An irony of doing business in a developing country is that there are lots of opportunities hidden underneath bigger challenges. Geographically, Nepal is placed between two giant economies- India and China, but it has not been able to utilize this strategic advantage. By 2020, China is expected to become the world’s largest economy whereas India is expected to rank fourth on the global economic scale by 2025. Therefore, if Nepal works towards making the conducive environment for businesses, it has tremendous potential for growth.
A high ease of doing business on World Bank’s report, ‘Doing Business (DB)’ ranking indicates a favorable regulatory environment to start and operate a local firm in that particular country. Nepal was ranked 105 out of 190 countries in ease of doing business as compared to 107 last year. As per World Bank, this increase was due to ease of getting secured loans and increase in the requirement of corporate transparency to protect minority investors. It also shows the improvement in Nepal’s business climate in the past year.
|Figure 1 Source: Doing Business|World Bank
Observing the trend in South Asia, Nepal holds third position after Bhutan and India in terms of ease of doing business. This slip in ranking was largely contributed by India’s improvement in ranking from 130th to 100th position globally, which can be seen in Figure 2. However, Nepal made improvements in 2 out of 10 areas that indicate ease of doing business.
Similarly, the distance to frontier (DTF) score measures the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier.
The data in Doing Business 2018 are current as of June, 2017.
|Figure 2 Source: Doing Business 2018/17
According to the World Bank, there are 10 aspects of doing business. The ease in conducting these aspects contribute to creating a system that is efficient and accessible to all.
1. Starting a business:
In 2014, Nepal made starting a business easier by reducing the administrative processing time at the company registrar and by establishing a data link between agencies involved in the incorporation process. In Nepal, it takes 7 steps to register a new business that is equal to an average global standard. However, surprisingly it takes 17 men days to complete these steps. This might be due to an unclear system, corrupt government and lack of one stop shop for all the procedures. Entrepreneurs have to go to Company Registrar, the Inland Revenue Office, Small and Cottage industry, and many other stops to register their business.
If you want to know more about registering a business in Nepal, follow this link:
2. Registering property
In DB 2010, Nepal made transferring property easier by reducing the registration fee. In 2017, among South Asian countries, Nepal has the second best ranking (globally 84) in registering property. It requires 4 procedures, 6 days and 4.8% of property value to register a property in Nepal. The regional average is 6.8 procedures, 111.6 days, and 6.9% of property value.
3. Dealing with construction permits
Nepal has made dealing with construction permits easier by implementing a new electronic building permit system in 2015. However, in 2017 Nepal increased the cost of obtaining a building permit. Though the position of Nepal has declined as compared to last year in terms of dealing with construction permits, it is still better than the regional average of South Asia.
4. Trading across Borders:
No country can flourish its business without efficient transaction across borders. As per Doing Business report, Nepal introduced special vehicle permit requirement which made export in Nepal difficult due to an increase in time and cost for documentary compliance. Although Nepal increased some compliance procedures, it also implemented the ASYCUDA World data management system to speed up the customs clearance process. The DTF score of Nepal in Trading across Borders’ remains unchanged at 77.17. The best performer of Doing Business has minimal time and cost associated with exports and imports due to easier documentary and border compliance.
5. Getting Credit:
In regards to getting credit, Doing Business measures the strength of the credit reporting systems and the strength of collateral and bankruptcy laws to facilitate lending. Nepal improved access to credit information by starting to distribute historical data. According to the World Bank, “Nepal’s DTF points increased 20 points- from 30 to 50, as it strengthened access to credit by operationalizing the existing law on secured transactions that implements a functional secured transactions system and establishes a centralized, notice-based, modern collateral registry.” Additionally, Nepal is also establishing various funds like Youth Self-Employment Fund, National Youth Council, etc. to help young entrepreneurs in their business ventures.
6. Protecting Minority Investors
A country with strict law against misuse of corporate assets by majority shareholders/directors for personal gain in order to protect the minority shareholders ranks highest in the Doing Business ranking. Nepal strengthened minority investor protections by requiring greater corporate transparency. Nepal improved oversight and monitoring in the court, speeding up the process for filing claims regarding protection of minority investors.
7. Getting electricity
Proper infrastructure is imperative to a country’s development and electricity is a basic requirement for operating any business. Having faced more than 18 hours of power-cuts and intermittent fuel crisis, Nepal is ranked poorly by DB 2017(131) in terms of access to electricity. However, due to better leadership in Nepal Electricity Authority, the dynamics have changed with regular power supply from November, 2016. We can assume that this may improve Nepal’s rank in coming years.
8. Paying Taxes
In 2017, Nepal’s DTF went down from 58.02 point last year to 58.01 this year, which is 0.01 point. This drop is due to the change in administrative system from manual to electronic. Due to change in system and lack of clear support provision to adapt to the changes, people were facing numerous problems. We have to pay different types of taxes like corporate income tax, land revenue tax, VAT, etc. 34 times a year which is about 29.6% of profit.
9. Enforcing Contracts
If a commercial dispute of two parties is resolved through a local court with less time and cost, and with quality of judicial process, then countries will score more on enforcing contracts. The score of ‘Enforcing Contracts’ remains unchanged at 45.26 points in DTF. Nepal ranks third position in South Asia and 153rd in the World. To settle a commercial dispute, it usually takes 910 days with an expense equal to 26.8% of claim value.
10. Resolving Insolvency
The country that takes less time and effort to recover the insolvency proceeding of domestic legal entities is ranked higher by DB. It also calculates the recovery rate as cents on the dollar. Those countries which have created a regulatory environment with efficient administrative processes and strong protection of property rights can set the stage for firms and investors to take opportunities as the economy develops. Nepal is ranked first with 43% recovery rate in this aspect as compared to 32.7% in other South Asian countries.
To read the full report of ‘Doing business’, please follow the link below: