A Study on Textile and Clothing

Sectors in Nepal

Submitted to

Nepal's Accession to World Trade Organization Project

(NEP/96/010)
HMG Ministry of Industry, Commerce and Supplies,
United Nations Development Program (UNDP)
&
United Nations Conference on Trade & Development (UNCTAD)

Prepared by:

Binayak Shah
National Consultant for Textile & Clothing
Kathmandu

April 2002
 Content

Page No.
List of Tables 3
Abbreviation and Acronyms ………………………………………………………... 4
Executive Summary ………………………………………………………………… 5-6
Chapter I Introduction…………………………………………………………… 7-8
1.1 About the Study………………………………………………………...
1.2 Status of Nepal's Accession to WTO………………………………….
1.3 Contents of the Study…………………………………………………..
1.4 Research Design and Methodology……………………………………
1.5 Limitations……………………………………………………………..
Chapter II Development of Textile and Clothing Sectors in Nepal……………. 9-29
2.1 Profile of the Textile Sector……………………………………………
2.2 Income and Employment Generation………………………………….
2.3 Supply and Demand of Textile…………………………………………
2.4 Export and Import of Textile……………………………………………
2.5 Profile of Garment Industry…………………………………………….
2.6 Garment Export…………………………………………………………
2.7 Major Export Items …………………………………………………….
2.8 Export Price…………………………………………………………….
2.9 Quota……………………………………………………………………
2.10 Export Market………………………………………………………
2.11 Backward Linkage……………………………………………………..
2.12 Forward Linkage……………………………………………………….
Chapter III Production, Technology and Productivity………………………….. 30-35
3.1 Entrepreneurship Development and Investment……………………….
3.2 Foreign Joint Ventures…………………………………………………
3.3 Technology, Skill Development and Productivity……………………..
3.4 Institutional Development………………………………………………
Chapter IV Government Policy and Laws……………………………………….. 36- 39
4.1 Policy…………………………………………………………………...
4.2 Implementation…………………………………………………………
4.3 Textile Policy…………………………………………………………..
4.4 Garments Policy……………………………………………………….
Chapter V Comparative and Competitive Advantages………………………… 40-44
5.1 Textile Industry…………………………………………………………
5.2 Garment Industry……………………………………………………….
5.3 Nepal's Competitive Position in Textile and Garment …………………
5.3.1 Textile ………………………………………………………………….
5.3.2 Garment…………………………………………………………………
5.4 Problems & Constraints………………………………………………...
5.4.1 Textile………………………………………………………………….
5.4.2 Garment…………………………………………………………………
Chapter VI Likely Impacts on Nepal's Textile and Clothing Sectors from ATC/WTO 45-48
Accession…………………………………………………
6.1 Likely Impacts on Textile and Clothing Sectors……………………….
6.2 Future Outlook…………………………………………………………
Chapter VII Strategic Recommendation…………………………………………... 49-54
7.1 Textile Sector………………………………………………………..
7.2 Garments Sector…………………………………………….
Annex 1 Nepal – Brief Profile…………………………………………………. 55-59

2
 List of Tables

Page No.
Table No. 1 Textile Industry in Nepal, Key Economic Indicator………………… 9
Table No. 2 Production of Textile……………………………………………….. 10
Table No. 3 Production Capacity of Textile Industry……………………………. 10
Table No. 4 Employment in Textile Sector……………………………………… 12
Table No. 5 Wage and Salary of the Workers in Textile Sector………………… 12
Table No. 6 Supply and Demand of Textile 1999/2000………………………… 13
Table No. 7 Export and Import of Textile as per HS Chapter 13
Table No. 8 Product wise Import of Textile, Garment and Related Materials 14
Table No. 9 Garment Industry in Nepal, Key Economic Indicator………………. 16
Table No. 10 Product wise Export of Textile, Garment and Related Materials 17
Table No. 11 Garment Export from Nepal………………………………………… 17
Table No. 12 Export of Major Type of Garments…………………………………. 18
Table No. 13 Average Price of Exported Garments……………………………….. 21
Table No. 14 Cost Sheet…………………………………………………………… 22
Table No. 15 Quota Utilization in 2000/2001……………………………………… 23
Table No. 16 Comparison of Visa/License Issued and Actual Garment Export in 23
Table No. 17 Nepal's Garment Export to the United States………………………... 24
Table No. 18 Nepal's Share in the US Garment Imports…………………………… 25
Table No. 19 Garment Export to EU and Canada in 2000/2001…………………… 27
Table No. 20 Foreign Joint Venture Industries in Textile and Garments…………. 31

3
 ABREVIATIONS & ACRONYMS USED IN THE REPORT

CBS Central Bureau of Statistics

EU European Union

FOB Free on Board

GAN Garment Association – Nepal

GSP Generalized Systems of Preference

HMG His Majesty's Government of Nepal

HS Harmonized System

MFA Multi Fiber Agreement

NTA Nepal Textile Association

US/USA United States of America

VAT Value Added Tax

EXPLANATION

1. Nepalese fiscal year runs from mid-July to mid-July (from the beginning of the month
of Shrawan to the end of Asar in the Nepali Calendar).

2. Tibe, Autonomous Region of People's Republic of China is referred to as Tibet/China

in the Report.

3. Trade regions – India, Nepal, Tibet.

4
 EXECUTIVE SUMMARY

1. Nepal's Textile and Garment industries contribute significantly in the manufacturing

sector of Nepal. This sector is a major source of employment and income and has helped
develop ancillary industries and business.
2. Textile weaving is an age-old economic activity, which is widespread even in the remote
hilly regions of the country. Besides organized textile mills in the formal sector, small
and cottage household weavers are also major sources of textile production.
3. Readymade garment has emerged as the chief export product of the country and has
contributed 39 per cent to the total overseas export and earned Rs. 11.5 billion (153.1
million US Dollars) in the last fiscal year (2000-2001). The garment industry, started
during the late 1970s, has developed into one of the major industrial activities within a
span of 20 years.
4. The textile industry in Nepal faces severe market problems due to the unrestricted
availability of cheap smuggled fabrics mainly from Tibet/China. Due to decreasing
market share, 60 per cent of the textile mills have closed down and the remaining mills
are operating only at 30 per cent of the capacity. Production of textiles in the last fiscal
year (2000-2001) was 20 million meters, which is only enough to meet only 5.7 per cent
of domestic demand; as Nepal's domestic demand of textile is estimated at 350 million
meters, the rest is to be supplied by import. Import of textile in the period under review
was 47.6 million meters, 13.6 per cent of the demand, and it is assumed that balance
demand for textile is supplied by smuggling. If the same situation continues unabated
survival of the textile industry will be extremely difficult.
5. Garment industry thrived in Nepal due to quota free access to major markets in the US
and EU. Indian exporters sponsored the manufacture of garments in Nepal to circumvent
their quota restriction. Quota is being phased out after 2005 as per the provisions of the
Agreement on Textile and Clothing under the auspices of the Uruguay Round, and a new
open trading situation is to emerge. Nepal, having the disadvantage of high cost of
production and transportation, faces a serious threat of losing export markets if necessary
preparations and adjustments are not undertaken at the earliest.
6. Countries in Sub-Saharan Africa and Caribbean that export garments of types similar to
those of Nepal, have been granted duty and quota free access to their market by the
United States. Nepalese garment exports may have been placed adversely in the market
competition against these suppliers from Africa and the Caribbean in the principal export
market of the United States. Decline in the export and low utilization of quota support the
argument that the Nepalese garment exports are adversely placed in the market
competition.
7. Nepal is in the process of obtaining membership to the WTO. If successful, it has to
comply with WTO rules that advocate a liberal and open trade regime. Manufacturing
and trade on textile and clothing will have to undergo changes to be compatible with the
new trading situation.
8. Both the textile and garment industry need a national strategy to face existing problems,
challenges, constraints and, more importantly, to take up the challenges and threats that
may emerge from a new world trading environment.
9. The specific industry's associations, namely Nepal Textile Association (NTA) and
Garment Association of Nepal (GAN), have to take the lead role in the preparation and

5
 the implementation of national strategy with endorsement and support from HMG. NTA
and GAN should work with HMG in the execution of a plan of action to rescue the ailing
industry. A national strategy and specific plan of action are needed urgently for
improving the deteriorating situation in textile and garment industry since the textile
industry has already plunged into deep problems, and corrective measures should not be
delayed any further. Otherwise, the industry could collapse. A national strategy is urgent
and could be delayed further if the industry awaits initiatives from the HMG. Likewise,
the garment industry is required to make necessary preparations before the new situation
in global trading emerges after 2004. Neighboring garment exporting countries prepared
their strategies and action plan immediately after the Multi Fiber Agreement (MFA) was
concluded in 1994.
10. The industry is complaining the inability of HMG in correcting the persistent problems
and constraints. To tackle the specific problem and to safeguard the industry, investment
and employment, respective industry is required to take the lead and should bring HMG
together in solving the problem.
11. Implementation of policies, programs and commitments made by HMG in order to
improve and simplify the conduct of the textile and clothing industry and trade has been
slow and ineffective. This has increased uncertainty, and credibility is questionable. But
on the other hand, there is a general tendency in the HMG bureaucracy to look at the
private sector as a group of people having vested interest without any sense of social
responsibility. This kind of undeclared crisis of confidence has hampered joint initiative
and partnership approach. More understanding and transparent behavior is required to
improve the situation.
12. Large-scale smuggling has to be curbed if the textile industry is to survive. Measures
have to be undertaken to boost sales in the domestic market and the use of locally
produced fabrics has to be increased by export oriented garment industry. The present
consumption of local fabrics by the garment industry is less than 2 per cent of its total
consumption.
13. HMG should step up its diplomatic negotiations with the US Government in regard to
obtain the preferential treatment on par with African and Caribbean nations. The
objective of the US preferential treatment is to increase economic activities in African
and Caribbean countries where per capita income is less than 1500 dollars. Nepal, with
the per capita income around 200 dollars should present its case with good research.
Initial request to the US Secretary of State during his visit to Nepal in the same subject
matter should be taken up vigorously. Though Nepal being a small supplier may not
generate any significant clout, if it acts strictly on commercial basis. It must develop and
continue political and diplomatic initiatives to receive commercial benefits. Opening up
new markets and securing preferential access for Nepalese textile and clothing products
in the emerging economies of Asia, including the huge neighboring market of India
should also be initiated by HMG.
14. High cost of production, high cost of transport, low level technology, inefficient scale of
production and weak marketing linkages are deeply rooted fundamental problems and
constraints faced by both textile and garment industries. Rescue plan of action in the
national strategies should address these fundamental problems.

6
 CHAPTER – I

Introduction

1.1 About the Study

The Study on Textile and Clothing Sectors in Nepal was sponsored by the United Nations
Conference on Trade and Development (UNCTAD), Geneva for Nepal's Accession to World
Trade Organization (WTO) Project in Kathmandu. The chief objective of the study has been to
examine the present status of the textile and clothing sectors in Nepal and assess the likely impact
on the sectors after the phasing out of the garment quota in 2005 and Nepal's accession to WTO.

The research study was undertaken between 12 December 2001 to 8 March 2002. In the course of
the study, several individual and group meetings and interactions were organized with concerned
entrepreneurs, associations, agencies of HMG and the private sector. Relevant published reports,
information and data were collected and analyzed for the purpose of the study. The study
collected information and data on the major export markets from relevant internet sites and
documents published in the recent past.

1.2 Status of Nepal's Accession to WTO

Nepal submitted its application for the accession to GATT in 1989 and to WTO in 1995. As
required by WTO, Nepal has already presented a Basic Memorandum and is engaged in making
necessary preparations. Preliminary rounds of meetings and explanation of its position are also
being undertaken for accession. Nepal is participating at WTO meetings as an observer.

With the support of UNDP and HMG Ministry of Industry, Commerce and Supplies, a separate
project called Nepal's Accession to WTO has been established in Kathmandu for providing
technical assistance to HMG and the private sector in preparation for the accession, and also for
dissemination of information to increase public awareness on the subject. Several interaction
programs organized by the Project with the objective of increasing the flow of information and
public awareness have been received very well by the target group of business community,
government officials, professionals, academicians and the press.

HMG accords high priority to the ongoing preparation for the accession to WTO and has
established a separate WTO Cell in the Ministry of Industry, Commerce and Supplies, the
government's nodal administrative agency for undertaking required works in regard to the
accession. Likewise, the Federation of Nepalese Chambers of Commerce and Industry, the
national apex body of the Nepalese business community, the Nepal Chamber of Commerce, the
largest chamber organization of the country and the Garment Association of Nepal (GAN), has
also established separate WTO cells.

1.3 Contents of the Study

The study presents the status of textile and clothing industries with a focus on production,
employment, investment, technology and foreign trade. Government policy, rules and regulation
in relation to these sectors have been reviewed. Problems, constraints and threats have been
analyzed in detail and strategic recommendations have been presented. A recommended plan of
action is presented separately for HMG, for specific associations and for individual enterprises.

7
The report presents a detailed assessment on the likely impact from the changing global trade in
textile and clothing, especially after the phasing out of the garment quota system under the
Uruguay Round Agreement on Textile and Clothing and WTO accession.

1.4 Research Design and Methodology

In order to present the report as per the terms of reference, research study has been undertaken in
four phases.

i. Situation appraisal
ii. Desk research
iii. Field survey
iv. Analysis and report writing

A number of situation appraisal meetings with selected textile and garment industries, office
bearers of the Nepal Textile Association, Garment Association of Nepal, Chief (Joint Secretary)
of the WTO Cell at Ministry of Industry, Commerce and Supplies, and the National Program
Manager of Nepal's Accession to WTO Project were organized. The national consultant, on the
basis of information and opinions gathered from these situation appraisal meetings developed a
detailed outline to carry out the research study. Published information was collected from NTA,
GAN, Federation of Nepalese Chambers of Commerce and Industry, Nepal – USA Chamber of
Commerce and Industry, Nepal – German Chamber of Commerce and Industry, Trade Promotion
Centre, National Productivity and Economic Development Centre, Central Bureau of Statistics,
and Nepal Rastra Bank. Desk research was undertaken to gather relevant information and
statistics. Information, statistics and opinions were collected from interviews with selected textile
and garment industries, associations, chambers of commerce, and HMG offices. Interaction
programs were organized with the active participation from entrepreneurs, exporters, investors,
service providers and information and opinions were gathered. The national consultant attended
few relevant meetings including a national seminar on "Nepalese Garment Industry under
Changing Global Trading Environment" which was organized by the Garment Association of
Nepal in Kathmandu on 26 December 2001. Information, opinions and statistics gathered from
situation appraisal meetings desk research and field surveys were tabulated and analyzed as per
the requirement of the study and the draft report was prepared. The draft report was presented to
the Nepal's Accession to WTO Project for comments. Comments received from the Project have
been incorporated and the final report is presented.

1.5 Limitations

As the entire research study was undertaken in eight weeks time, the national consultant did not
visit the textile and garment industries which are operating outside the Kathmandu valley. The
study has used information available in printed and electronic medium in analyzing statistics and
trends in major importing markets.

8
 CHAPTER – II

Development of Textile and Clothing Sectors in Nepal

2.1 Profile of the Textile Sector

The textile sector include the manufacturing of textile, yarn, jute, woolen carpets, garments,
pashmina (very soft and light warm woolen fabrics made of mountain goat's wool), and cotton
terry towels. These sectors are major manufacturing activities and are also major export products
of the country. Textile and yarn are more important for the local domestic market.

Jute farming and manufacturing used to be the main cash crop and exportable industrial product
till the early 1970s, but economic viability could not be maintained in the wake of the invasion of
cheap substitute like plastic. Jute now contributes only marginally to the economy. The textile
industry, flourishing till the 1980s, is facing a fate similar to that of the jute industry and is
currently passing through lean phase.

One of the key stated policies for liberalization of trade regime in 1990 was to open the Nepalese
market to the outside world and phase out protection given to domestic industries. In the process,
a high import tariff wall was lowered and, as a consequence, domestic industries, including
textile, faced severe competition from cheap imported products. Large scale smuggling of textile
products from across the open border with both India and Tibet/China has also severely weakened
the textile industry.

As per Nepal Textile Association (NTA) estimates, total production of fabrics in 2000/01 was
only 20 million meters, 60 million meters less than the annual production recorded a decade ago
in 1990/91. It is reported by NTA that 60 per cent of the textile mills have closed down and the
remaining 40 per cent are operating under 30 per cent of rated capacity. Out of 52 member textile
mills of NTA, only 12 are in operation.

Two modern spinning mills, one in the public sector and another a foreign joint venture
establishment, have ceased production due to problems in management and market. Likewise,
another public sector modern integrated textile mill established with Chinese aid and technology
also ceased its production in year 2000.

Table – 1
Textile Industry in Nepal

Key Economic Indicators 1991/92 1996/97 2000/01

Total investment Rs 15 billion
Production capacity 150 million metres
Present estimated production 20 million metres
Capacity utilization 13.3 per cent
Estimated total domestic demand 350 million metres
Share of local textile production in domestic demand 6 per cent
Share of import in domestic demand 94 per cent
Value addition in total manufacturing activity (%) 6.7 8.4 12.1
Excluding pashmina 6.7 8.4 3.1
Employment 16238 20633 6000*
Share of total manufacturing employment (%) 7.3 10.5

9
 Key Economic Indicators 1991/92 1996/97 2000/01
Number of total establishments 254 296 61
Cotton textile terry towel 12
Synthetic textile 22
Synthetic yarn 16
Jute products 11
Foreign joint venture establishments 1
Share of total number of manufacturing establishments (%) 5.9 8.3
Annual average value added growth rate at constant prices (%) 3.8 5.8 9.9
Excluding pashmina 3.8 5.8 -19.5
Value added output ratio 40.9 37.9 36.0
Excluding pashmina 40.9 37.9 21.6
- Figures presented cover only for organized sector
- Figures for carpet industry are not included
* Estimated
Sources: Census of Manufacturing Establishments 1991/92, 1996/97, CBS, Kathmandu
Industrial Statistics 2000/2001, Department of Industries, Kathmandu
Statistical Year Book of Nepal 2001, CBS, Kathmandu
Nepal & The World - A Statistical Profile 2001, FNCCI, Kathmandu
Economic Survey 2000/2001, Ministry of Finance, Kathmandu

Table – 2
Production of Textile

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000
Cotton textile 5421 6344 6236 5571 4864 6337 4065 3234* 2817 374
in '000 m (30) (36) (35) (31) (27) (35) (23) (18) (16) (02)

Synthetic textile 16485 11445 12795 14318 23400 18748 7850 18225* 16724 12064
in '000 m (143) (99) (111) (124) (202) (157) (154) (158) (328) (104)

Jute goods 11170 14819 11952 12673 7681 13908 18856 30636 28970 33130*
in '000 MT (61) (81) (65) (69) (42) (79) (103) (67) (158) (181)
Figures in brackets are production index base year 1986/87.
Source: Industrial Statistics, Department of Industries, Kathmandu
* Source: Nepal Rastra Bank
Statistical Year Book of Nepal 2001, CBS, Kathmandu
Economic Survey 2002/02, Ministry of Finance, Kathmandu

Table – 3
Production Capacity of Textile Industries

1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000
Cotton textile 14069 11820 11820 11820 11820 11820 11820 11820 11820 11000
in '000 m (39) (54) (53) (47) (41) (53) (34) (27) (24) (03)

Synthetic textile 45117 50756 43296 43296 45000 45000 41000 41000 32000 32000
in '000 m (37) (23) (30) (33) (52) (41) (44) (44) (52) (38)

Jute goods 31760 31760 38112 38112 38112 38112 38514 38514 38514 62978
in '000 MT (35) (47) (31) (33) (20) (36) (49) (80) (75) (53)
Figures in bracket are percentage of capacity utilization.
Source: Industrial Statistics, Department of Industries, Kathmandu
*Source: Nepal Rastra Bank

10
Total production of textile (cotton and synthetic combine) in 1999/2000 was 12438000 meters, 3
per cent of which was cotton and 97 per cent synthetic. Table 2 shows a sharp decline in the
production of cotton textile. Cotton textile production has decreased by more than 7 and half
times in comparison to the previous year. Production of synthetic fabric has also decreased by
27.8 per cent. Cotton textile mills in the period under review produced only 3 per cent of capacity
whereas synthetic textile mills utilized 38 per cent of the capacity. Refer Table – 3 for details.

Cottage and informal sector's share in the total textile production during the period under review
is estimated at 37.9 per cent. Its share was estimated at 42 per cent in total textile production and
1
63 per cent in cotton textile production in 1992/93. As per the survey undertaken in 1992/93,
there were 65 thousand looms in cottage and informal sector. It is estimated that there are about
25 thousand looms in operation in cottage and informal sector.

Over the years production of cotton textile has been decreasing and while production of synthetic
textile increased. Since 1986 a significant increase is noted in the production of synthetic fabrics.
Reason for this shift is increase in the demand for synthetic fabrics because of cheaper prices,
good finishing and suitable designs for market trends and durability. Another good reason for the
increase in synthetic production was high demand for the fabric in markets across the southern
border as import of synthetic yarns and fabrics was strictly regulated in India during that period.

2.2 Income and Employment Generation

Employment in the textile industry has decreased sharply from 20633 in 1996/97 to 6000 in
2000/01. This is due to the closing down of 60 per cent of the factories. It is reported that the
majority of workers who lost their jobs due to shut down of the factories are engaged in family
farming and civil construction works. Due to low demand of handloom textile, income and
employment in the cottage and informal sector has also decreased.

Details of income and employment generation in the textile sector are presented in Table 4. As
per the 1996/97 census of manufacturing units (with 10 or more workers), 15258 workers were
engaged in the spinning weaving, finishing and textile made up manufacturing activities. Of the
total, 4.21 per cent workers were owner and owner family (without salary and wages), 81.15 per
cent were contract workers, 9.39 percent were administrative and 5.25 per cent were technical
workers.

As per the census, the textile sector had generated Rs. 378.33 million in wages and salaries. 73.18
per cent of the total wages and salaries were paid to contract workers where as salaries paid to
administrative workers and technical workers were 14.24 per cent and 12.58 per cent of the total
respectively. Details are presented in Tables 4 and 5.

1
Availability of Nepali Fabrics for Exportable Ready-to-Wear Garments, DFG NGCCI – Institute of Trade
& Development, Kathmandu, 1993.

11
 Table – 4
Employment in Textile Sector

Sector No. of Employment in Number Owner & Family Total

Estds. Contract Admin Technical Members Workers
Spinning & weaving 134 352 6134 554 402 7442

Finishing 89 240 5457 803 383 6883

Made-up textile 19 51 790 76 16 933

Total 242 643 12381 1433 801 15258

Per cent share in total 4.21 81.15 9.39 5.25 100

Source: Census of manufacturing establishment, CBS, 1996/97.

Table – 5
Wage and Salary of the Workers in Textile Sector

Sector No. of Wages and Salaries of Workers Rs '000 Total

Estds. Contract Administrative Technical Workers
Spinning & weaving 134 137250 23004 22322 182576

Finishing 89 129863 28575 24671 183109

Made-up textile 19 9774 2304 574 12652

Total 242 276887 53883 47567 378337

Per cent share in total 73.18 14.24 12.58 100

Source: Census of manufacturing establishment, CBS, 1996/97.

2.3 Supply and Demand of Textile

Estimated domestic demand of fabric in 1999/2000, as per NTA, was 350 million meters
(calculation is based on National Planning Commission's per capita estimated consumption of 15
meters). It is noted that domestic production was 20 million meters and 47.6 million meters
textile was imported in the period under review. This demonstrated that out of an estimated 350
million meters, only 67.6 million meters of textile was available in the market from the formal
sources of supply the rest (282.4 million meters) of textile is believed to have met by alleged
smuggling.

Import of textile by export-oriented garment factories for manufacturing garments for export is
not included in the above figures. As per the figure made available by the Department of
Customs, 18.4 million meters of textile were imported under bank guarantee by garment
industries making garments for export.

12
 Table – 6
Supply and Demand of Textile 1999/2000

Estimated National Estimated Domestic Import Shortfall

Requirement Production
350 million 20 million 47.6 million 282.4 million
meters meters meters meters
(5.7%) (13.6%) (80.7%)
Source: NTA and Department of Customs, Kathmandu

Table – 7
Export & Import of Textile & Garment as per Harmonized System Chapter
(Percentage of Total Overseas Export in 2000/01)

HS Code Product Description Export % of Total Import % of Total

Chapter Value in Overseas Value Overseas
wise '000 Rs. Export '000 Rs. Import
50 Silk 3361 0.01 943261 1.38
51 Wool yarn & woven fabric 17 0.00 3470424 5.08
52 Cotton 12834 0.04 267226 0.39
53 Other vegetable textile fibers 3245 0.01 113864 0.17
54 Man-made filaments 721 0.00 706417 1.03
55 Man-made staple fibers 25 0.00 1274345 1.87
56 Wadding, felt, twine, cordage, 0 nil 11857 0.01
ropes and cables
57 Carpets & other textile floor 8603721 29.9 139308 0.20
coverings
58 Special woven fabrics like tapes- 0 nil 122372 0.17
tries, trimmings, embroidery
59 Textile fabrics, articles suitable 7231 0.02 309726 0.45
for industrial use
60 Knitted or crocheted fabrics 0 nil 144208 0.21
61 Articles of apparel & clothing 2011331 7.01 129967 0.01
accessories knitted or crocheted*
62 Articles of apparel & clothing 14689463 51.2 478248 0.70
accessories not knitted or
crocheted**
63 Other made up textile articles 518671 1.8 107259 0.16
Total 25850620 88.99 8101512 11.86
Compiled and analyzed on the basis of published statistics.
Source of Statistics – Nepal Overseas Trade Statistics, Annual Publication of Trade Promotion Centre,
Kathmandu 1991/92 to 2000/01.

* also includes woolen jerseys, pullovers, cardigans, sweaters, waistcoat knitted, woolen socks, and gloves, knitted,
shawls, scarves, mufflers, mantillas, veils and the like (pashmina)
** also include woolen (pashmina) and textile shawls, scarves, mufflers, mantillas, veils and the like.

13
2.4 Export and Import of Textile

In the last fiscal year (2000-2001), garment, carpet, pashmina and terry towel exports contributed
88.99 per cent of the total overseas export of the country. Import of textile products covered
11.86 per cent in the total overseas import of the country in the period under review.

Export of pashmina was negligible till 1997/98 but soared to Rs. 730 million (3.3 per cent of the
total overseas export) in 1998/99, 3878 million (13.9 per cent of the total overseas export) in
1999/2000 and Rs. 5270 million (18.4 per cent of the total overseas export) in 2000/2001.
However, export of this product has slowed down considerably in the current fiscal year.

Export of terry towel has developed as one of the main export products of the country since
1993/94. Export of terry towel was Rs. 31.8 million in 1993/94 which went on to increase to Rs.
218.9 million in 1995/96, Rs. 366.9 and Rs. 447.6 million (1.5 per cent of the total overseas
export) in 2000/01.

In 1999/2000, 21.83 million meters of textiles were imported from India for domestic market and
8.11 million meters were imported by garment industries for making garment for export. In this
period 3.75 million meters were imported from overseas markets for local market and 10.32
million meters for garment industries. Import of textiles from Tibet/China was 21.97 million
meters, higher than the import from India, and overseas. It is observed that the import from
Tibet/China has become an increasingly important source of supply. It is also noted that garment
industries have imported more textiles from overseas markets than from India in 1999/2000.
Refer to Table – 8 for details.

Of late, several overseas markets such as Hong Kong/China, Singapore, Dubai and Europe have
emerged as major suppliers of textiles for Nepalese garment industries. Nepalese garment
industries are importing mainly cotton fabrics from India and for textiles other than cotton.
Overseas markets are the main sources of supply. Garment industries are also importing
accessories such as elastic, buttons, zipper, buckram and the like from both India and overseas.

Table – 8
Product wise Import of Textile, Garments & Related Materials in 1999/2000

Import from
Products Import from India Import from Overseas Tibet/China Total
Local Under Bank Local Under Bank Local
Import Guarantee Import Guarantee Import
All types of Fabrics (mtr) 21834395 8115397 3750527 10322901 21973463 65996683
(354067) (3451465) (196859) (2288596) (632625) (6623612)
Hosiery Fabrics (kgs) 100849 804466 905315
(7683) (215718) (223401)
Cotton Garment (doz) 128657 341084 764050 1233791
(39559) (338687) (618943) (997189)
Linen, Curtain, Bed 109803 11305 117864 238972
spread Blanket (doz) (19145) (60898) (24929) (104972)
Yarn (kgs) 572700 1294798 670944 373971 688773 3601186
(69583) (118508) (2735951) (1943458) (401921) (5269421)

14
 Import from
Products Import from India Import from Overseas Tibet/China Total
Local Under Bank Local Under Bank Local
Import Guarantee Import Guarantee Import
Elastic (mtr) 406657 406657
(362) (362)
Zip Fastner (inch) 2270899 3473 9266 grus
(767) (503) (3483)
Label (kgs) 1005476 4543 1743399 doz
(4013) (4794) (583382)
Buckram (mtr) 338536
(5417)
Thread (grus) 46870 3000
(9866) (328)
Buttons (doz) 847915 198410
(3785) (25445)
Hangers (doz) 4305973
(22667)
Note: Figures in bracket are value in '000Rs.
Source: Department of Customs.

2.5 Profile of Garment Industry

The garment industries in many least developed countries, including Nepal, received a boost after
garment exports from these countries were granted quota free access by industrialized nations
under the provisions of the Multi Fiber Agreement (MFA) in 1974. Earlier, production of garment
in Nepal for export was limited to ethnic garments and little souvenir items for tourists. Garment
production for export intensified in the late 1970s and the early 1980s as a few Indian garment
exporters in collaboration with local exporters sponsored production and initiated exports from
Nepal mainly to the United States to circumvent quota restrictions.

In the absence of production logistics such as appropriate sewing machines, fabrics, accessories,
even labour and managerial staff, almost everything was brought in from across the border to
begin the businesses. Nepalese collaborators organized space for factory and organized official
formalities. As the business did not face official or social resistance and exports received quota
free access in the major international markets, more and more Indian exporters were attracted to
Nepal. For Indian entrepreneurs and exporters, geographical proximity, low cost of living, similar
culture and cheap labor were added advantages in Nepal. Although a number of regulations were
introduced in later years, in the beginning, garment producers/exporters could set the precedent as
there were no specific rules to regulate the new business. This was another advantage for new
entrants. New factories, so as to reap the economic benefits in shortest possible time, were able to
begin production in rented residential buildings even in downtown Kathmandu. In the beginning,
no factories were registered as foreign joint ventures but were registered in the name of Nepalese
collaborators so that they could begin business without any delay.

In about 20 years, garment production and export has become one of the major economic
activities in Nepal. Nepalese entrepreneurs no longer act as only collaborators but are owners and
managers in the industry.

15
Table – 9 explains the status and contributions of the garment industry to the national economy,
income and employment.

Table- 9
Garment Industry in Nepal: Key Economic Indicators

Total number of establishments 212

Foreign joint venture establishments 22
Total investment Rs. 6 billion (81.08 million US$)
Employment 50,000
Share in the manufacturing sector 7.2 per cent
Value addition 35 per cent
Capacity utilization 40 per cent
Source: Theme Paper presented at the National Seminar on Nepalese Garment Industry, organized by GAN in
Kathmandu on 26 December 2001.

The number of registered factories reached to a peak of 1067 in 1994/95, mainly to receive more
export quota. The number of establishments declined after the quota distribution system changed.
Closure of many inefficient small enterprises also curtailed the number of establishments. As per
GAN, there are 212 registered garment factories at present and only 20 per cent of them are in
operation.

Along with the decrease in the number of factories, employment has also gone down from around
1000 thousand in the early 1990s to around 50 thousand now.

2.6 Garment Export

Annual garment export from Nepal, prior to the influx of India exporters in the late 1970s, used to
be less than Rs 10 million. Since then, garment has been one of the main exports of the country
and presently contributes about one-fifth of the total national export and about 40 per cent of total
overseas export. It has overtaken carpet, the principal export product of the country, in terms of
export earning since 1999/2000. Although garment export increased by 167 per cent in Rs. terms
and 109 percent in US Dollar terms during the one decade from 1991/92 to 2000/01, the growth
pattern is erratic. Within a span of four years, export dropped to negative growth in 1994/95 from
a phenomenal more than cent percent growth in 1991/92. After slowing down for two years,
garment export maintained an impressive growth rate of more than 20 per cent for two years till
1998/99. Garment export grew only by a paltry 3.1 per cent in the last fiscal year in comparison
to substantial 35.9 per cent growth in 1999/2000. Export has declined by 8.9 per cent in the first
three months of the current fiscal year 2001/2002.2

The value of US$ appreciated by almost 75.23 per cent against the Nepalese Rs. in the decade
1991-2001. Due to this, the export growth rate of garment is less in dollar terms. As a matter of
fact, export has declined y 2.7 per cent in 2000/01 in terms of dollar earning.

2
As per the provisional overseas export statistics provided by Trade Promotion Center, Kathmandu.

16
Product wise export in quantity to India. Overseas markets and Tibet/China is presented in Table
– 10.

Table – 10
Product wise Export of Textile, Garments & Related Materials in 1999/2000

Value in '000 Rs.

Products India Overseas Tibet
Quantity Value Quantity Value Quantity Value
Cotton textile (mtr) 6108 188 353105 6222

Polyester textile (mtr) 1816482 104008 96757 7150

Wool garments (pcs) 10211 3769

Cotton hosiery garments (pcs) 496079 32895

Woolen yarns (kgs) 11775 311

Polyester yarns (kgs) 19249325 1804894

Garments (doz) 18544208 11477977 1505 138

Source: Department of Customs, Kathmandu.

Table – 11
Garment Export from Nepal

Value in million
Fiscal Year Value of Per cent Change Value Value of Share of Garment Exchange
Garment of Total Exports to Rate ***
Exports Exports Overseas** Rs = 1
in Rs. in US$ in Rs. in US$ (TE)* in TE in Overseas US$
1991/1992 3112 73.05 131.6 132.2 13838 12185 22.4 25.5 42.60
1992/1993 3723 75.98 19.6 4.0 17333 15494 21.4 24.0 49.00
1993/1994 5756 117.21 54.6 54.2 19077 16495 30.1 34.8 49.11
1994/1995 5357 106.18 -6.9 -9.4 17926 14288 29.8 37.4 50.45
1995/1996 5414 96.25 1.0 -9.3 19758 15526 27.4 34.8 56.25
1996/1997 5617 98.98 3.7 2.8 22862 17011 24.5 33.0 56.75
1997/1998 6783 100.34 20.7 1.3 27402 17987 24.7 37.7 67.60
1998/1999 8155 199.66 20.2 19.2 35269 22181 23.1 36.7 68.15
1999/2000 11083 157.43 35.9 31.5 49561 27828 22.3 39.8 70.40
2000/2001 11431 153.12 3.1 -2.7 56520 28690 20.2 39.8 74.65
Compiled and analyzed on the basis of published statistics.
Source of Statistics – Nepal Overseas Trade Statistics, Annual Publication of Trade Promotion Centre, Kathmandu
1991/92 to 2000/01.
* include export earnings from India, convertible currencies area and Tibet, Autonomous Region on PR China
** Export to Convertible Currencies Areas only
*** Source : Nepal Rastra Bank

17
2.7 Major Export Items

Nepal exported 107 different items of garments in the fiscal year 2001/02 to more than 50
countries (Table – 12). Top 12 items exported in the last fiscal year in terms of quantity and value
were: (1) M&B cotton shirt, not knitted (5.99 million pcs / 1660 million Rs), (2) M&B cotton
trousers, bib & brace overalls, not knitted (4.09 million pcs / 1662 million Rs), (3) Cotton T-
shirts, vest knitted (3.52 million pcs / 709 million Rs), (4) W&G garment of textile fabric and
rubberized textile fabric (2.54 million pcs / 689 million Rs), (5) W&G cotton trousers, bib and
brace overalls breeches and shorts (2.29 million pcs / 614 million Rs), (6) W&G woolen blouses,
shirts and shirt-blouses (2.26 million pcs / 628 million Rs), (7) W&G cotton dresses, not knitted
(2.19 million pcs / 569 million Rs), (8) W&G cotton blouses, shirt and shirt-blouses, not knitted
(2.13 million pcs / 551 million Rs), (9) M&B cotton shirts, knitted (1.81 million pcs / 492 million
Rs), (10) M&B shirt of textile materials, not knitted, (1.51 million pcs / 352 million Rs), (11)
M&B cotton night shirt & pyjama, not knitted (1.38 million pcs / 324 million Rs), and (12) W&G
cotton night shirt, pyjama, not knitted (1.20 million pcs / 227 million Rs).

Table – 12
Export of Major Type of Garments 2000/2001

HS Code Type of Garments 1999/2000 2000/2001 Per Unit Export Price

Chapter No. of Quantity No. of Quantity Value Value
wise pieces '000 Rs pieces '000 Rs (Rs.) (US$)
6105.10 M&B cotton shirts knitted 767282 167624 1813775 491919 271.21 3.63
(136.4) (193.5) (24.1) (17.0)

6105.20 M&B shirts knitted or 79322 17478 300424 83627 278.36 3.73
crocheted or man-made fabrics (278.1) (378.5) (26.3) (19.5)

6106.10 W&G cotton blouses, 343931 66394 147868 35139 237.63 3.18
shirts, shirt-blouses knitted (-57.0) (-47.1) (23.0) (16.0)

6109.10 Cotton T-shirts, vest 881850 193404 3515349 709303 201.77 2.70
knitted (298.6) (266.7) (-8.0) (-13.1)

90.90 T-shirts, singlets & vest 11808 6304 209705 41583 198.29 2.66
knitted or crocheted (1675.9) (559.6) (-269.2) (-284.9)

10.10 Woolen jersey, pullover, - 146369 - 221852 - -

cardogam, sweater, waistcoat, (51.6)
knitted

20.20 Cotton jersey, pullover, 288468 77623 730672 175704 240.46 3.22
20.21 cardigans, waistcoat and (153.3) (126.24) (-10.6) (-15.7)
similar articles

6117.10 Shawls, scarves, mufflers, - 102664 - 45670 - -

mantillas, veils and the like, (-55.5)
knitted
12.12 M&B cotton overcoat, car, 108619 32160 152312 31875 209.27 2.80
coat, capes, cloaks and similar (40.2) (-0.9) (-29.3) (-150.0)
article, not knitted or crocheted

1.1.1 W&G cotton overcoat, car 63589 21826 246816 68256 276.55 3.70

18
HS Code Type of Garments 1999/2000 2000/2001 Per Unit Export Price
Chapter No. of Quantity No. of Quantity Value Value
wise pieces '000 Rs pieces '000 Rs (Rs.) (US$)
coat, rain coat, capes, cloaks (288.1) (212.7) (-19.4) (-24.1)
and similar article, not knitted
6203.22 M&B cotton ensembles, 404990 96057 530224 140043 264.12 3.54
not knitted (30.9) (45.8) (11.3) (5.0)
6203.32 M&B cotton jackets and 186585 50432 295397 112951 382.37 5.12
blazers, not knitted 958.3) (124.0) (41.4) (33.3)
6203.39 M&B jacket and blazers 219 76 310128 100449 323.90 4.34)
(141510.9) (132069.7) (-6.6) (-11.9)
42.42 M&B cotton trousers, bib & 4192557 1032980 4091982 1161889 283.94 3.80
brace overalls not knitted (-2.5) (12.5) (15.2) (8.5)

49.49 M&B trousers, bib & brace 13221 3460 352308 90054 255.61 3.42
overalls breaches & shorts of (2564.7) (2502.7) (-2.3) (-8.0)
other textiles
6204.12 W&G cotton suits 1364781 378201 1122918 328436 292.48 3.92
(-17.7) (-13.2) (5.5) (-0.2)

6204.21 W&G woolen ensembles 196622 48630 380958 103093 270.62 3.63
(93.7) (112.0) (9.4) (3.4)

6204.22 W&G cotton ensembles, not 90356 23415 855985 171569 200.43 2.68
knitted (847.3) (632.7) (-22.6) (-27.1)

29.29 W&G ensembles of textile 8792 1999 81596 28511 349.42 4.68
materials not knitted (828.0) (1326.3) (53.6) (44.8)

6204.32 W&G cotton jacket, not 308478 81548 891900 196274 220.06 2.95
knitted (189.1) (140.7) (16.7) (21.5)

39.39 W&G jacket of textile 2330 440 113606 50290 442.67 5.93
materials, not knitted (4775.8) (11329.5) (134.4) (121.2)

6204.42 W&G cotton dresses, not 872106 228292 2194385 569274 259.42 3.48
knitted (151.6) (149.4) (-0.9) (-6.4)

6204.52 W&G cotton skirts, not 4475397 1013498 573821 172711 300.98 4.03
knitted (-679.9) (-83.0) (32.9) (25.1)
6204.59 W&G skirt of textile 6400 2364 299933 79931 266.50 3.57
material, not knitted (4586.4) (3281.2) (-27.8) (-32.0)

62.62 W&G cotton trousers, bib 3514215 839284 2288654 613606 268.11 3.59
& brace overalls breeches & (34.9) (-26.9) (12.2) (5.9)
shorts
6205.10 M&B woolen shirt, not 128804 33715 352425 157590 447.16 5.99
knitted (173.6) (367.4) (70.8) (61.0)

6205.20 M&B cotton shirt, not knitted 10658786 2582689 5993291 1659561 276.90 3.71
(-43.8) (-35.7) (14.3) (7.8)
30.30 M&B shirt of man made 493671 143874 137350 46632 339.51 4.55
fibers, not knitted (178.2) (-67.6) (16.5) (9.9)
90.90 M&B shirt of textile 232335 47251 1513188 351742 232.45 3.11
materials, not knitted (551.3) (644.4) (14.3) (7.6)

19
HS Code Type of Garments 1999/2000 2000/2001 Per Unit Export Price
Chapter No. of Quantity No. of Quantity Value Value
wise pieces '000 Rs pieces '000 Rs (Rs.) (US$)
10.10 W&G blouses, shirt & shirt- 21848 8672 855111 200202 234.12 3.14
blouse of silk or silk waste (3813.9) (2208.6) (-41.0) (-55.7)
20.20 W&G woolen blouses, shirt 1940172 294112 2256395 628000 278.32 3.72
& shirt-blouses (16.3) (113.5) (83.6) (73.0)
30.30 W&G cotton blouses, shirt & 2986005 721910 2130099 550838 258.60 3.46
shirt-blouses, not knitted (-28.7) (-23.7) (6.9) (0.8)
40.40 W&G blouses, shirt & shirt- 198581 25081 521455 126969 243.49 3.26
blouses of man made fibers (162.6) (406.2) (92.8) (82.1)
90.90 W&G blouses, shirt and 818278 319612 557538 333711 598.54 8.01
shirt-blouses of textile (31.9) (4.4) (53.2) (44.3)
materials, not knitted
11.11 M&B cotton under pants & 316614 66024 218504 52298 239.35 3.21
briefs not knitted (31.0) (-20.8) (14.8) (8.4)
21.21 M&B cotton night shirt & 837264 166172 1379936 323742 234.61 3.14
pyjama, not knitted (64.8) (94.8) (18.2) (11.3)
6207.91 M&B cotton vest, not knitted 477555 107806 466767 126823 271.71 3.63
(-2.3) (17.6) (20.3) (13.0)
21.21 W^G cotton night shirt, 691863 215663 1200205 227655 189.68 2.54
pyjama not knitted (73.5) (5.6) (39.1) (-42.7)
29.29 W&G night shirt & pyjamas 49872 19459 169052 44615 263.91 3.54
of other materials (239.0) (129.3) (34.4) (36.1)
6209.20 Babies cotton garments, not 1220566 294929 997080 248960 249.69 3.34
knitted (-18.3) (-15.6) (3.3) (-2.6)

40.40 M&B garment of textile 1320393 427631 1037286 322370 310.78 4.16
fabric & rubberized textile (-12.4) (-24.6) (-4.0) (-9.6)
fabric
50.50 W&G garment of textile 6060606 978110 2543764 688897 270.82 3.63
fabric & rubberized textile (138.3) (-29.6) (67.8) (58.5)
fabric

6211.42 W&G cotton dhoti & lungi, 25874 3164 155425 36814 236.86 3.17
not knitted (500.7) (1063.5) (93.7) (83.2)
20.20 Woolen shawls, scarves, - 2747673 - 3921643
mufflers, mantillas, veils and (42.7)
the like
60.60 Toilet linen & kitchen linen - 21807 - 134364
of terry toweling or similar (516.2)
terry fabric or cotton
6302.91 Cotton kitchen linen - 415851 - 271963
(-34.6)
6302.99 Kitchen linen of textile - - - 41189
materials
6305.20 Cotton sacks & bags 978405 91395 1018413 37211 36.54 0.49
(4.0) (-59.3) (-60.9) (-63.11)
90.90 Hats & headgears, knitted 871576 59524 780411 55131 7064 0.95
crocheted (-10.4) (-7.4) (3.4) (-2.6)
99.99 Headgear, whether or not 1192758 90646 293535 27420 93.41 1.25

20
HS Code Type of Garments 1999/2000 2000/2001 Per Unit Export Price
Chapter No. of Quantity No. of Quantity Value Value
wise pieces '000 Rs pieces '000 Rs (Rs.) (US$)
lined or trimmed (-75.4) (-69.8) (22.9) 15.7
Note: (1) Figures in bracket are percentage change in comparison with previous fiscal year.
(2) Compiled and analyzed on the basis of published statistics.
Source of Statistics – Nepal Overseas Trade Statistics, Annual Publication of Trade Promotion Centre,
Kathmandu 1991/92 to 2000/01.

2.8 Export Price

Average per unit price of exported garment in the last fiscal year was Rs. 263.21 (US$ 3.52). A
decade ago average export price was Rs. 122.78 (US$ 2.88). Increase in the average per unit price
over the years suggests improvement in the quality, increase in image and goodwill and
strengthening of market networking.

Export per unit price of US$ 8.01 for W&G blouses, shirt and shirt-blouses of textile materials,
not knitted was the highest per unit price earned in the export during 2000/2001.

Table – 13
Average Price of Exported Garments

Fiscal Year Quantity Export Earning Average Per Unit Price

in '000Rs Rs. US$
1991/92 25346508 3112002 122.78 2.88
1992/93 22785186 3723448 163.42 3.34
(-10.1) (19.6) (33.0) (15.9)
1993/94 40967865 5756485 140.51 2.86
(79.8) (54.6) (-14.0) (-14.3)
1994/95 33505181 5357029 159.89 3.17
(-18.2) (-6.9) (13.7) (10.8)
1995/96 27969944 5414746 193.59 3.44
(-16.5) (1.0) (21.1) (8.5)
1996/97 29953917 5617478 187.54 3.30
(7.0) (3.7) (-3.1) (-4.0)
1997/98 34950594 6783025 194.07 2.87
(16.6) (20.7) (3.7) (-13.0)
1998/99 37748724 8154920 216.03 3.17
(8.0) (20.2) (11.3) (10.4)
1999/2000 46836446 11082558 236.62 3.36
(24.0) (35.9) (9.5) (5.9)
2000/2001 43430777 11431246 263.21 3.52
(-7.2) (3.1) (11.2) (4.7)
Note: (1) Figures in bracket are percentage change in comparison with previous fiscal year.
(2) Compiled and analyzed on the basis of published statistics.
Source of statistics – Nepal Overseas Trade Statistics, Annual Publication of Trade Promotion Centre,
Kathmandu 1991/92 to 2000/01.

21
As it is seen that the average price that Nepal received from export of garment export in
2000/2001 was US$ 3.52 per piece, cost breakdown of the same is prescribed in Table – 14.

Table – 14
Cost Sheet
Production Costs in US Dollar
Items Tentative Cost % of the FOB Price
1. Fabrics 1.76 50
2. Accessories – thread, buttons, lining 0.21 06
zipper, foam, buckram
3. Stitching 0.42 12
4. Cutting, finishing, ironing, quality 0.14 04
checking, labeling, packing
5. Packing materials / labels / washing 0.14 04
instruction
Export Costs
6. Clearing, forwarding, transportation, 0.25 07
customs duty, visa, chamber, quota
approval fees and unseen expenses
Overhead / Profit
7. Factory management, maintenance & 0.60 17
repair production logistics, utilities,
administrative expenses, marketing and
PR expenses, bank interests and profit
Total FOB Price 3.52 100%
Freight
8. Freight cost for land sea transport to US 0.53 15
port
Total Landed Cost (C&F) at US Port 4.05, excluding insurance.

Bringing in raw materials and bringing out the finished garments constitutes one of the major
costs for Nepalese garment export. Fabrics and accessories comprise 56 per cent of the FOB
price, whereas export processing cost, including unseen expenses, stands at to 7 per cent and
labor expense at 20 per cent. Likewise, 17 per cent is operational and administrative expenses,
including profit and bank interest.

2.9 Quota

10 categories of garment and 2 categories of terry towel are subject to quota in the export to the
US. Likewise, 2 categories of garments are permitted into Canada under quota.

Garment quota was not fully utilized by Nepal in 2001 (Table – 15). Export of only two
categories 369-S Shop Towel and 347/348 W&G Shorts achieved above 90 per cent quota
utilization whereas export of categories 363 Terry Towel and 342/642 W&G Shirts met above 60
per cent quota. Utilization of quota by categories 340 M&B shirts and 336/636 W&G dresses is
above 40 per cent and categories 341 W&G blouses and tops and 640 M&B rayon shirts have
only made above 20 per cent quota utilization. Performance of category 641 W&G blouses and
tops made of rayon is very poor as it has utilized only 0.69 per cent of the total available quota.

22
Utilization of quota in the export of garment to Canada is also not encouraging. Export of
category 5 trousers, overalls and shorts is equivalent to 55.24 per cent of the available quota and
only 4.87 per cent of the quota is exported in category 7 Woven shirts, blouses and similar
articles.

Table – 15
Quota Utilization in 2000 and 2001

Year US Quota Category and Product Description

USA USA 341 USA ISA USA USA USA USA USA Canada Canada
340 Blouse 342/642 347/348 336/636 640 641 369-S 363 5 7 Woven
Men's Doz Skirts Shorts Ladies Rayon Rayon Shop Terry Trousers Shirt
Shirt Doz Doz Dress Men's Blouse Towel Towel Overalls Blouses
Doz Doz Shirt Doz Kgs Nos. Shorts &
Doz Pcs Similar
Articles
PCs
2000

Annual 380089 1220891 331733 856127 263161 191297 431326 983454 7741604
Quota
Actual 453990 520489 161817 869918 248468 134006 9413 982148 8293380
Quota
Utilization (100) (42.63) (48.77) (100) (94.42) (70.05) (2.18) (99.86) (100)
(in %)

2001
Annual 402896 1119397 351638 905501 306848 202775 457208 1012958 8206100 219135 334555
22805C 66902 6% 51367CF +54450S S6% 11477 CF
Quota +81675 S9% =
=380091 200353 9% 51367SCF = 191298
940892
=952142

Actual 174254 263934 221760 878603 128064 49721 3165 964568 5376600 121054 16306
Quota
Utilization (45.84) (27.72) (63.06) (93.34) (41.74) (25.99) (0.69) (95.22) (65.52) (55.24) (4.87)
(in %)
Source: NPEDC, GAN

Table – 16
Comparison of Visa/License Issued and Actual Garment Export in 2002/2001

Value in '000 US$

Period Value of Visa/License Issued
16 to 31 July 2000 5770512
August 2000 9011430
September 2000 10880876
October 2000 13719133
November 2000 13719133
December 2000 8364619
January 2001 20477997
February 2001 22703786

23
March 2001 2046494
April 2001 12979167
May 2001 12792827
June 2001 8927810
1 to 15 July 2001 5260505
Total 14658289
(95.8% of Total Export Value 153120000)

Source: NPEDC, GAN

2.10 Export Market

The United States is the single largest market for garment export from Nepal. Almost 90 per cent
of the garment export from the country has gone to the US. Garment export to the US increased
over the years but growth is erratic. After maintaining an impressive growth rate of above 33 per
cent in two consecutive years, export to the US increased by only 11.1 in the last fiscal year.
Export during 1994 to 1997 stagnated at around 4650 million Rs. after achieving a good export
growth earlier.

Although garment is the single largest export item to the US, it is observed that exports of other
products are also on the rise. Due to this increase, share of garment in the total export to US is
decreasing. See Table – 17.

Table – 17
Nepal's Garment Export to the United States

Value in million
Fiscal Value of Garment % Change Total Garment % of US in % of Garment Total
Year Export to US Export Total Garment in Total Export Exports
in Rs. equiv US$ in Rs. in US$ in Rs. equiv US$ Export to US to US
1991/92 2898 68.02 132.7 133.3 3112 73.05 93.1 91.6 3161
1992/93 3258 66.49 12.4 -2.2 3723 75.98 87.5 88.7 3673
1993/94 5216 106.21 60.0 59.7 5756 117.21 90.6 93.3 5587
1994.95 4637 91.91 -11.1 -13.4 5357 106.18 86.5 90.1 5142
1995/96 4671 83.04 -0.7 -9.6 5414 96.25 86.2 82.3 5673
1996/97 4693 82.69 -0.5 -0.4 5617 98.98 83.5 79.1 5930
1997/98 5626 83.22 19.8 0.6 6783 100.34 82.9 79.1 7106
1998/99 7352 110.52 33.8 32.8 8155 119.66 92.3 79.1 9520
1999/00 10179 144.58 35.1 30.8 11083 157.43 91.8 82.8 13678
2000/01 10305 136.67 1.2 -5.5 11431 153.12 90.1 75.6 14974
Note: Compiled and analyzed on the basis of published statistics.
Source of Statistics - Nepal Overseas Trade Statistics, Annual Publication of Trade Promotion Centre, Kathmandu
1991/92 to 2000/01.

24
Nepal is a small supplier to the world market. Nepal's share in US import is less than 1 per cent.
Only in three categories (HS Code 610342, 620442 and 621420) is Nepal's share more than 1 per
cent. Mexico and other near by countries in South America and the Caribbean, and major garment
exporting countries in Asia such as China, Taiwan, Indonesia, South Korea, Philippines,
Thailand, India, Pakistan, Sri Lanka and Bangladesh are major suppliers to the US markets.
Details are presented in Table - 18.

Table – 18
Nepal's Share in the US Garment Import 1998 Statistics

HS Total No. of Nepal's Top 5 Exporting Countries with their % Share

Code Importing Share in
Countries %
610130 44 0.07 Philippine 9.32, Taiwan 8.24, Malaysia 8.02, Egypt 6.79, Thailand 5.67
610220 36 0.04 Hong Kong 8.86, El Salvador 6.83, Singapore 6.38, Turkey 6.33, Mexico 5.03
610342 64 1.08 Mexico 19.16, Dominican Republic 12.20, Honduras 9.24, Turkey 8.01, El Salvador 4.73
610412 09 0.85 Mexico 54.12, Italy 14.23, Turkey 13.53, Cambodia 7.47, Israel 2.88
610442 67 0.06 Malaysia 10.04, Turkey 8.42, Hong Kong 7.06, Pakistan 6.98, Mexico 6.94
610444 41 0.13 Mexico 18.90, Korea Rep. 17.88, India 12.43, Italy 9.92, Hong Kong 7.42
610462 81 0.16 Mexico 12.59, Honduras 9.28, Turkey 8.15, Korea Rep 7.68, Taiwan 6.54
610510 85 0.54 Pakistan 11.61, India 9.65, Honduras 8.18, Thailand 6.40, Philippines 5.38
610610 82 0.11 Macau 10.61, Mexico 8.33, Hong Kong 7.01, Turkey 6.78, Korea Rep. 5.02
610831 62 0.00 Hong Kong 18.42, Turkey 18.87, Philippines 6.02, Malaysia 3.51, Korea Rep. 3.31
610910 95 0.11 Mexico 28.55, Honduras 17.20, El Salvador 8.91, Jamaica 7.69, Dominican Rep. 6.68
610990 61 0.01 Mexico 25.95, Honduras 23.04, Dominican Rep. 9.39, El Salvador 9.31, Korea Rep. 4.31
611010 68 0.01 Hong Kong 39.57, Italy 13.38, China 11.65, Thailand 8.32, UK 6.08
611020 105 0.13 Mexico 9.50, Honduras 4.92, China 4.84, Macau 3.63, Indonesia 3.52
611120 69 0.06 Thailand 18.75, Hong Kong 11.23, Philippines 8.71, Macau 6.22, China 5.84
611591 22 0.45 UK 35.33, Italy 21.32, Canada 18.12, Costa Rica 7.35, Switzerland 4.10
611691 17 0.54 China 44.86, Taiwan 16.46, Philippines 12.21, Haiti 11.95, Italy 3.27
611710 34 0.53 Taiwan 29.86, China 15.64, Italy 11.37, Philippines 10.49, Korea Rep. 6.17
611790 15 0.09 China 56.92, Taiwan 17.18, Mexico 8.55, Sweden 8.41, Italy 2.28
620111 49 0.50 Italy 25.83, Dominican Rep. 14.56, Bulgaria 6.58, Canada 6.38, Hungary 6.17
620112 48 0.50 China 18.37, Sri Lanka 12.27, Guatemala 9.58, Indonesia 8.94, Thailand 6.19
620191 32 0.26 India 25.60, Canada 11.42, Hong Kong 9.32, Italy 8.97, Korea Rep. 8.04
620192 60 0.18 China 19.22, Hong Kong 12.47, Sri Lanka 6.71, Thailand 6.48, Indonesia 6.14
620193 72 0.04 China 15.41, Korea Rep. 15.14, Taiwan 9.38, Sri Lanka 7.98, Thailand 6.08
620211 52 0.02 Dominican Rep 21.64, Italy 19.63, Guatemala 4.12, Honduras 3.81, France 3.63
620212 52 0.2 China 13.23, Hong Kong 11.12, Sri Lanka 8.59, India 8.27, Pakistan 6.89
620291 45 0.13 Italy 17.78, Dominican Rep. 10.52, Canada 1048, Thailand 7.87, Ukraine 6.25
620292 60 0.38 China 20.14, Hong Kong 16.12, Bangladesh 11.59, Sri Lanka 11.23, India 8.11
620293 68 0.04 China 18.99, Korea Rep. 8.47, Sri Lanka 8.20, Taiwan 7.16, Bangladesh 6.79

25
 HS Total No. of Nepal's Top 5 Exporting Countries with their % Share
Code Importing Share in
Countries %
620342 100 0.76 Mexico 29.76, Dominican Rep. 11.09, Hong Kong 7.14, China 4.21, Costa Rica 3.98
620343 79 0.04 Mexico 17.53, Dominican Rep. 17.29, China 10.58, Indonesia 9.47, Bangladesh 6.34
620349 48 0.15 China 47.69, Dominican Rep. 8.91, Indonesia 8.04, Hong Kong 7.26, Mexico 4.24
620429 17 0.10 China 27.85, Philippines 27.70, India 21.54, Indonesia 8.69, Bangladesh 7.79
620432 53 0.28 Hong Kong 20.97, India 10.76, Italy 10.14, China 9.18, Thailand 4.69
620433 58 0.01 Guatemala 15.85, Dominican Rep. 9.13, Philippines 7.32, Mexico 7.26, Taiwan 6.88
620442 80 3.32 India 14.72, China 10.06, Philippines 9.32, Sri Lanka 5.59, Bangladesh 5.46
620443 71 0.18 China 30.24, Philippines 10.23, Mexico 8.93, Indonesia 8.25, Guatemala 5.18
620444 66 0.47 India 19.10, Philippines 11.94, China 10.22, Mexico 8.77, Indonesia 6.69
620449 57 0.00 China 60.93, India 6.57, Italy 6.07, Hong Kong 5.69, Korea Rep. 3.97
620452 69 0.18 Hong Kong 17.07, India 9.32, China 8.53, Taiwan 6.72, Sri Lanka 6.53
620459 65 0.03 China 33.58, India 10.91, Korea Rep. 6.88, Philippines 4.91, Guatemala 3.48
620462 92 0.27 Mexico 28.21, Hong Kong 12.72, Dominican Rep. 6.17, China 6.09, Bangladesh 3.96
620463 75 0.03 Mexico 13.07, Indonesia 10.94, Korea Rep. 6.48, Taiwan 6.28, Dominican Rep. 6.25
620469 71 0.05 China 40.31, Hong Kong 5.92, Indonesia 5.74, Dominican Rep. 4.57, Korea Rep. 3.8
620520 98 0.73 Hong Kong 12.96, Bangladesh 8.37, India 8.06, Indonesia 6.18, Sri Lanka 4.92
620530 63 0.23 Korea Rep. 28.35, China 22.54, Honduras 7.20, Mexico 5.77, Hong Kong 5.70
620610 30 0.01 China 87.69, India 3.54, Korea Rep. 2.62, Italy 2.24, Germany 1.16
620630 85 0.66 India 26.55, Hong Kong 21.91, Bangladesh 8.05, Indonesia 7.12, China 5.82
620640 72 0.02 China 15.84, Indonesia 14.17, Mexico 10.27, Korea Rep 8.57, India 8.11
620711 44 0.01 Honduras 15.26, Costa Rica 13.37, El Salvador 11.27, Indonesia 11.24, Bangladesh 5.94
620721 37 0.49 Dominican Rep. 28.82, China 13.67, Taiwan 9.91, Hong Kong 7.81, El Salvador 4.99
620791 43 0.03 Turkey 18.35, Brazil 11.62, Dominican Rep. 8.58, Egypt 7.03, China 6.76
620821 50 0.28 China 17.21, Bangladesh 16.43, Hong Kong 10.38, India 8.03, Indonesia 7.75
620891 56 0.02 Turkey 32.16, Bangladesh 8.11, Mexico 7.73, El Salvador 6.41, Pakistan 5.19
620892 46 0.16 China 20.98, Sri Lanka 13.98, Mexico 10.57, Philippines 4.60, Pakistan 4.30
620920 64 0.37 Philippines 18.59, China 11.84, Indonesia 9.89, Bangladesh 9.57, Sri Lanka 6.63
621131 24 0.43 Hong Kong 19.58, Italy 15.02, Columbia 12.66, UK 9.25, Canada 6.76, Israel 6.26
621132 49 0.32 Mexico 33.02, Canada 8.34, Bangladesh 7.89, Honduras 6.16, Hong Kong 4.65
621141 40 0.10 Mexico 13.38, India 10.31, Hong Kong 9.09, China 6.55, Philippines 5.81
621142 67 0.07 China 15.59, India 14.13, Sri Lanka 10.05, Bangladesh 8.57, Hong Kong 8.08
621140 27 0.02 Italy 34.94, Canada 21.74, France 16.54, Korea Rep. 10.29, Japan 8.91
621429 22 1.41 Italy 43.01, UK 29.63, Germany 7.50, France 5.06, China 3.22

Source: TRAINS, UNCTAD Geneva, Spring 2000

European Union and Canada are the other emerging markets for garment exports from Nepal.The
share of garment exports to EU in the fiscal year 2000/01 was 9.04 per cent in quantity and 9.01
per cent in value. It is seen that garment export to EU is on the rise over the years, and in view of

26
the recent extension of EU derogation of rules of origin for Nepal for another three years, export
is expected to increase. As per the export figures, export growth, particularly to Germany, France
and UK, is encouraging. Export to Canada was worth 1.23 per cent in quantity and 1 per cent in
value in the last fiscal year. Canada is another potential market for garment export from Nepal.

Table – 19
Garment Export to EU and Canada 2000/2001

Countries Quantity Pcs. Value in Million % in Total Garment

in Rs. in US$ Export Qty. Rs.
European Union 39229933 1030.23 13.66 9.04 9.01
Austria 53386 21.15 0.28 0.12 0.18
Belgium 154241 45.68 0.60 0.35 0.39
Denmark 42883 10.58 0.14 0.09 0.09
Finland 2980 0.59 0.007 0.006 0.004
France 1361335 242.18 3.21 3.13 2.11
Germany 847890 433.26 5.74 1.95 3.79
Greece 13671 0.87 0.01 0.03 0.007
Ireland 29556 3.94 0.05 0.06 0.03
Italy 339390 39.29 0.52 0.78 0.33
Luxembourg 13283 2.04 0.02 0.03 0.01
Netherlands 94500 17.79 0.23 0.21 0.15
Portugal 3918 0.29 0.003 0.009 0.002
Spain 380744 35.15 0.46 0.87 0.30
Sweden 30509 7.13 0.09 0.07 0.06
UK 561647 170.29 2.25 1.29 1.48
Canada 535611 114.45 1.51 1.23 1.00
Note: Compiled and analyzed on the basis of published statistics.
Source of Statistics – Nepal Overseas Trade Statistics, Annual Publication of Trade Promotion Centre, Kathmandu
1991/92 to 2000/01.

2.11 Backward Linkages

It is observed that use of locally produced textile by export oriented garment industries is less
than 2 per cent. Non availability of appropriate width, irregular weaving, poor finishing and color
variation are some of the major factors restricting garment manufacturers from using domestic
garments. Width of majority of textile produced by domestic mills is between 36 to 41" but
garment factories require 44" or more. Irregular weaving is a major problem, causing serious
quality problems and wastage. Guarantee of color-fastness has also been sought by garment
factories.

Garment factories feel that textile mills are not marketing their product aggressively. Textile
mills, as per garment manufacturers, wish to receive production orders well in advance so that
they can plan accordingly. In an open market situation where the required amount of textile can

27
be ordered and procured by just making a phone call, it is not appropriate for textile mills to
expect orders months ahead of delivery.

It is also observed that most of the garment orders are placed as a total package – designs are sent,
source of textile and accessories pre-determined and finished products taken back. In this set up,
garment factories cannot procure textile from their desired sources.

Against this background, it is noted that the garment industry, despite its fast growth over the
years, contributed only marginally to the sale of local textile mills.

As per GAN, 40 per cent of the requirement of accessories such as zipper, elastic, foam, buttons,
buckram etc., are produced in the country. However, most of the garment factories, to a large
extent, use imported accessories as supply is regular and dependable, price and quality are good,
and business terms are favorable. In cases where buyers want specific quality accessories, or for
the production of high value garments, only imported accessories are used.

Although the garment industry has helped accessories manufacturers to establish manufacturing
units in the country, an erratic trend in demand has made the industry vulnerable. Moreover,
accessories manufacturers in general carry only a small stock of raw materials and finished
materials hence they cannot supply materials in quantity within a short period as raw materials
required for the production have to be imported. On the contrary, supply of imported finished
materials is readily available.

Development of garment and carpet industry has contributed in the development of the dyeing
industry. Several small and medium sized dyeing plants are successfully operating in the country.
In order to cater to export orders, dyeing plants have upgraded their technology. They also take
care of buyers' requirements such as color fastness, shrinkage, etc., including non use of harmful
substances like AZO.

2.12 Forward Linkages

Development of carpet and garment exports has contributed significantly in the strengthening and
development of the freight forwarding business. Nepalese companies, in order to be able to cater
to increasing export cargoes, improved considerably their professional and logistics capability
and developed international business networks and partnerships. Freight forwarding services in
Nepal have developed well and are capable of handling export import cargoes to and from any
part of the world. Transport network service between Nepal and Kolkotta port, international
network between Nepalese freight forwarding companies and international ocean freight
operators, and shipping lines have improved considerably.

According to the Freight Forwarders Association of Nepal, the use of sea containers for garment
export has increased significantly over the years and at present about 80 per cent of garment
export is being transported in this mode.

It is estimated that about 950 containers were employed to transport exported garments to markets
overseas in the last fiscal year. For high value fashion garments, air cargo is used by garment
exporters. Out of 10455 MT of air cargoes cleared in the year 2000 by Tribhuvan Airport
Customs office, Kathmandu at the country's only international airport, it is estimated that about
30 per cent cargoes were of garment.

28
Most of the major US and European buyers generally work exclusively with specified
international freight companies and require the same company to handle their cargoes from Nepal
also. This practice has helped Nepal to develop international business linkages and increase
professional standards, especially in the modern system of global communications.

Another sector that has receive a significant boost from the development of the garment industry
is the packaging industry. Almost the entire requirement of packing cardboard and polythene bags
are supplied by local industry. Demand of labels and related printed materials is also met by local
industry.

Garment industry extensively uses courier and express mail services for sending and receiving
samples. Likewise, international telephone service, air travel and hotel industry, transport and
insurance industry also receive good business from the garment industry.

Banking services in the country have benefited handsomely though garment manufacturing and
trading activities. Interest from project financing on garment industries and service charges from
export-import and bank guarantee form a significant portion of the earnings of the banking sector.

29
 CHAPTER – III

Production, Technology and Productivity

3.1 Entrepreneurship Development and Investment

The garment industry in Nepal, started with collaboration from its Indian counterparts since the
late 1970s, has firmly established itself as one of the important economic sectors of the Nepalese
economy. More than 70 per cent of the operating small and medium sized garment factories are
entirely owned and managed by Nepalese entrepreneurs. Still in some bigger sized
establishments, their Indian counterparts have the major say in the operation. Indian collaborators
are still engaged in the production and export of garments with mutual understanding and
informal arrangement.

The role of Indian or third-country collaborators is very strong in regard to marketing and
obtaining export orders. Foreign collaborators secure export orders from major buying houses and
arrange supply of design pattern, fabrics and accessories. Finished products are exported through
the same collaborators.

As per GAN, more than Rs. 6 billion has been invested in the industry. Most of the established
industries are operated in their own sheds, and still quite a number of industries operate at large
residential buildings in and around Kathmandu.

Garment and textile are among the largest sectors where banks have provided financing for
project establishment and working capital. Banks have reported that there has been delay and
request for rescheduling for the payment of loan and interest from the garment and textile
industry.

3.2 Foreign Joint Venture

There are 22 garment industries operating under foreign joint venture. The combined annual
production capacity of these joint venture industries is 37.62 million pieces and combined
authorized capital of these establishments is Rs. 791.69 million. Out of 22, 12 operating industries
are with Indian collaborators, 2 each with Germany and UK, 1 each with Austria, France, Hong
Kong/China, Panama, Switzerland and USA.

Joint venture garment factories have introduced modern methods of production and technology
for the production of high quality products. Having better marketing know-how and contacts,
these companies have been able to maintain regular export orders, especially from the US and
EU.

One joint venture factory with Bangladesh is under construction, 10 such industries (3 from
India) have been granted license and 30 companies (12 from India) have been approved. Of late,
collaborators from China have shown interest in establishing garment industries in Nepal. With
the huge success of Nepalese Pashmina products in the world market, Chinese collaborators are
interested in harnessing the existing potential of the product.

Authorized capital of all 41 joint venture companies under construction, licensed and approved
amounts to Rs. 1176.55 million and will produce additional 58.09 million pieces annually.

30
Foreign joint venture will contribute immensely in enabling technological advancement in the
industry, product quality and exports. However, the present state of emergency in the country and
economic recession in major garment buying countries such as the US and EU could delay the
establishment of many licensed and approved joint venture companies.

There is one operating textile factory under joint venture with India, one is under construction,
two are granted license and one is approved. Joint venture companies have also been operating in
towel manufacturing and dyeing. Licenses have been given for the production of yarn and zip
fastners. See Table-20 for details.

Table – 20
Foreign Joint Venture Industries in Textile and Garment Sectors
(As of 15 July 2001)

Sector Country Status Investment in Capacity in million

million Rs Mtrs/Pcs
Textile India Operating 142.66 6.40
India Under construction 85.36 6.00
India Licensed 58.41 4.00
Pakistan 81.43 0.40
Textile Polyester Japan 78.08 1.40
Textile Silk China Approved 67.70 1.20
Garment Austria Operating 40.35 0.58
France 4.00 0.08
Germany 9.76 0.19
Hong Kong/China 80.30 1.40
India 225.02 3.60
India 8.32 0.60
India 5.20 0.54
India 12.50 0.84
India 6.50 0.70
India 53.67 14.70
India 29.08 0.60
India 46.00 1.50
India 10.40 0.30
India 5.30 0.36
India 31.40 2.20
India 57.07 4.32
Panama 83.28 1.70
Switzerland 20.00 0.60
UK 5.00 0.04
UK 27.71 0.86
USA 22.87 0.11
Bangladesh Under 135.64 1.10
Construction
China Licensed 8.78 0.20
India 67.35 0.60
India 143.41 1.08
India 4.42 2.00
Korea Republic 23.90 0.67
Philippines 19.30 0.56
Thailand 142.00 0.51
USA 18.93 1.50

31
 Sector Country Status Investment in Capacity in million
million Rs Mtrs/Pcs
Knitwear Japan 28.48 0.36
Pashmina USA 9.33 0.30
Bangladesh Approved 25.14 1.00
China 166.73 0.90
China 47.00 0.10
China 9.82 0.15
China 30.63 0.60
Finland 5.00 0.10
Germany 45.32 1.50
Hong Kong/China 14.65 0.16
India 10.00 1.00
India 5.00 0.10
India 4.90 0.60
India 73 0.42
India 29.08 0.60
India 29.60 0.84
India 36.92 0.60
India 15.00 0.16
India 20.00 0.30
India 161.60 1.00
Japan 4.07 0.04
Japan 4.00 0.05
Korea Republic 9.44 0.03
Switzerland 15.40 0.02
UK 71.39 0.25
USA 5.00 0.07
Pashmina China 343.02 0.50
China 30.63 0.06
China 25.33 0.15
Silk China 74.96 0.49
Cotton Knit India 28.04 0.60
India 29.03 0.40
Dyeing USA Operating 4.48 290MT
Zip Fastner India Licensed 58.41 4.00pcs
Yarn Korea Republic Licensed 496.66 3000MT
Philippines Closed 460.50 3663MT
Towel Pakistan Operating 24.27 0.96 pounds
Pakistan 141.46 2.8pcs

Source: Foreign Investment Promotion Division, Department of Industries, Kathmandu.

3.3 Technologies, Skill Development and Productivity

Leaving aside a few bigger mills, the majority of Nepalese textile mills employ outdated
technology. Textile mills use semi-automatic shuttle looms, automatic shuttle changing and cop
changing looms, shuttle less rapier and projectile looms. Power looms are also very common
among the textile mills, half of which are semi-automatic of Indian make. Other types of looms
used in Nepal are automatic shuttle and shuttle-less looms, mostly of Chinese and Japanese make.
Shuttle less rapier and projectile looms of Japanese make and Swiss projectile looms are being
used by synthetic textile mills for the production of quality fabrics for shirting and suiting.

32
Under the public sector, Hetauda Textile Mills is the only modern integrated textile mill in the
country. It has spinning, weaving and finishing facilities under one roof. Established under
Chinese aid, the mill has 14,688 ring spindles and 488 automatic shuttle changing looms and
machinery for dyeing, printing, folding, etc. Production technology used in the mill is Chinese
conventional methods. However, the mill is not in operation following the government decision
to close it down.

Cottage industry and textile producers in the unorganized sector use traditional throw shuttle
hand-looms and fly shuttle.

Nepalese textile mills work on labor-intensive methods, whereas efficient textile producing
countries have become increasingly capital intensive. Efficient textile industries worldwide are
those operating in large economies of scale. Merger and integration is very common in the major
textile producing countries. But the Nepalese textile industry, operating on a moderate scale,
limited investment size and production capacity, has not been able to upgrade technology,
whereas massive technological innovation and changes have taken place in neighboring India and
elsewhere over the last decade. In spinning, new innovation in technology has increased
processing speed by four times and has reduced labor substantially by 40 per cent. Likewise,
further advancement in the working of shuttle less loom has increased productivity dramatically.

However, in terms of introducing new technology, the garment industry has come a long way
since its humble beginnings some two decades ago. The majority of garment factories use
advanced sewing machines of Japanese or German make. Larger establishments have switched to
assembly line methods of production. Advanced technology has also been adopted by these
establishments in cutting, finishing and quality checking, ironing and packing etc. The average
number of sewing machines per factory is about 100 and labor is 200.

The machine labor ratio 1:2 is very high when compared to those of neighboring countries.
Absence of efficient management and production system is responsible to a large extent for the
high machine labor ratio. The majority of factories don't have a proper engineering design in their
factory sheds which poses difficulty in effective physical, production and management control in
the overall system. As most of the factories are housed in multi story buildings, separate control
and supervision is needed on each floor.

Productivity is directly linked with the level of skill, compliance by work force with the industrial
culture and discipline. Work force employed in the factories is not adequately trained and, to a
large extent, lack industrial culture and discipline. No matter how effective the management and
production system, support to and compliance with the system is not encouraging. There is
increasing tendency among the work force to comply with prescribed procedures and rules only
when they are guided to do so by the management. There is a feeling of unfair treatment in terms
of wages and facilities in the work force, which is not conducive for a sound industrial culture
and discipline. Because of conventional owner-worker relation, industrial culture has not been
adequately developed and there is little or no influence of work force on operational matters. The
level of low transparency in operation from the management side is also a general trend.

As per the NPEDC report 1999, labor productivity index in the manufacturing sector has declined
in the last decade. As per industry sources, labor productivity in the Nepalese garment industry is
35 per cent lower than what it is in the neighboring countries. It is reported that in Bangladesh
hundred machines could produce 3000 pieces of garments but this ratio is less than 1000 in
Nepal.

33
Nepal still lacks organized vocational training to teach the various skills required for textile and
garment manufacturing industries. There are a few privately run short term training centres for
sewing and other skills. Garment factories are thus required to train the work force by themselves
and in many instances, workers learn the skill of trade by doing. Demand for skilled workers is
high, and many of these are recruited from India since the manpower needed is not available in
the local labor market.

As per entrepreneurs, the present Labor Law is labor-biased and does not help in developing a
sound industrial culture. Excessive use of extreme pressure tactics such as strike and bandh by
political parties has been resorted to by the trade union movement in the country. Trade unions,
divided into several fractions on the ideology of the contemporary political parties, are more
active in propagating and supporting political ideology than safeguarding the professional interest
of the labor class. To avoid unfair pressure tactics from the trade unions, entrepreneurs prefer to
recruit temporary seasonal workers. This has hampered productivity as skill development
programs for the workers on a regular long-term basis is not undertaken by the industry.
Temporary seasonal workers have only short-term interests which restrict them from making a
total commitment and good performance.

3.4 Institutional Development

Several agencies have promote the institutional and professional development of the textile and
garment sector. The major agencies are listed below with their brief profiles.

1. Nepal Textile Association (NTA)

Established in 1980 in Kathmandu by textile mills for the promotion and strengthening of the
sector, NTA actively represents the collective interest of the sector and its members. NTA
regularly examines the problem and prospects of the sector and recommends appropriate
measures to the sectors concerned including HMG and its member industries. Due to the shut
down of several mills over the years, NTA's present membership stands at 12. NTA has very
limited physical and logistical facilities and staff. Having limited resources, its regular functions
and programmes have been severely curtailed over the years.

2. Garment Association of Nepal (GAN)

GAN was established by a group of garment producers in 1986. Its present membership is 212.
GAN constantly works for the development of the garment sector and maintains constant
vigilance on the smooth operation of the industry. One of the main services of GAN is to monitor
and make recommendations for the distribution of US and Canadian quotas. GAN has recently
prepared a report on the likely scenario of the Nepalese garment industry after phasing out the
MFA quota after 2004, and is actively working to devise appropriate strategies for preparing the
industry in the new changing global trading environment. GAN is working to initiating necessary
preparation for action to obtain preferential treatment in order to have access to the US and EU
markets.

GAN maintains a full-fledged secretariat with basic physical and logistical facilities, including
staff. Off late, GAN has earned a good reputation from garment entrepreneurs as an organization
that can look after the collective interests of the industry.

34
3. Garment Export Promotion Committee (GEPC)

Established a decade ago, GEPC is a regulatory organ of HMG to supervise quota distribution
and other related aspects for the development of garment industry. The Committee is chaired by
the Secretary of the Ministry of Industry, Commerce and Supplies and represented by other
Ministries and Departments concerned such as Finance and Customs, Central Bank and private
sector agencies like GAN. The Ministry of Industry, Commerce and Supplies acts as the
secretariat of the Committee.

It has been in the past that several decisions taken by the Committee have not been implemented
effectively as other ministries such as the Finance Ministry did not take decisions with a mandate
from HMG. A necessary change in stature is deemed necessary to make the functioning of GEPC
more effective and relevant.

4. National Productivity and Economic Development Center (NPEDC)

NPEDC has been assigned by HMG to monitor and distribute quotas (visas) for garment export to
the US and Canada. The HMG Department of Commerce monitors and issues license permits to
specified type of garments for export to EU.

5. The Trade Promotion Center (TPC)

TPC is a national export promotion organization of HMG. It arranges Nepals' participation in a

few international trade fairs and exhibitions. TPC also organizes various market promotion
activities from time to time. It collects and publishes export-import statistics and organises
seminars and workshops on relevant issues. TPC does not have effective programmes in relation
to development of linkages in major export markets of the US, Canada and EU, hence it is
expected to work in this way.

6. The Department of Cottage and Village Industries & Cottage and Village Industry
Development Board

These organizes short-term training on vocational trade, relating to garment and textile
production. These training should be made more professional and tailored to the need of the
industries.

7. Others

The Federation of Nepalese Chambers of Commerce and Industry, the Nepal Chamber of
Commerce and bi-national Chambers such as the Nepal – US Chamber of Commerce and
Industry and the Nepal German Chamber of Commerce and Industry also undertake programs for
the development of garment and textile industries.

35
 CHAPTER – IV

Government Policy and Laws

4.1 Policy

His Majesty's Government of Nepal has initiated reforms in economic policies and laws since the
early 1990s and several major changes have been announced to liberalize trade and investment.

Reforms in economic policies and laws have encouraged the private sector to take a lead role in
economic activities, and the entire manufacturing and trading activities are the under private
sector's operation and ownership. HMG acts as the facilitator and is not engaged in manufacturing
and trade.

Trade and industry policies of HMG advocate the promotion of the textile and garment sectors.
Accordingly, laws and regulations have been incorporated to regulate and develop these sectors.
The system of open general licensing, full convertibility of Nepalese rupees in current account
transaction, reduction of tariffs and tax, simplification of procedures and documentation, bonded
warehouse facility, duty drawback scheme, liberalization of foreign investment law and reforms
in banking and finance sector have contributed significantly to the development of the
manufacturing and export of the garment sector.

The export sector has been accorded top priority. The textile and garment as prominent export
products of the country have received priority from HMG.

4.2 Implementation

One of the main complaints of the entrepreneurs is poor implementation of policies, rules and
regulations by the government. Industry sources indicated that the implementation of the duty
drawback system is very slow and ineffective. No matter how liberal and favorable the policies
and laws, beneficiaries receive only little of what they are promised. Lack of coordination among
the line agencies and bureaucratic systems are largely responsible for the poor state of affairs.
Implementation of policies and programmes having implication on tax or economic facilities are
slow and ineffective. Unstable political environment and frequent changes of government have
also helped worsen the situation as a new government generally ignores the priorities, policy and
programs set by its predecessor.

There is lack of trust and confidence in the private sector when it comes to promises and
commitment made by the government. It has happened several times that policies, programmes,
commitments and promises made by the government have only been implemented partially. On
the other hand, it is noted that government bureaucracy regards private sector entrepreneurs or
businessmen as persons working only for self interest and do not care for their social obligations.
It is seen in the past that the existing bureaucracy instead of penalizing individual culprits, stops
the whole functioning of the system and imposes penalty on the whole sector whenever corrective
measures are taken. Lack of trust between the government and the private sector has hampered
the joint initiation of action for achieving a common goal, as one side still does not see the other
as a reliable and trustworthy partner. An interaction and partnership approach between the two
sides has increased significantly in comparison to the post 1990 era, and conditions for an active
private sector participation in economic programs of donor agencies have ensured more private
sector partnership and made the private sector more committed and responsible.

36
4.3 Textile Policy

The textile industry is gradually closing down because of the large scale smuggling of fabrics
taking place in and around the open border with India and Tibet/China. NTA says 70 per cent of
the total textile import is brought of Nepalese market through the back door. This is the most
serious threat to the survival of the Nepalese textile mills.

As per the official import figure, 21.97 million meters of textile were officially imported from
Tibet/China. NTA estimates official import is less than 20 per cent of what actually is brought
into the Nepalese market through smuggling. Smuggled Chinese fabrics are available at
unbelievably cheap prices. NTA has cautioned that if the same situation continues unabated for
another year or two, the Nepalese textile industry will be totally ruined.

NTA blames the Customs Office for not doing much to control smuggling. They believe, the
smuggling in of millions of meters of fabrics on a regular basis year after year, could not take
place without connivance of the personnel concerned on duty.

Another serious complaint made by NTA is about the under valuation of imported fabrics. In
some instances, invoice value declared for the imported fabrics is Rs 2 per meter. By declaring a
low value, importers can evade substantial amounts in the form of import tariff.

Unlike special incentive packages in earlier years, the textile sector has not received any
incentives after the initiation of economic reform program. Import duty on cotton yarn is 2 per
cent, and 10 to 12 per cent on synthetic yarn. The import duty of 20 per cent (16 per cent in case
of India) on textile should theoretically provide some protection to locally produced textiles, but
this protection is not enough to protect the textile industry and to ensure supply to export oriented
garment manufacturers as they receive duty refund under duty drawback system. Instead, this has
given more economic incentive to smugglers as they can make a profit of minimum 20 per cent in
the form of import duty and 10 per cent in the form of VAT.

No significant business linkage is seen between the textile and the garment industries in matters
of usage of locally made fabrics by the garment industry. The garment industry imports almost all
the required fabrics from India and third countries under bank guarantee as they enjoy the duty
drawback system.

It is estimated that the garment industry used 108.5 million meters fabrics in making 43.4 million
pieces of garments for export during the last fiscal year. On the basis of 2 per cent usage of
locally produced fabrics, it is estimated that 2.17 million meters of locally made textile were used
by garment industries in the year 2000/20001. Customs figures show import of only 18.43 million
meters of fabrics by the garment industries in the fiscal year 1999/2000 for making garments for
export.

Textile mills should reduce its work force as production is irregular and currently below 30 per
cent of the total capacity. But the rigid labor law makes it difficult to reduce the work force,
forcing enterprises to shut down. Trade union, with support from political parties, have taken to
strong lobbying and could even paralyze the establishment if the work force is reduced.

The high costs of project financing is restricting the establishment from upgrading technology
and productivity. Lack of skill training centers for the supply of skilled manpower is also
hampering enterprises from increasing their productivity, enhancing industrial discipline and to
decreasing the high rate of absenteeism.

37
4.4 Garment Policy

One of the major and serious constraints faced by the Nepalese garment industry is the high cost
of production. It is said that garments manufactured in Nepal are at least 15 to 25 per cent more
expensive than in neighboring countries. High transport cost is a major factor that escalates
export prices by 12 to 15 per cent. Project financing cost in Nepal is also high, discouraging
enterprises from investing in modernization of the manufacturing units. Likewise, despite the
completion of physical facilities in three major border customs points, operation of dry ports
(Internal Container Terminal) is being delayed because of procedural matters and delay in
bilateral agreement with India on networking with the Indian Railway up to Kolkotta port.

There has been a serious complaint from garment exporting factories that the committed duty
refund by the government under the duty drawback system takes several years to materialize. The
procedure to claim the refund and documentation is cumbersome and lengthy. This has created
added complications for the garment factories. Several factories reported that they need additional
special manpower to deal with the government office concerned and maintain files and
documentation as things are pending for months. Delay in VAT refund on local purchase of
fabrics and accessories are also reported by the garment industries. To qualify for the duty
drawback system, factories have to maintain bank guarantee at the customs offices till the
finished products are exported. This is another cumbersome practice, which increases production
costs.

The majority of Nepalese garment factories do not have any say in the marketing of their
products. To a great extent, buyers or market mediators place the order, supply the design pattern,
organize supply of fabrics, accessories and coordinate export sales. This has kept Nepalese
garment factories far away from the market in terms of knowing prevailing prices, market and
fashion trends, and unable to influence or convince buyers as in majority of the cases, the buyers
are not known. Having no direct contact with the market, garment industries are not aware of
developments taking place in the market like forecast in fashion trends color and designs, etc.
Especially in the garment business, fashion trends, color and designs are determined several
months in advance, and the merchandise is supplied well ahead of the season.

To improve the situation, the Nepalese garment factories should develop direct contacts with the
buyers and the market. As market promotional activities are quite expensive and beyond the
means of the majority of individual factories, these activities must be organized by government
agencies such as the Trade Promotion Centre, the Garment Export Promotion Committee, and the
Export Promotion Committee. So far, desired activities from the government agencies do not
exits on a regular and planned basis.

In view of the millions of rupees generated on account of visa and quota fees by the governmental
agencies, some portion should be utilized in market promotion, publicity and skill development
training.

Although HMG has made development of economy, trade and industry as one of the priority
agendas for its diplomatic missions abroad, performance by the Royal Nepalese Embassies in
economic matters are not impressive. Nepalese diplomatic missions are not active and effective in
initiating economic diplomacy to protect Nepal's interest and gain more economic advantages for
the Nepalese trade and industry. Nepalese diplomatic missions are expected to undertake
effective lobbying to gain preferential treatment for Nepalese garment exports in major markets
like the US, Canada and EU. Competitive strength of Nepalese garment exports to the US has
eroded as the result of duty and quota free access given by the United States to its market from

38
specified Sub-Saharan African and Caribbean Basin countries under the United States Trade
Development Act of 2000.

GAN strongly feels that the present Labor Law is labor-biased and needs to be improved.
Garment industries have not been able to take advantage of cheap labor, because labor unions
under the motivation of political parties determine their terms. Trade Unions generally do not
realize that the interests of the class will be served better if the industry is developed. This has
discouraged a good working environment and industrial discipline. To avoid unjustified demand
and threats from labor unions, factories prefer to employ seasonal workers. As a result, factories
have not been able to develop skilled manpower on a long-term basis.

39
 CHAPTER – V

Comparative and Competitive Advantages and Disadvantages

5.1 Textile Industry

Strengths

1. Knowledge of local market tastes and ability to adjust as per the demand and tastes are
inherent strengths of the textile industry. Small-scale operations enable these industries to
follow quickly changing demand and fashion trends.

2. Nepal's traditional textile product Pashmina has developed remarkably within a very
short span of time. This has demonstrated development potentiality of the traditional
product and also capability of Nepalese entrepreneurs to harness the potential. The
success story of Pashmina can be replicated in the development of other traditional
textiles such as Dhaka, Allo, Khaddar, heavy cotton, Shyama, Gheri, etc.

3. Nepal could benefit from its closeness to the huge markets of India and China where
trade liberalization is taking place and the market is expected to open up gradually.

Weaknesses

1. Small scale operation and inefficient technology is increasing the production costs of
Nepali products, causing them to loose ground to cheap imported or smuggled foreign
textiles.

2. Inability of the government in curbing the smuggling problem is eroding its strength.

3. The industry has not been able to market its products to the local garment industry.

5.2 Garment Industry

Strengths

1. Because of low living costs, the wage structure in Nepal is one of the lowest among the
South Asian garment exporting countries. This is one of the major comparative
advantages of Nepal.

2. Cheap and easily trainable labor is available in the country. Through skill development
training programs, productivity of labor can be increased.

3. Industries have already been established in the country for supplying most of the
accessories and packing materials for the garment industry.

4. Despite the country's landlocked position, the Nepalese garment industry has achieved 90 per
cent on-time delivery.

40
5. The Nepalese garment industry has been able to create a good image of the country as a
reliable supplier of garments. This goodwill and trust is vital for the sustained
development of the industry and to win the confidence of the buyers and trust in the
market.

6. The major US buying houses generally buy from several countries so that they do not
have to depend only on few suppliers. This could help Nepal maintain business contacts
with US buyers.

7. The Nepalese garment industry is free from child labor. Garment factories are sensitive to
the environment and could adopt easily the requirements of eco labeling. Factories have
performed well in quality and facility audits undertaken by major US and European
buying houses.

8. Being small or medium sized establishments, Nepalese garment factories are able to
accept small order. This is an added advantage for small but specialized stores.

Weakness

1. Machine labor ratio in the Nepalese garment industry is higher. The ratio is nearly 1:2.
This has deprived the industry of taking advantage of cheap labor.
2. Most of the factories lack sound management and floor engineering systems. Many
factories still run within the rented premises of large residential buildings.
3. Most of the industries are not getting sound economic benefits because of their small
scale operations.
4. Absence of market information/market intelligence system, both for export and import of
raw materials and accessories, has made marketing and sale of the products dependence
on third parties. This has also restricted the industry in sourcing raw materials from most
competitive sources at most favorable terms.
5. Difficulty has been experienced by small scale factories to address provisions requested
by buyers with regard to quality audit, including eco-friendly label and effluent treatment
plants, etc.

5.3 Nepal's Competitive Position in Textile and Garment

5.3.1 Textile

Nepal does not posses significant competitive and comparative advantages in textile. Low
technology, dependency on foreign market for raw materials and its landlocked position make the
cost of production high. Low level of skill and productivity also increases the cost of production,
whereas extensive technological advancement in other countries has significantly increased
productivity and quality, and lowered production costs.

The government's policy is pursuing a market oriented development approach and opening up the
economy and has abandoned the policy to protect the domestic industry. This has opened up
market for imports. In line with requirements for Nepal's accession to WTO. Nepal is expected to
lower the tariff to open the market further. This is not going to help the Nepalese textile industry.

41
Nepal could develop its traditional handloom textile products like Dhaka. Allo, Gharbuna for
local market as well as for export. Success of Pashmina could serve a good example.

5.3.2 Garment

Nepal lacks competitive strength in garments due to the high cost of production, high transport
costs and dependency on foreign markets for raw materials. 17 to 35 per cent duty and quota on
garment export from Nepal has made Nepalese products less competitive in comparison to the
products of a number of African and Caribbean countries that enjoy duty and quota free access to
the US market.

Nepal could develop garment exports further to the EU market as it receives GSP facilities there.
It is noted that Nepalese garment manufacturers and exporters who were exporting only to the US
market earlier now are trying to develop their market share in EU. As per the information from
Nepal-German Chamber of Commerce and Industry, participation in fashion fairs in EU by
Nepalese garment factories are on the rise. EU could offer good market opportunity to Nepal
provided the Nepalese garment industry prepares good marketing strategy. New potential markets
like Japan and Australia should also be explored and market promotion activities initiated.

Nepal is expected to increase exports in the emerging markets of South East Asia and
neighboring India and China with good marketing strategies. An estimated 2 million people of
Nepalese descent live in north-east region of India and these people are attached to Nepal and
Nepalese products. The Nepalese garment industry is expected to do good business if it supplies
traditional ethnic style garments to these areas. Some Nepalese consumer products have done
extremely well in these areas and the Nepalese garment industry could learn from this success. As
textile and garment sectors have strong lobby in India, marketing strategies should be carefully
planned and the matter should be endorsed at the political level.

Nepal's majority of export garments primarily cater demand to low-end cheaper markets. It is
seen that garment exporting neighboring countries are upgrading their production technology and
diversifying their export products to high priced products. Nepal's could stick to cheaper products
and gain from the export market. Nepal should also diversify its export product to new categories
such as clothing needed for work and uniforms. New markets should also be explored.

5.4 Problems & Constraints

Most of the problems, constraints and threats experienced by both textile and garment industries
need to be tackled immediately. Otherwise the industries will suffer more severely. The textile
industry in particular is passing through very difficult times and if concrete measures for revival
are delayed, the very existence of the industry could be at stake.

It is seen that the production as well as market strength of textile and garment industries has been
weakening since the last few years. The situation is deteriorating faster in the textile industry and
needs to be checked urgently.

It is important to note that textile and garment industries need immediate interventions so that the
industries can gather strength to face challenges in the new trading environment that is expected
from the planned membership of Nepal in WTO and, more specifically, the phasing out of the
MFA Quota System in 2005. The basic issue now is to ensure smooth functioning of the textile
and garment industries until 2004 so that they are prepared to cope effectively with the
challenges.

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5.4.1 Textile

1. The textile industry is seriously affected by large-scale rampant smuggling of textiles

from across the borders with India and Tibet/China. Availability of smuggled fabrics at
very cheap prices has significantly eroded the market demand of local products.
2. Valuation by customs offices of imported textile for the purpose of customs duty has
been very low. This has made prices of imported textile cheaper.
3. Consumption of locally produced textiles by export-oriented garment industries is less
than 2 per cent of total consumption.

5.4.2 Garment

1. Continued growth of garment exports has been disrupted in the last fiscal year
(2000/2001). Export in terms of quantity has declined by 7.2 per cent. Despite export
earning in Nepalese rupees slightly increasing due to the appreciation of US dollar vis-à-
vis Nepalese rupees, dollar earnings from exports has gone down by 2.7 per cent. Figures
suggest a 8.8 per cent export decline in the first three months of the current fiscal year
(2001/2002).
2. Nepalese garment exports attract duty and quota in major export markets of the US and
Canada. Nepal is not been able to compete effectively with neighboring garment
exporting countries as its cost of production and transportation is high. Nepal's
competitive edge has declined against selected African, Caribbean and Arabian countries
that have been granted quota and duty free market access by the US. due to special tariff
concessions available under North American Free Trade Arrangement (NAFTA), many
US buyers have diverted their orders from far-flung Asian countries to neighboring
Mexico and countries in South America and Caribbean so that they can take advantage of
cheap labor and also save costs in transportation. Under the Outward Processing Trade
Initiative aimed at shifting manufacturing activities including garment production to
lower cost member states. EU buyers are increasingly sourcing their requirements to the
East European and Mediterranean regions. Likewise, the United States has made free
trade arrangement with its closet Middle East allies like Jordan. Under the Qualifying
Industrial Zone (QIZ) agreement with Jordan, Jordanian garment exporters receive quota
and duty free access to the US markets it export merchandise is manufactured in QIZ.
New developments like this could take away the market share of small suppliers like
Nepal.
3. Nepalese garment export attracts tariffs and quota in major markets of the US and Canada
and are subject to complicated rules of origin in obtaining preferential treatment in EU is
noted that under the US Trade Development Act, 2000, selected African and Caribbean
countries who also export types of garment very similar to Nepal, are in a position to sell
their garments at cheaper prices as these countries do not have to pay normal duty that
ranges from 17 to 35 percent. Compliance of environment and social requirements
demanded by buying countries are also causing additional anxieties and expenses for
exporters.
4. Production costs in the Nepalese garment industry are 15 to 25 per cent higher than in
neighboring garment-exporting countries. Due to the country's landlocked position,
delivery takes longer and transportation costs comes between 11 to 15 per cent of the ex-
factory price.

43
5. Performance of the Nepalese garment industry in terms of quota utilization in two
principal export markets, the US and Canada, is poor.
6. Due to small scale of operation, factories have not been able to receive economic benefit
from economies of scale. The industry finds it difficult to adopt new products quickly due
to low technological capability.
7. Lead time from the date of order and delivery is relatively longer than in neighboring
countries.
8. The Nepalese garment industry has weak linkages with the main export market.
Information on changes taking place in terms of market trends and fashion are not
promptly communicated to the industry.
9. Government regulations, specially refunding from duty drawback system, are slow,
complicated and time consuming. The Labor Law needs to be amended as it is not
helping to create a conducive industrial environment.

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 CHAPTER – VI

Likely Impact on Nepalese Textile and Clothing Sectors

From ATC / WTO Accession

6.1 Likely Impacts on Textile and Clothing Sectors

1. With the beginning of the ATC third stage of integration program from 1 January 2992,
51 per cent of the textile and clothing products are integrated into WTO/GATT rules, and
bilateral quotas on these products have automatically been removed. The final stage will
integrate all the products and remove all quotas from 1 January 2005.
No major impact was felt by Nepalese garment exports till the first and second stages of
quota phase out as the products that were integrated into WTO/GATT rules were of low
relevance to Nepal. Impact from quota phase out will be seen from now onwards as more
than half of the products are already integrated, but the real impact on Nepal is expected
only after the final integration after 2004, as most of the categories of garments relevant
to Nepal will be integrated then.
If Nepal accedes to WTO before the expiry of ATC. Nepal is required, as per Article 2.6
and 8 of the ATC, to integrate 51 per cent (accumulation of 16 per cent in I stage, 17 per
cent in II stage and 18 per cent in III stage) of the total import volume in 1990 if the right
to transitional safeguards is retained (as per the provision made under Article 6). If this
right is not retained, Article 2.9 will apply and it is deemed that the country has integrated
fully its textile and clothing sector into the GATT rule. The product list is given in the
Annex of ATC in terms of HS line or categories. The selection of products need careful
study and consideration as it may create economic and political problems. Selection
should include mostly yarn and textile as Nepal needs these products for production of
garments for export.

2. It is believed that the imposition of quota by the United States and Canada on a number
or fast moving categories was primarily motivated to check Indian exporters from taking
advantage of the quota-free status of Nepal. Involvement of Indian exporters has
gradually be decreasing and level of quota-utilization is also declining over the years. But
the quota is still in place. Nepal, not being an MFA member, could resist the demand to
impost quota by the US and Canada, but if Nepal becomes a WTO member during the
life of ATC, as per the provision of Article 6, it can resist imposition of any new quota
until it is convinced that its exports have caused serious market disruption and hampered
the domestic producers or call the Textile Monitoring Body (TMB) for its needful
interventions or take resource of the Dispute Settlement Body of WTO.
In view of low utilization of quota and declining export, demands for quota imposition by
new importing countries or additional quota by the United States and Canada are not
likely, even if such demand is made during the life of ATC. Nepal will safeguard its
interest if it agrees to the imposition of quota in the form of unilateral decision, not as a
bilateral agreement. The unilateral decision will become invalid once Nepal accedes to
the WTO, but the bilateral agreement will continue till the existence of ATC as specified
by Article 2:1.
If Nepal receives WTO membership during the life of ATC, the present quota growth rate
of 6 per cent will increase by 27 per cent to become 7.62 per cent till December 2004 as
per Article 2:14 (b) of the ATC. According to the provisions laid out in Article 6:6 (a)

45
 and (d). Nepal as a least developed country is eligible to receive significantly more
favorable treatment in respect of quota levels, growth rates and flexibility provisions.
Base level of quota provided will be significantly higher than the level prescribed as per
Article 6:8, and the growth rate should be more than 6 per cent as specified by Article to
13.
Looking at the low utilization of the quota by the Nepalese garment industry, it is opined
that is not the quota that is restricting the export growth but the high cost of production
and transportation quality standard and inefficient marketing that are hampering exports.
In a situation where there will be no quota restriction after 2005, and export transaction
will take place on the strength of quality and price, the Nepalese garment industry will
not have any choice but to develop competitive strength on quality and price.

3. Judging by the past trends and precedence during the working of GATT, MFA and even
ATC, it is expected that, the major buying countries such as the US and EU, though
agreeing to make their market open and quota free in the post ATC era, in order to
safeguard their vested interest will make not-tariff barriers stronger and more
complicated. It is anticipated that the rules of origin could be used as effective controlling
measures by major buying nations in the post-ATC era. One of the strong criteria that the
GSP providing nations seek is more value addition and more manufacturing/processing
activities in the country of origin. Generally, origin of a product is attributed to a specific
country where substantial transformation takes place. For example, transformation of
fabric to garment, change in the tariff line, from Chapter 52 to 62 of the HS code in the
present case. Change of tariff line is generally accepted as substantial transformation.
WTO's Agreement on Rules of Origin is also based on the concept of substantial
transformation, but EU's rules of origin for GSP require two stages of processing that
means the garment must be made in the country by locally manufactured textile import of
yarn is accepted, but garment made of imported textile will not qualify. The substantial
transformation required by EU is more than WTO requirements.
The United States' rules of origin is even more complicated as the product is defined
under six different rules: the wholly produced rule, the assembled rule the multi country
rule, the fabric rule, the yearn rule and the knit-to-shape rule. Nepal, not having an
efficient textile production base, could face serious constraints in qualifying for the rules
of origin prescribed by importing nations. It will be advantageous for Nepal to establish
the concept of regional accumulation in line with the special treatment given to ASEAN
nations by EU. Origin of a product is established to a particular ASEAN member state,
even if different stage of production is carried out in one or more member states of the
regional group. SAARC and ASEAN have already been accepted by EU while granting
derogation of the rules of origin, Nepal should proceed further in preparing its case and
negotiating with major importing countries to recognize the concept of regional
accumulation in matters of interpretation of rules of origin.

4. In the post ATC era WTO regime, another non-tariff barrier that is likely to be strictly
enforced by major importing countries are concerning environmental and social issues.
Any product destined for major industrialized nations has to prove that during the
manufacturing process Good Manufacturing Practice (GMP) has been followed, the
environment is not harmed or polluted, wage to labor has been adequately paid and the
laborers are given clean, healthy and safe working environment. The United States for
instance, is trying to link trade with the well being of labor at various world forums,
including WTO. Different countries have devised different standards, and to prove

46
 standards, certified labels will be sought. Major buying companies have already started
asking for Quality Audit Reports, including certification of no harm to environment, no
child and bonded labor, no use of harmful chemical or substances.

5. The elimination of quota and application of uniform MFN tariffs will create a new market
for Nepal. But realization of the benefit is subject to Nepal's competitive strength,
particularly in price and quality. In order to achieve phased reduction of tariffs by all
members, the Marrakesh Protocol of GATT in 1994 recommended tariff reduction in five
equal installments from the commencement date of WTO. Upon accession, Nepal could
benefit from declining tariffs in all markets of its interest, but at the same time it has to do
the same, which will attract increased import. This may destabilize further its domestic
textile industry. However, Nepal will continue to receive GSP facility as it is waived
from the relevant provisions of GATT WTO rule.

6. At a least developed country, Nepal will be exempted from commitments under WTO's
Agreement on Subsidies and Countervailing Measures. Nepal can use this opportunity in
strengthening domestic industry and also to attract foreign investment in the sector. As
per the guidelines contained in Annex III of the Subsidy Agreement, the duty drawback
scheme is defined as an export subsidy. Although Nepal as a least developed country is
exempted under the provision of Article 27, it is advisable to prepare the scheme in line
with the guideline so that it will be easier to defend Nepal's position the negotiation for
accession.

7. Nepal as a landlocked country will receive unrestricted freedom of transit in the conduct
of foreign trade under Article V of GATT. Also under the transitional safeguards
provision, Nepal could exercise its right to resist the demand for additional quotas from
powerful major importing countries. As of now, Nepal as a small supplier does not have a
strong bargaining power. The dispute settlement mechanism of WTO could help Nepal in
protecting its legitimate rights and interests and also in resisting improper demands from
its trading partners.

8. Nepal could utilize the WTO forum in finding remedies to its inherent problems of high
cost of production and transportation due to its land locked position.

9. The Nepalese textile industry caters mainly to the domestic market and export is
miniscule and limited mostly to cotton handloom. As Nepal does not maintain restrictions
on the import of textile and clothing, the industry is losing ground against imported
fabrics. After its accession to WTO, the problem of Nepalese textile industry is expected
to intensify as Nepal has to lower the tariff structure for opening up the market.

10. In view of a large gap between estimated demand and supply of textile, supply of huge
quantity of textile and clothing from smuggling could not be ruled out. This has severely
affected the local textile industry and also opened up a possibility for smuggled textile
and clothing to be re-exported as having its origin in Nepal. It is recalled here that GSP
and other commercial documents illegally issued in Nepal were used to export ships load
of third country-made garments to EU. Nepal is required to strengthen its customs
administration and step up market intelligence to curb smuggling and possible
transshipment, rerouting and false declaration. This will also help Nepal in preparing for
accession into WTO, especially in regard to the provisions made under Article 5 of the
ATC. Nepal has not so far introduced anti-dumping regulations. In view of the abundance
of cheap Chinese textiles and clothing in the Nepalese markets, HMG should work out an

47
 anti-dumping regulation. This will also help Nepal in its preparation for accession into
WTO in relation to Article VI of the GATT.

6.2 Future Outlook

Future outlook does not look promising for the textile and clothing sectors in Nepal. The world
trade on textile and clothing will be liberalized after 2004 and new opportunities will be opened
up for those garment-exporting countries whose big export capacity is being under utilized due to
existing quota restrictions. Small garment exporting countries like Nepal, where garment export
developed merely on the basis of MFA quota restrictions on other strong suppliers, may lose
market share if it can not compete on price, quality and delivery. The Nepalese garment industry
in order to develop their competitive strength, is required to achieve improvement especially in
reducing high cost of production, transportation and increasing quality. The garment industry is
also required to develop good business linkages with the export market.
The textile industry on the other hand is even more hard pressed. It is losing market share due to
the abundance of cheap imported or smuggled fabric from neighboring countries. Upon its
accession into WTO. Nepal is required to lower tariffs which will make more room for imported
fabrics.
Measures undertaken to solve the fundamental problems like curbing of smuggling has to be
initiated from HMG. Inability of HMG in initiating required corrective measures may lead to a
virtual collapse of the industry. Thus it is high time NTA came up with a specific action plan for
the revival of the industry and compel HMG to take required action. NTA should be proactive in
bringing HMG into action.
Likewise, GAN must also bring out a strategy to deal with the emerging situation and make HMG
work for the enforcement of the action plan. It is up to the party concerned to make HMG do the
needful.
Foreign joint ventures could help develop the textile and clothing industries as they introduce new
technology and market know-how, besides bringing in investment. HMG should initiate a new
approach towards attracting such investment in the country.
The success story of Pashmina could be replicated in other potential traditional textiles such as
Dhaka, Allo and other types of handloom cotton products. Special promotional activities are
required to bring potential products to the notice of the world.
The vast market of neighboring India is gradually opening up and Nepal could promote the export
of traditional types of textiles and garments. To begin with, Nepal can attempt to sell typical
Nepali textile and garments in those areas where people of Nepali descent live. For this, HMG
should win political endorsement from the Indian government.
The Nepalese garment industry could do well if it receives preferential treatment at par with
several African and Caribbean nations from the United States government. It is up to HMG to
make an attempt to win political endorsement.
The deteriorating law and order situation in the country coupled with global action against
terrorism under US leadership has created an adverse situations for the development of industry
and business. Markets in the United States and EU are not doing well in the aftermath of
September 11 terrorist attacks in the US. The Nepalese garment export has suffered from the
present situation at home and abroad. NTA and GAN have to play a crucial role in designing
appropriate strategies in resolving these problems.

48
 CHAPTER – VII

Strategic Recommendations

The textile industry in Nepal is in a grave situation. In view of serious problems, constraints and
threats, concrete measures are needed immediately to begin the revival process of the textile
industry. It is feared that further delay in initiating rescue measures will further disadvantage the
industry and revival will be more difficult.

The garment industry, on the other hand, has shown weaknesses associated with production and
export marketing, and needs measures to strengthen, expand and diversify. In view of the MFA
quota phase-out, the industry is required to prepare itself to cope with the emerging situation.

HMG and the respective industry are required to work together in devising appropriate measures
and their implementation within a specified timeframe. It is expected that the respective industry
will work actively and their role will determine the level of achievement in improving the
situation. As HMG, industry as a group, individual enterprises and other agencies concerned are
the key players that can bring about needed changes for the betterment of the industries, the role
of each key player has been specified and interventions from each sector is recommended.

7.1 Textile Sector

(A) Suggested measures to Nepal Textile Association

1. Textile Industry Rescue Task Force at NTA

The Nepal Textile Association does not seem to have prepared a national strategy to
rescue the industry from collapsing. It should form a Textile Industry Rescue Task Force
with a mandate to prepare a rescue plan for an ailing industry and get endorsement of the
plan from HMG and concerned agencies. The mandate given to the Task Force should
include authorization to deal with HMG and concerned agencies in the execution of the
rescue plan recommended by the Association. The team must have total backing from the
industry and the team should complete its job in a specified time schedule.

(B) Recommendations to HMG

1. Curbing Smuggling and Strengthening of Customs Valuation

In order to provide a fairer chance to domestic industry in competing with imported goods, HMG
should enforce tighter border control to curb rampant smuggling, strict vigilance on sales of
smuggled goods, strict enforcement of VAT and improvement of the prevailing system of
arbitrary customs valuation HMG should also undertake phase-wise gradual reduction of import
duty which will make smuggling less profitable. This will also help Nepal in its quest for WTO
membership. Customs and security official should be closely watched and wrong doers should be
penalized heavily. Deployment of army at the border for controlling smuggling should be further
strengthened and extended at all major points of trade.

49
2. Increase Use of Locally Made Textile in Garment Export

HMG should devise a system so as to develop the usage of locally produced fabrics by the
garment industry. The garment industry uses a sizeable amount of basic fabric like gray shetting
and even a small textile mill with basic facilities can easily produce this fabric. HMG should
provide priority in market promotion activities to garment factories that use specified minimum
amount of gray shetting fabrics of local make.

The NTA should also work effectively to establish market links with garment producers in
supplying them with basic fabrics like gray shetting.

3. Amendment to Labor Law

The present Labour Law should be amended to develop a congenial industrial environment in the
industry. Measures should be devised to safeguard legitimate rights of both workers and
entrepreneurs. Reward and punishment should be linked with the performance and trade union
should strictly be allowed to look after only the class interests not the interest of the political
party's ideology that they share.

4. Vocational Training

To ensure the supply of a skilled labor force, appropriate training schemes should run in major
centers. Private sector institutions should be encouraged to run such trainings. Garment factories
should also be encouraged to work out an in-service training scheme.

(C). Suggested Measures at the Enterprise Level

Textile industries should actively participate in the preparation and execution of a rescue plan for
the industry.

(D). Suggested Measures to the Bank and Financial Sector

The Nepal Rastra Bank should design a special scheme to help in the revival of the industry by
providing project financing and working capital. Cost of project financing should be made
cheaper and easily available.

7.2 Garment Sector

(A) Recommendation to GAN

1. Pro-active Role of GAN

The Nepalese garment industry still has not prepared its strategy to cope with the impacts that are
likely to emerge after phasing out quota after 2004 under the Uruguay Round's Agreement on
Textile & Clothing (ATC). Neighboring garment exporting countries immediately after the
conclusion of ATC under Uruguay Round of Agreement of GATT in 1994 have already prepared
strategies to face the eventualities after 2004 whereas the Nepalese garment industry is still
discussing the issue. It is strongly suggested that GAN take a lead role in preparing national
strategies and work together with HMG in preparing national policy and programs. The policy
and programs should be prepared separately for two stages – Stage I should cover the period till
2004 and Stage II should cover the period between 2005 to 2008.

50
Stage I should address major problems, constraints and threats that the industry is facing now,
whereas Stage II should focus on strategies to compete in the quota free global trading
environment. Strategies should also be worked out to address the situation after Nepal receives
WTO membership.

2. Market Promotions and Diversification

One of the weaknesses of the Nepalese garment industry is an inefficient marketing network and
limited linkages with the main export markets of the US, Canada and EU. The Nepalese garment
industry, to a large extent, depends upon intermediaries and agents for finding buyers and
establishing business contacts. This has made the Nepalese garment industry insecure and
vulnerable in terms of marketing. Neither GAN nor enterprises are doing much in this regard. It
will be expensive and difficult for many enterprises to undertake market promotion activities
abroad on its own. Thus GAN should actively engage in market promotion activities such as trade
fair participation, organization of trade visits, buyers-sellers meets, and various other promotional
and publicity campaigns in major export markets like the EU, Japan and Australia. The GAN
Annual General Meeting should approved annual promotional plans and programs for execution
with maximum involvement from capable enterprises. The GAN should make arrangements for
obtaining the necessary budget from NPEDC and the Export Promotion Fund.

The Nepalese garment industry should take effective market promotion activities in EU as it has
received a three-year extension in derogation of the rules of origin.

3. Liaison Office in Major Export Markets

For better market linkages and prompt market information. GAN should maintain liaison offices
in major export markets of the US, Canada and EU. Competent local marketing company or
qualified Nepali nationals living in the region should be hired to work for GAN.

4. Import Management Cell at GAN

GAN should establish an import management cell with specialized experts to help industries in
finding the best sources of supply textiles and accessories from the world market. As it is said one
rupee saved is one rupee earned – industries could make substantial saving if they explore the
best sources for their requirements.

(B) Suggested Measures to HMG

1. National Strategy and Policy

HMG should assign and activate a Readymade Garment Export Promotion Committee at the
Ministry of Industry, Commerce and Supplies to prepare together with GAN national policy and
strategies for preparing the industry to face the eventualities of post ATC after 2004 GAN should
take a lead role in such preparation and HMG should assist GAN as a facilitaor.

2. Efforts to Receive Preferential Treatment

The Nepalese garment industry could get a new lease of life if the industry could succeed in
receiving preferential treatment from the US in terms of duty and quota at par with African and
Caribbean counters or qualify for GSP facility HMG together with GAN, should prepare Nepal's

51
case for effective representation Nepal's case is expected to receive a favorable response as it can
be convincingly argued especially in the following aspects.

- The garment industry is one of Nepal's major economic activities and contributes
significantly in terms of employment and income to the population, and failure of the
garment industry could generate an adverse impact on the development of the Nepalese
economy;
- Due to the country's landlocked position, moderate production technology and facilities.
Nepali products are 15 to 25 per cent more expensive than the neighboring countries'
products, and they can compete in the market only if preferential treatment is granted;
- Because of the small size of the industry, Nepal's share in the US garment import is less
than 0.1 per cent. In no way could it influence or jeopardize the market; and
- As Nepal has not contradicted US policy and interests in the past, it will be easy for
Nepal to win support from influential political personalities.

A visit to Nepal by the US Secretary of State in 2002 has been regarded as the US appreciation
for Nepal's support for the US global action against terrorism. The US Secretary of State's
response to look into the possibility for Nepal's official request for special consideration for
preferential access to US markets for Nepalese garments is a good beginning, and must be
followed up more extensively and actively.

3. Early Operation of Dry Port

Transportation of imported raw materials and accessories into the country and shipment of the
finished products out of the country adds 12 to 15 per cent cost to the Nepalese garment export
Operation of Multimodel Dry Ports at three major border customs points is expected to lower the
present transport cost by 40 per cent. Although physical facilities at these Dry Ports have already
been constructed with the assistance of World Bank loans, operation has not started as
finalization of internal management and conclusion of the agreement with India for networking
with its railway network up to Kolkotta port is delayed. HMG should expedite this to make Dry
Ports operation at the earliest. HMG should provide required facilities for air freighter services so
as to enable most direct and efficient air freighter service from the country. Few direct air
freighter services provided earlier by Lufthansa German Airlines and other have been disrupted
due to low level of logistical facilities at airport and declining volume of export cargoes. Facilities
have been increased significantly at the Tribhuvan International Airport after the opening up of
new cargo complex.

4. Assistance to GAN Market Promotions / Sales Promotion Activities

HMG should assist GAN in undertaking market and sales promotional activities in major export
markets, especially EU, Japan and Australia. Part of the revenue collected from garment export
should be given to the execution of such promotional programs.

5. Establishment of Separate Industrial Area for Garment Manufacturing

It is observed that the garment factories are still operating in buildings made for residential
purposes in densely populated quarters of Kathmandu and the buildings lack basic engineering
and physical logistics. Studies made in the past have recommended relocation of garment
industries from Kathmandu to a suitable area near the Dry Port facility in Birgunj.

52
HMG should allocate a suitable area for the establishment of a separate industrial area for
garment manufacturing. This will demonstrate HMG's national commitment to developing the
industry and will give a positive signal to national and foreign entrepreneurs.

A separate industrial area for garment manufacturing should be developed in line with HMG's
announced policy to develop an Export Processing Zone in the country.

Separate area for garment manufacturing will have the following advantages:

i. Factories could have proper and adequate engineering and physical facilities.
ii. They could receive benefits from economies of scale.
iii. Required number of ancillary industries could cater to the need of factories in the Area.
iv. Easier to administer government procedures with regard to import of raw materials and
accessories, duty draw back scheme, labor law.
v. Facility of central R&D and training centers, trade support services.
vi. Help in technological upgrading.
vii. Easy to regulate pollution, social issues.

6. Amendment to the Existing Labor Law

The export-oriented garment industry, being labor intensive and deliver-sensitive, requires good a
industrial environment to function smoothly. However, present labor-management relations could
not be regarded as cordial. There have been excessive interferences by trade unions in the factory
operation in matters instigated by politics. Frequent strikes and tough demands by the trade
unions have made factories increasingly vulnerable and uncertain. The present Labor Law needs
to be amended to ensure a congenial industrial environment for smooth production and timely
export delivery. Concerns expressed by major importing countries in matters related to good work
good pay, healthy and safe work place must be addressed in the amendment. The amendment
should also address the special needs of export-oriented industries and export commodities.

7. Implementation of Government Plans and Policies

HMG must implement its announced policies and programs. Commitment made by the
Government in the 1999/2000 National Budget Speech to provide pre-shipment financing of up to
35 per cent L/C value has still not been implemented. This caused serious doubt over HMG
policies and programs.

8. Encourage Foreign Investment

HMG should encourage foreign direct investment in textile and garment as foreign joint venture
companies could bring in much required new technology and efficient market contact. The new
joint venture companies that are working in Nepal have remarkably increased exports to Germany
and other EU countries. Extension for another three years of derogation of EU's rules of origin
could attract more European investors. Nepal should benefit from available schemes offered by
bilateral or multilateral international organizations. EU's scheme like "Asia Invest" could help
Nepal to bring in European investors, as the scheme offers finances and technology know-how on

53
easy terms. As the US market is getting more and more competitive for Nepal, EU could offer the
best alternative as Nepal is eligible for preferential treatment.

9. Trade Financing

HMG should introduce separate lending schemes for export-oriented industries. As these
industries need to invest more in maintaining quality standards and meet strict deliver deadlines,
finances should be available at preferential lending rates. HMG should issue directive to
commercial banks to introduce separate preferential lending schemes to industries which earn
foreign exchange. The existing provision for submitting bank guarantee against import of raw
materials and accessories under the duty draw back scheme is blocking a huge amount of
finances, increasing productions costs and creating additional work loads.

(C) Measures Suggest for Enterprises

Enterprises should work together in the implementation of national policy and strategy to be
worked out and executed by GAN in cooperation with HMG. They should also provide the
required financial assistance for the programs of GAN.

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 Annex – 1

Nepal – Brief Profile

The Kingdom of Nepal, a small country in South Asia between the People's Republic of China
and the Republic of India, covers a total area of 147,181 square kilometer. Roughly rectangular in
shape, the land extends 885 km east west lengthwise and non-uniform north-south width ranges
between 145 to 241 km (means is 193 km). Ecologically, Nepal is divided into three major
regions – the plains (17 per cent), hills (64 per cent) and Himalayas (19 per cent), including
Mount Everest (the highest peak on the earth) and 8 of world's 14 highest peaks.

According to the last census, 18 per cent of land is under cultivation and areas covered by forest,
snow, pasture, water, and others are 37.6 per cent, 15.3 per cent, 13.4 per cent, 2.7 per cent and
13.0 per cent respectively. High Himalayas in the north are the source of several principal rivers
system in the Indian sub-continent that have the potential to generate 83,000 MW, 44,000 in
commercially viable scale, which is about 15 per cent9 of the world's hydro electricity power.

The country is divided into 5 Development Regions, 14 Zones and 75 Districts. Kathmandu is the
capital. Nepal is a landlocked country and the nearest seaport is Kolkotta in India, which lies 594
kms away from the country's eastern border and 1200 kms from Kathmandu.

Nepal is the home of 60 ethnic groups and as many languages and dialects spoken in the country.
Nepali is its official language and English is widely used in business and taught in schools as a
compulsory subject.

As per the preliminary results of the 2001 Census, the population of Nepal is 23.21 million (49.92
per cent male, 50.08 per cent female), 57 per cent of the population (68 per cent male, 45 per cent
female) are in economically active age group, 12 per cent live in urban areas, 39 per cent are
literate (54 per cent male, 25 per cent female) and life expectancy is 58.3 years.

Multi party system of government was restored in Nepal following a popular people's movement
in 1989. The new constitution, promulgated in 1990, paved the way for constitutional monarchy
and multi party democracy, under which general elections are held every five years to elect
parliament and the majority winning party runs the government.

Economy

Nepal, one of the least developed countries in the world, is pre dominantly an agricultural
economy. 81.10 per cent10 of the economically active population is engaged in the agricultural
sector, but the contribution of the sector to the GDP is decreasing over the years. A decade ago in
1991/92, the contribution in question was 44.96 per cent, which decreased to 40.48 per cent in
1995/96 and 36.79 per cent in 2000/01. The agricultural sector, although one of the top priority
accorded sectors in the country, is marred by low productivity and lacks commercialization as
most of the farming is still done using primitive methods with minimum of appropriate
technology and minimum of basic re-requisites like irrigation, fertilizer, improved seeds and
credit facilities. Good production in agriculture continues to largely depend on erratic monsoon
rains.

55
Other major economic activities in Nepal are trade, tourism (including hotel, restaurant, trekking,
mountaineering, rafting, civil aviation, etc.), services (including community and social), financial
and real estate, construction, manufacturing, transport, communication and storages, electricity,
gas, water, mining and quarrying.

Table - A presents contribution from major economic activities to Gross Domestic Product
(GDP).

Table – A
Contribution from Major Economic Activities to Gross Domestic Product

At Constant Price Value in Million Rs.

Contributing Sector 1998/1999 1999/2000* 2000/2001** % Change

Agriculture, Fishery, Forestry 132,373 142,908 144,420 1.06

(40.12) (39.10) (36.79)
Trade and Tourism (Hotel/Restaurant) 39,313 43,109 45,862 6.39
(11.91) (11.80) (11.68)
Community and Social Services 30,582 34,024 40,680 19.56
(9.27) (9.31) (10.36)
Financial and Real Estate 33,203 36,919 40,507 9.72
(10.06) (10.10) (10.32
Construction 39,313 43,109 45,862 10.02
(10.08) (9.89) (10.02)
Manufacturing 30,337 35,387 38,714 9.40
(9.19) (9.68) (9.86)
Transport, Communication, Storage 24,631 29,281 33,322 13.80
(7.47) (8.01) (8.49)
Electricity, Gas, Water 4,574 5,895 7,715 30.87
(1.39) (1.61) (1.97)
Mining and Quarrying 1,685 1,815 1,981 9.15
(0.51) (0.50) (0.51)

GDP at Factor Cost 329,960 365,465 392,532 7.41

Less Imputed Value of Banking 9,438 10,708 11,912 11.24

System
Indirect Taxes Net 21,465 24,898 28,633 15.00

Agriculture (40.12) (39.10) (36.79)

Non-Agriculture (59.88) (60.90) (63.21)

* revised estimate ** preliminary estimate

figures in the bracket are percentage of the total
Computed on the basis of data published in Economic Survey 2000/2001, Ministry of Finance, Kathmandu.

Since early 1990, several reforms have been made in economic policies and regulations so as to
initiate a market oriented approach in development activities and also to integrate the Nepalese
economy of the world. In the process, Open General Licensing system and full convertibility of
Nepalese currency in current account transaction have been adopted. Government control over
economic activities has been minimized and private sector has been encouraged to take the lead

56
role in the matters of trade and industry and all major economic activities in the economy. Several
public sector companies have been privatized and investor-friendly policy and laws have been
announced.

Although trade, investment and economic policies and laws have been simplified and reformed,
implementation of the same is highly desired. Political instability and frequent changes in
government have prevented plans and policies from operating for longer period. This has had a
severe negative impact on the effective management of the government administration and the
system has been proved weak and ineffective to curb corruption and inefficiency.

Despite poor implementation of economic policy and regulations, the private sector has assumed
an important role in the conduct of all major economic activities. It runs the entire trade and
industry, tourism, banking, finance, insurance and civil aviation, and the achievement made in the
pas decade is remarkable. The private sector owns and runs the entire textile and garment
industry, and trade in the country.

Of late, declaration of state of emergency to deal with Maoist insurgency in the country has
hampered the development of trade, tourism, investment and economic activities in the country.
Tourism, civil aviation, hotel and restaurant, manufacturing and trade sector have been severely
affected and this has shrunk the job market. Internal security problem and also the US led
international fight against terrorism have also affected the Nepal textile and garment industry.
Recession in the major importing markets of the United States and EU has slowed down garment
exports from Nepal.

Table – B below presents the health of the Nepalese economy, development trends and growth.

Table – B
Nepal – Key Economic Indicators 1996/97 – 2000/01

Indicators 1996/97 1997/98 1998/99 1999/2000 2000/01

Gross Domestic Product (% change) 5.0 3.0 4.4 6.5 5.9*

(at producer's constant price)
Gross Domestic Product (% change) a 4.8 3.4 4.5 6.4 5.8*
Agriculture 4.1 1.0 2.7 5.0 4.0*
Non-agriculture 5.2 5.1 5.6 7.4 6.9*
Gross Domestic Product (% change) 12.7 7.2 13.7 11.0 7.8*
(at producers' current price)
Gross Domestic Product (% change) b 12.6 7.5 13.9 10.8 7.4*
Agriculture 12.3 3.4 17.7 8.0 1.1*
Non-agriculture 12.8 10.3 11.4 14.6 11.5*
Gross National Product at current price (% 12.9 7.6 15.0 11.3 8.5*
change)
Major Agricultural Production (% change) 3.0 9.9 6.1 7.7 4.2*
Food Crops 2.4 -1.0 2.1 8.0 2.7*
Cash Crops 4.5 2.2 15.0 7.0 7.3*
Major Industrial Production (% change) 3.0 37.6 14.6 8.7 3.6*
1986/87 = 1000

57
 Indicators 1996/97 1997/98 1998/99 1999/2000 2000/01
1986/87 = 1000

Gross Domestic Product 7.5 3.9 9.0 4.1 1.5*

Price Index (% change)
Agriculture 7.8 2.3 14.6 2.8 -2.8*
Non-agriculture 7.2 4.9 5.5 4.9 4.2*
Consumer Price Index e 8.4 11.4 3.5
(Annual average % change)
Gross National Savings 15.7 15.8 16.6 18.2 19.7
Gross National Income Ration (%)
Ratio of GDP (at producers)
Current prices with (%)
Gross Domestic Savings 14.0 13.8 13.6 15.1 16.1
Total Investment 25.3 24.8 20.5 24.3 25.7
Domestic Savings & Investment Gap (+) 11.3 11.1 6.9 9.2 9.6
Total Consumption 86.0 86.2 86.4 84.9 83.9
Total Government Expenditure 18.1 18.6 17.4 17.5 -
Regular Expenditure 8.6 9.0 9.1 9.1 -
Development Expenditure 9.5 9.6 8.3 8.4 -
Total Revenue 10.8 10.9 10.9 11.3 -
Tax Revenue 8.7 8.6 8.4 8.7 -
Non Tax Revenue 2.1 2.3 2.5 2.6 -
Budget Deficit 5.1 5.9 5.3 4.7 -
Receipt of Foreign Loan 3.2 3.7 3.5 3.1 -
Receipt of Foreign Loan and Grants 5.4 5.5 4.7 4.6 -
Outstanding Domestic Loan 12.8 15.8 14.4 14.3 -
Outstanding Foreign Loan 47.1 53.6 49.6 50.2 -
Total Outstanding Loan 59.5 66.4 64.1 64.5 -
Total Exports 8.1 9.1 10.4 13.6 -
Total Imports 33.4 29.6 25.6 28.2 -
Merchandise Trade Deficit 25.3 20.4 15.2 14.6 -
Current Account Deficit -5.9 -5.0 -0.1 -1.5 -
Outstanding Foreign Loan/Government 434.9 489.4 454.9 444.6 -
Revenue (%)
Outstanding Foreign Loan/Total Exports (%) 583.5 585.9 475.0 369.4 -
Government Revenue (% change) 8.9 8.4 13.1 15.1 -
Regular Expenditure (% change) 12.1 12.4 14.3 11.2 -
Development Expenditure (% change) 6.2 9.0 -1.4 11.3 -
Total Government Expenditure 9.0 10.6 6.2 11.2 -

58
 Indicators 1996/97 1997/98 1998/99 1999/2000 2000/01
Debt Service (principal & interest 31.1 28.3 28.1 29.1 -
repayments)/ regular expenditure ratio (%)

Money Supply (% change)

M1 5.4 17.4 13.1 19.4 14.9
M2 11.9 21.9 20.8 21.8 13.7
Private Sector's Share in the Total Outstanding 65.1 66.3 67.4 69.3 69.9
Credit of the Banking System (%)
Total Exports (% change) 13.9 21.5 29.7 44.7 19.7
Total Import Ratio (%) 25.6 -4.9 -1.7 22.2 8.5
Export/Import Ratio (%) 24.2 30.9 40.8 48.3 51.7
Current Account (Rs. in Million) -1650.8 -1518.9 -23.5 -562.7 -475.3**
Balance of Payments (Rs. in Million) 320.2 1096.6 984.0 1443.4 351.1**
Foreign Exchange Reserve (Rs. in Million) 4854.1 6515.8 7665.1 9394.4 10760.8
Exchange Rate (US$ 1 = Rs…) d 57.0 67.9 68.5 70.00 74.65c
Total (in Thousand) 21023 21526 22040 22567 23107*

+ Revised Annual Estimate

* Preliminary Annual Estimate
** First Six Months
a Factor Cost at Constant Price prior to deduction of the imputed value of the Bank service change.
b Factor Cost at Current Price prior to the deduction of the imputed value of the Bank service change.
c Mid-April
d Average of Buying and Selling rates in Mid-July
e Change of the base year

Source: Economic Survey 2000/2001, Ministry of Finance, Kathmandu

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