export enterprises and 14,728 IT freelancers in software development and technology, as well as 51,781 freelancers active in exporting IT services via various digital platforms. Total IT service exports reached USD

515 million in 2022, indicating a 64.2% sector can provide targeted attention 84 increase over 2021. IT service exports and resources. amounted to 1.4% of GDP and 5.5% of foreign exchange reserves in 2022.81 To become a prominent player in the global IT industry, Nepal needs to adopt a comprehensive national strategy. The government should focus on improving the quality and market relevance of skills of IT graduates, develop and implement a sector brand/specialization strategy, establish new IT parks/ hubs and reform the existing IT Park, and improve 82 business incubation support. Boosting digital trade and e-commerce through different measures can be a potential for making Nepal a game changer in the global trade system. The measures can be cross-border digital payment systems, and consumer protection and data privacy regulations meeting the 83 practices of international standards. Assistance is crucial for software development and hardware component design and manufacturing, as it fosters technical advancement and long-term economic growth. The country's data center count must be increased to ensure secure data storage and management, as well as remote data access, disaster recovery, and energy efficiency. Adequate resources should be allocated to assist IT R&D initiatives. The government should also take an active role in encouraging IT start-ups. The provision of early-stage finance for IT firms has the potential to significantly boost growth in Nepal's IT sector. Creating an autonomous government organization dedicated to assisting the IT

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Conclusion In recent years, Nepal's trade trends have significantly changed through various economic, political, and global factors. While Nepal has traditionally relied on India as its primary trading partner, a concerted effort has been made to diversify trade relationships and reduce reliance on a single market and limited export products. The NTIS 2023 was released, increasing the number of export products from 12 to 36. However, the effectiveness of this trade strategy in producing positive results remains to be determined. Over the past 12 years, there has been a surge in the volume of imports; however, the volume of exports has not shown a parallel growth trajectory during the same period. Furthermore, there has been a noticeable shift towards digitalization and ecommerce, as evidenced by the emergence of online marketplaces and payment gateways that facilitate crossborder trade. This shift has the potential to create new opportunities for small businesses to participate in international trade. In recent years, Nepal's IT services exports have shown promising growth and potential. While not on the same level as some of the world's IT outsourcing behemoths, Nepal has made significant strides in developing its IT industry and expanding its services to the international market.

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However, challenges remain in terms of infrastructure development, trade facilitation, and bureaucratic impediments to Nepal's trade sector's growth. Nepal will need to continue its efforts to improve infrastructure, simplify trade procedures, and promote political stability to fully realize the potential of its geographical location between two economic giants. Trade regulatory provisions, relevant acts, and policies must undergo necessary amendments, formulation, and rigorous implementation wherever deemed essential. In the coming years, Nepal will need to adapt to changing global trade dynamics and capitalize to promote inclusive and sustainable economic growth. Trade trends should be closely monitored and responded to with informed evidencebased policies that facilitate the country's integration into the global economy and ensure a smooth transition to a middle-income developing country.

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82.“Creating Market in Nepal”. World Bank Group. November 2018. https://www.ifc.org/content/dam/ifc/doc/mgrt/cpsd-nepal.pdf 83. “Nepal has export potential worth $9.2 billion, World Bank says”, The Kathmandu Post, April 12, 2021, https://kathmandupost.com/money/2021/04/12/nepal-hasexport-potential-worth-9-2-billion-world-bank-says 84. “Unleashing IT: Advancing Nepal’s Digital Economy”. Institute for Integrated Development Studies (IIDS). July 2023. https://iids.org.np/images/publications/15c4487b777dcf3239cd6af6dd15c2c1.pdf

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