Economic Liberalization Policy Adopted by Nepal:

 Liberalization is to liberate the economy from the clutch of the government and provide the platform
for the enhance role of the private sector in economic activities.
 Liberalization seeks to see the transformed role of the government from ruler to facilitator in order to
strengthen the market forces in resource allocation.
 It refers to the opposite of economic regulation by the state and includes deregulation of markets,
deregulation of prices, privatization of Public Enterprises, de-licensing and removal of quota system in
foreign trade.
 According to WB ‘economic liberalization means freeing of prices, trade and entry to markets from
state of control while stabilizing the economy’. It is the tool for non-interventionist approach owned-
enterprises, deregulation and de-licensing and curtailing grant and subsidy provided by the government
to different sectors of the economy.
Nepal’s Initiatives in Economic Liberalization:
 Need for liberalization: 1982/83 excessive liquidity due to election.
 Nepalese currency devaluated by 14.7% (1985) with USD.
 As an assistance from WB and IMF they agreed to pay back with interest in the condition that Nepal
frees its trade and adopts the economic liberalization.
 From 1987: Structural Adjustment Program and Structural adjustment facility.
 Supply side reforms:
o Supply side reforms: improving the efficiency with which market operates.
o Price reforms
o Changing the price of tradable goods relative to the non-trader.
o Getting the correct terms of trade between agriculture goods and industrial goods.
o Reducing the size of the public sector
o Financial reforms
o Tax reforms

Reform in Trade:
 Before liberalization the nature of trade was dichotomous – more or less free with India and controlled
with the rest of the world. In other words, imports from overseas countries were controlled through tariff
and non-tariff barriers and exports were more or less freed.
 In early 1990, trade policy has been changed from ISI policy to export led economic growth strategy.
 Stringent restrictive barriers in the form of high tariff wall and quantitative restrictions were rationalized.
 Imports were freed to assist exports.
 The reforms in the trade sector were sought to put in place through the enhancement of IP 1992 and
Foreign Investment and Technology Transfer Act, 1992 which made current account convertible and
capital account partially convertible.
A. Reform in Imports:
a. Reform in Non Tariff Barriers:
 When Nepal approached WB and IMF in order to overcome the excess liquidity problem in mid 1980s,
they pressurized to give up Quantitative Restriction policy for liberal trade policy.
 Open General License (OGL) system replaced the quantitative restrictions.
  An import Auction License System (IALS) replaced the administrative quota system in July 1986 for
88 commodities and later on, with the successful conclusion of stand-by arrangement program, SAL
and SAP.
b. Reform in Tariff:
 With the replacement of quota system by auction system and later one by OGL system, Nepal had only
one tariff measures left to curb the import.
 High custom tariff preserved domestic industry, raise revenue, curtail luxury consumption, preserve
foreign reserves and maintain BOP equilibrium at its satisfactory level.
 But advocates of free trade opine that these objectives are better realized with income tax, and subsidy
for domestic production compared to custom tax. Thus both tariff rates and slabs have been slashed
down. Tariff rate slashed down to max 80% from 300%.

B. Reforms in Export:
 With the implementation of adjustment programs bonus and subsidy facilities were replaced by Bonded
Warehouse, and duty draw back system. Exports are tax exempted except 0.5%
 Sales tax is replaced by VAT which does not tax exports.
 New trade policy was introduced in 1992
C. Reforms in Foreign Exchange:
Current Account Reform:
 With effect from March 1992 foreign exchange is made partially convertible and from 1993 it is made
fully convertible.
 Foreign exchange market converted to floating system but it is still pegged with Indian currency.
 Commercial banks are allowed to keep balance abroad.
Capital Account Reforms:
 Effective from 1991: Nepalese working in INGO can keep their account convertible currencies if they
receive salary in such currency.
 Similarly Nepalese working abroad also can keep account in convertible currency in local banks.
 Commercial banks can provide loan to the exporter in foreign exchange and central bank started to
refinance area to commercial banks in US currency rom 1998.

Non-Tariff Measures:
Non-tariff barriers to trade or sometimes called non-tariff measures are trade barriers that restrict imports or
exports of goods or services through mechanisms other than the simple imposition of tariffs. NTB is any
obstacles to international trade that is not an import or export duty. They may make the form of import quotas,
subsidies, customs delays, and technical barriers or other systems preventing or impeding trade. According to
WB, non-tariff barriers to trade include import licensing, rules for valuation of goods at customs, pre shipment
inspections rules of origin and trade prepared investment measures.

Policy Purpose Examples

Protectionism To help domestic firms and Import quotas, local content
enterprises at the expense of other requirement, and public
countries procurement practices.
Assistance policy
Non protectionism polices
To help domestic firms and Domestic subsidies, and dumping
enterprises, but no at the expense laws, industry bailouts.
of other countries
To protect the health and safety of Licensing, packaging, and labeling
people, animals, and plants to requirements, sanitary and
protect or improve the phytosanitary rules, food, plant
environment. and animal inspections imports
bans based on objectionable
fishing or harvesting methods.

 Non tariff barriers help help protect the development of new industries against oreign rivals.
 If foreign industries compete with domestic infant industries then NTBs such as import quotas, can
protect the infant industries from too much competition through its maturing stages until its competitive
capacity is enhanced.
 Use of NTB is believed to provide increased domestic employment through encouragement to domestic
industries.
 Boost up the local industries.