2009 Index of Economic Freedom

Quick Facts

Population:

• 27.6 million

GDP (PPP):

• $27.6 billion
• 2.8% growth
• 2.9% 5-year compound annual growth
• $999 per capita

Unemployment:

• 42.0%

Inflation (CPI):

• 6.4%

FDI Inflow:

• $-6.6 million

Nepal’s economic freedom score is 53.2, making its economy the 133rd freest in the 2009 Index. Its score is 0.9 point lower than last year, reflecting declines in four of the 10 economic freedoms. Nepal is ranked 29th out of 41 countries in the Asia–Pacific region, and its score is below the world average.

Nepal scores relatively high in fiscal freedom, government size, and monetary freedom. Both the top income tax rate and the top corporate tax rate are moderate. Nepal has made some progress in reducing poverty, but overall economic reform efforts have failed to stimulate broad-based economic growth. The role of the state remains excessive, impeding development of a more vibrant private sector.

Potential entrepreneurs face significant challenges. Investment freedom, financial freedom, trade freedom, property rights, and freedom from corruption are weak. Nepal's average tariff rate remains high, although reforms are slowly having an effect. Many foreign investments must be approved or face licensing requirements. Along with political instability, lack of transparency, and corruption, a burdensome approval process impedes investment growth. The same issues impede development of the financial sector. Property rights are not secured by the judiciary, which is subject to substantial corruption and political influence.

Background Back to the top

Nepal's young government is headed by Maoists, and the country's democratic future is uncertain. The Maoists, who fought a 10-year insurgency that left over 13,000 dead, signed a peace accord in 2006 that provided for elections, but violence and violations of human rights continue. In the midst of the country's remarkable political changes in 2008, which included abolition of the monarchy, economic development has largely stalled. Nepal attracts very little foreign direct investment; its main industries are agriculture and services.

Business Freedom 60.5 Back to the top

The overall freedom to conduct a business is limited by Nepal's regulatory environment. Starting a business takes an average of 31 days, compared to the world average of 38 days. Obtaining a business license takes almost twice the world average of 225 days. Bankruptcy proceedings are lengthy and complex.

Trade Freedom 63.2 Back to the top

Nepal's weighted average tariff rate was 13.4 percent in 2006. Nepal continues to implement reforms, but import bans, services market access barriers, import taxes, non-transparent regulations, inadequate infrastructure and trade capacity, and customs corruption add to the cost of trade. Ten points were deducted from Nepal's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 86.3 Back to the top

Nepal has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 25 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 10.9 percent.

Government Size 91.0 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 17.3 percent of GDP. The public expenditure system suffers from structural weaknesses and lack of transparency. The state oil company is a drain on the economy. Privatization has been minimal.

Monetary Freedom78.7 Back to the top

Inflation is moderately high, averaging 6.6 percent between 2005 and 2007. While most price controls have been eliminated, the government regulates the prices of petroleum products and telecommunications services and subsidizes companies in strategic sectors. Five points were deducted from Nepal's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom20.0 Back to the top

Nepal is generally open to investment in many sectors, but investments must be approved, and many face licensing requirements. Foreign investors complain about complex and opaque government procedures, as well as poor infrastructure, legal inconsistency, and political unrest. Bureaucracy and regulatory administration are burdensome, non-transparent, inconsistently implemented, and inefficient. Political instability, pervasive corruption, and inadequate infrastructure and administrative capacity also inhibit investment. Residents may hold foreign exchange accounts in specific instances; most non-residents may hold such accounts. Convertibility is difficult and not guaranteed. Most payments and transfers are subject to prior approval by the government. There are restrictions on most capital transactions, and all real estate transactions are subject to controls. Foreign investors may acquire real estate only for business use.

Financial Freedom30.0 Back to the top

Nepal’s fragmented financial system is heavily influenced by the government. Financial supervision is insufficient, and anti-fraud efforts are lacking. Regulations are not transparent and fall short of international standards. The banking sector dominates the financial sector. Over 20 commercial banks operate in Nepal, and the number of other financial intermediaries has increased in recent years. The high cost of credit and limited access to financing deter entrepreneurial activity. Nepal’s government-owned banks represent more than 30 percent of total banking assets and account for more than half of total bank branches. The central bank has gradually phased out “priority sector” financing activities whereby banks must lend a certain amount to government-designated projects.

Property Rights30.0 Back to the top

Nepal's judicial system suffers from corruption and inefficiency. Lower-level courts are vulnerable to political pressure, and bribery of judges and court staff is endemic. Weak protection of intellectual property rights has led to substantial levels of optical media copyright piracy.

Freedom From Corruption25.0 Back to the top

Corruption is perceived as widespread. Nepal ranks 131st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Foreign investors have identified corruption as an obstacle to maintaining and expanding direct investment, and there are frequent allegations of official corruption in the distribution of permits and approvals, the procurement of goods and services, and the awarding of contracts.

Labor Freedom46.9 Back to the top

Nepal's restrictive labor regulations impede employment and productivity growth. The non-salary cost of employing a worker is low, but the difficulty of laying off workers is a disincentive for job creation.