A Study Report on Textile & Clothing Sectors in Nepal

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

List of Tables Abbreviation and Acronyms ………………………………………………………... Executive Summary ………………………………………………………………… Chapter I Introduction…………………………………………………………… 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…………….

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 Chapter III 3.1 3.2 3.3 3.4 Chapter IV 4.1 4.2 4.3 4.4 Chapter V 5.1 5.2 5.3 5.3.1 5.3.2 5.4 5.4.1 5.4.2 Chapter VI

Profile of the Textile Sector…………………………………………… Income and Employment Generation…………………………………. Supply and Demand of Textile………………………………………… Export and Import of Textile…………………………………………… Profile of Garment Industry……………………………………………. Garment Export………………………………………………………… Major Export Items ……………………………………………………. Export Price……………………………………………………………. Quota…………………………………………………………………… Export Market……………………………………………………… Backward Linkage…………………………………………………….. Forward Linkage………………………………………………………. Production, Technology and Productivity………………………….. Entrepreneurship Development and Investment………………………. Foreign Joint Ventures………………………………………………… Technology, Skill Development and Productivity…………………….. Institutional Development……………………………………………… Government Policy and Laws……………………………………….. Policy…………………………………………………………………... Implementation………………………………………………………… Textile Policy………………………………………………………….. Garments Policy………………………………………………………. Comparative and Competitive Advantages………………………… Textile Industry………………………………………………………… Garment Industry………………………………………………………. Nepal's Competitive Position in Textile and Garment ………………… Textile …………………………………………………………………. Garment………………………………………………………………… Problems & Constraints………………………………………………... Textile…………………………………………………………………. Garment………………………………………………………………… Likely Impacts Impacts on Nepal's Textile and Clothing Sectors Sectors from ATC/WTO Accession………………………………………………… 6.1 Likely Impacts on Textile and Clothing Sectors………………………. 6.2 Future Outlook………………………………………………………… Chapter VII Strategic Recommendation…………………………………………... 7.1 Textile Sector……………………………………………………….. 7.2 Garments Sector……………………………………………. Annex 1 Nepal – Brief Profile………………………………………………….

2

Page No. 3 4 5-6 7-8

9-29

30-35

36- 39

40-44

45-48

49-54

55-59

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 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

Total investment Production capacity Present estimated production Capacity utilization Estimated total domestic demand Share of local textile production in domestic demand Share of import in domestic demand Value addition in total manufacturing activity (%) Excluding pashmina Employment Share of total manufacturing employment (%)

9

1991/92

1996/97

6.7 6.7 16238 7.3

8.4 8.4 20633 10.5

2000/01 Rs 15 billion 150 million metres 20 million metres 13.3 per cent 350 million metres 6 per cent 94 per cent 12.1 3.1 6000*

Key Economic Indicators  Number of total establishments Cotton textile terry towel Synthetic textile Synthetic yarn Jute products Foreign joint venture establishments Share of total number of manufacturing establishments (%) Annual average value added growth rate at constant prices (%) Excluding pashmina Value added output ratio Excluding pashmina

1991/92 254

1996/97 296

5.9 3.8 3.8 40.9 40.9

8.3 5.8 5.8 37.9 37.9

2000/01 61 12 22 16 11 1

9.9 -19.5 36.0 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

in '000 m

(30)

(36)

(35)

(31)

(27)

(35)

(23)

(18)

(16)

(02)

374

Synthetic 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

14069

11820

11820

11820

11820

11820

11820

11820

11820

11000

(39)

(54)

(53)

(47)

(41)

(53)

(34)

(27)

(24)

(03)

45117

50756

43296

43296

45000

45000

41000

41000

32000

32000

(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)

Cotton textile in '000 m Synthetic Synthetic textile in '000 m

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 Spinning & weaving

No. of  Estds.

Employment in Number  Contract Admin Technical

Owner & Family Members

Total Workers

134

352

6134

554

402

7442

Finishing

89

240

5457

803

383

6883

Made-up textile

19

51

790

76

16

933

242

643

12381

1433

801

15258

4.21

81.15

9.39

5.25

100

Total Per cent share in total

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

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

No. of  Estds.

Wages and Salaries of Workers Rs '000 Contract Administrative Technical

Total Workers

134

137250

23004

22322

182576

Finishing

89

129863

28575

24671

183109

Made-up textile

19

9774

2304

574

12652

242

276887

53883

47567

378337

73.18

14.24

12.58

100

Total Per cent share in total

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 Requirement

Estimated Domestic Production

Import

Shortfall

350 million meters

20 million meters (5.7%)

47.6 million meters (13.6%)

282.4 million meters (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 Chapter  wise 50 51 52 53 54 55 56 57 58 59 60 61 62

63

Product Description

Silk Wool Wool yarn yarn & wove woven n fabr fabric ic Cotton Othe Otherr vege vegeta tabl blee text textil ilee fibe fibers rs ManMan-m made ade fila filam ments ents ManMan-m made ade stap staple le fib fibers ers Wadding, felt, twine, cordage, ropes and cables Carpets & other textile floor  coverings Special woven fabrics like tapestries, trimmings, embroidery Textile fabrics, articles suitable for industrial use Knit Knitte ted d or cro crochet cheted ed fab fabrics rics Articles of apparel & clothing accessories knitted or crocheted* Articles of apparel & clothing accessories not knitted or  crocheted** Othe Otherr made made up text textil ilee arti articl cles es Tota Totall

Export % of Total Value in Overseas '000 Rs. Export 3361 0.01 17 0.00 .00 12834 0.04 3245 3245 0.01 0.01 721 0.00 .00 25 0.00 0.00 0 nil

Import Value '000 Rs. 943261 3470 470424 424 267226 1138 113864 64 706 706417 417 1274 127434 345 5 11857

% of Total Overseas Import 1.38 5.08 .08 0.39 0.17 0.17 1.03 .03 1.87 1.87 0.01

29.9

139308

0.20

nil

122372

0.17

7231

0.02

309726

0.45

0 2011331

nil nil 7.01

1442 144208 08 129967

0.21 0.21 0.01

14689463

51.2

478248

0.70

5186 518671 71 2585 585062 0620

1.8 1.8 88.99 8.99

1072 107259 59 8101 81015 512

0.16 0.16 11.8 11.86 6

8603721 0

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, jerseys, pullovers, cardigans, sweaters, 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

Products

All types of Fabrics (mtr)

Import from India Local Under Bank  Import Guarantee

Import from Overseas Local Under Bank  Import Guarantee

8115397 (3451465)

Hosiery Fabrics (kgs)

100849 (7683)

804466 (215718)

Cotton Garment (doz)

128657 (39559)

341084 (338687)

764050 (618943)

1233791 (997189)

Linen, Curtain, Bed spread Blanket (doz)

109803 (19145)

11305 (60898)

117864 (24929)

238972 (104972)

Yarn (kgs)

572700 (69583)

688773 (401921)

3601186 (5269421)

14

10322901 (2288596)

21973463 (632625)

Total

21834395 (354067)

1294798 (118508)

3750527 (196859)

Import from Tibet/China Local Import

65996683 (6623612) 905315 (223401)

670944 (2735951)

373971 (1943458)

Products

Import from India Local Under Bank  Import Guarantee

Elastic (mtr)

406657 (362)

Zip Fastner (inch)

2270899 (767)

Label (kgs)

1005476 (4013)

Buckram (mtr)

338536 (5417)

Thread (grus)

46870 (9866)

Import from Overseas Local Under Bank  Import Guarantee

Import from Tibet/China Local Import

Total

406657 (362) 3473 (503)

9266 grus (3483) 4543 (4794)

1743399 doz (583382)

Buttons (doz)

847915 (3785)

198410 (25445)

Hangers (doz)

4305973 (22667)

3000 (328)

 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, K athmandu.

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 Cotton textile (mtr) Polyester textile (mtr) Wool garments (pcs) Cotton hosiery garments (pcs) Woolen yarns (kgs) Polyester yarns (kgs)

India Quantity Value

Overseas Quantity Value

6108

188

353105

6222

1816482

104008

96757

7150

10211

3769

496079

32895

11775

311

19249325

1804894 18544208

11477977

Garments (doz)

Tibet Quantity Value

1505

138

Source: Department of Customs, Kathmandu.

Table – 11 Garment Export from Nepal Value in million Fiscal Year 

1991/1992 1992/1993 1993/1994 1994/1995 1995/1996 1996/1997 1997/1998 1998/1999 1999/2000 2000/2001

Value of  Garment Exports in Rs. in US$ 3112 73.05 3723 75.98 5756 117.21 5357 106.18 5414 96.25 5617 98.98 6783 100.34 8155 199.66 11083 157.43 11431 153.12

Per cent Change

in Rs. 131.6 19.6 54.6 -6.9 1.0 3.7 20.7 20.2 35.9 3.1

Value of Total Exports (TE)* 13838 17333 19077 17926 19758 22862 27402 35269 49561 56520

in US$ 132.2 4.0 54.2 -9.4 -9.3 2.8 1.3 19.2 31.5 -2.7

Value of  Exports to Overseas** 12185 15494 16495 14288 15526 17011 17987 22181 27828 28690

Share of Garment

in TE 22.4 21.4 30.1 29.8 27.4 24.5 24.7 23.1 22.3 20.2

in Overseas 25.5 24.0 34.8 37.4 34.8 33.0 37.7 36.7 39.8 39.8

Exchange Rate *** Rs = 1 US$ 42.60 49.00 49.11 50.45 56.25 56.75 67.60 68.15 70.40 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 Tshirts, 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 Chapter  wise

Type of Garments

6105.10

M&B cotton shirts knitted

6105.20

M&B shirts knitted or crocheted or man-made fabrics

6106.10

6109.10

1999/2000  No. of  Quantity  pieces '000 Rs

Per Unit Export Price Value Value (Rs.) (US$)

767282

167624

1813775 (136.4)

491919 (193.5)

271.21 (24.1)

3.63 (17.0)

79322

17478 (278.1)

300424 (378.5)

83627 (26.3)

278.36 (19.5)

3.73

W&G cotton blouses, shirts, shirt-blouses knitted

343931

66394

147868 (-57.0)

35139 (-47.1)

237.63 (23.0)

3.18 (16.0)

Cotton T-shirts, vest knitted

881850

193404

3515349 (298.6)

709303 (266.7)

201.77 (-8.0)

2.70 (-13.1)

11808 (1675.9)

6304 (559.6)

209705 (-269.2)

41583 (-284.9)

198.29

2.66

-

146369

-

221852 (51.6)

-

288468

77623

730672 (153.3)

175704 (126.24)

240.46 (-10.6)

-

102664

-

45670 (-55.5)

-

108619

32160

152312

31875

209.27

2.80

(40.2)

(-0.9)

(-29.3)

(-150.0)

246816

68256

276.55

3.70

90.90

T-shirts, singlets & vest knitted or crocheted

10.10

Woolen jersey, pullover, cardogam, sweater, waistcoat, knitted

20.20 20.21

Cotton jersey, pullover, cardigans, waistcoat and similar articles

6117.10

Shawls, scarves, mufflers, mantillas, veils and the like, knitted

12.12

M&B cotton overcoat, car, coat, capes, cloaks and similar  article, not knitted or crocheted

1.1.1

2000/2001  No. of  Quantity  pieces '000 Rs

W&G cotton overcoat, car

63589

18

21826

-

3.22 (-15.7)

-

HS Code Chapter  wise

Type of Garments

1999/2000  No. of  Quantity  pieces '000 Rs

coat, rain coat, capes, cloaks and similar article, not knitted 6203.22 6203.32   6203.39

  49.49

404990

96057

530224 (30.9)

140043 (45.8)

264.12 (11.3)

M&B cotton jackets and blazers, not knitted

186585

50432

295397

112951 958.3)

382.37 (124.0)

M&B cotton trousers, bib & brace overalls not knitted

M&B trousers, bib & brace overalls breaches & shorts of  other textiles

6204.12

W&G cotton suits

6204.21

W&G woolen ensembles

6204.22

W&G cotton ensembles, not knitted

29.29

6204.32

39.39

W&G ensembles of textile materials not knitted W&G cotton jacket, not knitted W&G jacket of textile materials, not knitted

6204.42

W&G cotton dresses, not knitted

6204.52

W&G cotton skirts, not knitted

6204.59

W&G skirt of textile material, not knitted

62.62

Per Unit Export Price Value Value (Rs.) (US$) (-19.4) (-24.1)

M&B cotton ensembles, not knitted

M&B jacket and blazers

42.42

2000/2001  No. of  Quantity  pieces '000 Rs (288.1) (212.7)

W&G cotton trousers, bib & brace overalls breeches & shorts

6205.10

M&B woolen shirt, not knitted

6205.20

M&B cotton shirt, not knitted

3.54 (5.0) 5.12 (41.4)

219

76

310128 (141510.9)

100449 (132069.7)

323.90 (-6.6)

4192557

1032980

4091982

1161889 (-2.5)

283.94 (12.5)

3.80 (15.2)

4.34) (-11.9)

13221

3460

352308 (2564.7)

90054 (2502.7)

255.61 (-2.3)

3.42 (-8.0)

1364781

378201

1122918 (-17.7)

328436 (-13.2)

292.48 (5.5)

3.92 (-0.2)

196622

48630

380958 (93.7)

103093 (112.0)

270.62 (9.4)

3.63 (3.4)

90356

23415

855985 (847.3)

171569 (632.7)

200.43 (-22.6)

2.68 (-27.1)

8792

1999

81596 (828.0)

28511 (1326.3)

349.42 (53.6)

4.68 (44.8)

308478

81548

891900 (189.1)

196274 (140.7)

220.06 (16.7)

2.95 (21.5)

2330

440

113606 (4775.8)

50290 (11329.5)

442.67 (134.4)

5.93 (121.2)

872106

228292

2194385 (151.6)

569274 (149.4)

259.42 (-0.9)

3.48 (-6.4)

4475397

1013498

573821 (-679.9)

172711 (-83.0)

300.98 (32.9)

4.03 (25.1)

6400

2364

299933 (4586.4)

79931 (3281.2)

266.50 (-27.8)

3.57 (-32.0)

3514215

839284

2288654 (34.9)

613606 (-26.9)

268.11 (12.2)

128804

33715

352425 (173.6)

157590 (367.4)

447.16 (70.8)

5.99 (61.0)

10658786

2582689

5993291 (-43.8)

1659561 (-35.7)

276.90 (14.3)

3.71 (7.8)

3.59 (5.9)

30.30

M&B shirt of man made fibers, not knitted

493671

143874

137350 (178.2)

46632 (-67.6)

339.51 (16.5)

4.55 (9.9)

90.90

M&B shirt of textile materials, not knitted

232335

47251

1513188 (551.3)

351742 (644.4)

232.45 (14.3)

3.11 (7.6)

19

(33.3)

(8.5)

HS Code Chapter  wise 10.10

Type of Garments

W&G blouses, shirt & shirt  blouse of silk or silk waste

1999/2000  No. of  Quantity  pieces '000 Rs 21848 8672

2000/2001 Per Unit Export Price  No. of  Quantity Value Value  pieces '000 Rs (Rs.) (US$) 855111 200202 234.12 3.14 (3813.9) (2208.6) (-41.0) (-55.7)

20.20

W&G woolen blouses, shirt & shirt-blouses

1940172

294112

2256395 (16.3)

628000 (113.5)

278.32 (83.6)

3.72 (73.0)

30.30

W&G cotton blouses, shirt & shirt-blouses, not knitted

2986005

721910

2130099 (-28.7)

550838 (-23.7)

258.60 (6.9)

3.46 (0.8)

W&G blouses, shirt & shirtblouses of man made fibers

198581

25081

W&G blouses, shirt and shirt-blouses of textile materials, not knitted

818278

319612

557538 (31.9)

333711 (4.4)

598.54 (53.2)

M&B cotton under pants & briefs not knitted

316614

66024

218504

 

52298 (31.0)

239.35 (-20.8)

3.21 (14.8)

(8.4)

M&B cotton night shirt & pyjama, not knitted

837264

 

323742 (64.8)

234.61 (94.8)

3.14 (18.2)

(11.3)

6207.91

M&B cotton vest, not knitted

477555

107806

466767 (-2.3)

126823 (17.6)

271.71 (20.3)

3.63 (13.0)

21.21

W^G cotton night shirt,   pyjama not knitted

691863

215663

1200205

227655 (73.5)

189.68 (5.6)

2.54 (39.1)

W&G night shirt & pyjamas of other materials Babies cotton garments, not knitted

49872

19459

1220566

294929

169052 (239.0) 997080 (-18.3)

44615 (129.3) 248960 (-15.6)

263.91 (34.4) 249.69 (3.3)

3.54 (36.1) 3.34 (-2.6)

40.40   90.90

11.11 21.21

29.29 6209.20

166172

521455 126969 243.49 3.26 (162.6) (406.2) (92.8)

1379936

(82.1)

8.01 (44.3)

40.40

M&B garment of textile fabric & rubberized textile fabric

1320393

427 631

1037286 (-12.4)

322370 (-24.6)

310.78 (-4.0)

4.16 (-9.6)

50.50

W&G garment of textile fabric & rubberized textile fabric

6060606

978110

2543764 (138.3)

688897 (-29.6)

270.82 (67.8)

3.63 (58.5)

6211.42

W&G cotton dhoti & lungi, not knitted

25874

3164

155425 (500.7)

36814 (1063.5)

236.86 (93.7)

3.17 (83.2)

-

2747673

-

3921643

0.49 (-63.11)

20.20

Woolen shawls, scarves, mufflers, mantillas, veils and the like

60.60

(42.7)

Toilet linen & kitchen linen of terry toweling or similar  terry fabric or cotton

-

21807

-

134364 (516.2)

6302.91

Cotton kitchen linen

-

415851

-

271963 (-34.6)

6302.99

Kitchen linen of textile materials

-

-

-

41189

6305.20

Cotton sacks & bags

978405

91395

1018413 (4.0)

37211 (-59.3)

36.54 (-60.9)

90.90

Hats & headgears, knitted crocheted

871576

59524

780411 (-10.4)

55131 (-7.4)

7064 (3.4)

0.95 (-2.6)

99.99

Headgear, whether or not

1192758

90646

293535

27420

93.41

1.25

20

(-42.7)

HS Code Chapter  wise

Type of Garments

1999/2000  No. of  Quantity  pieces '000 Rs

lined or trimmed

2000/2001  No. of  Quantity  pieces '000 Rs (-75.4) (-69.8)

Per Unit Export Price Value Value (Rs.) (US$) (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

25346508 22785186 (-10.1) 40967865 (79.8)

Export Earning in '000Rs 3112002 3723448 (19.6) 5756485 (54.6)

1994/95

33505181 (-18.2)

5357029 (-6.9)

159.89 (13.7)

3 3..17 (10.8)

1995/96

27969944 (-16.5)

5414746 (1.0)

193.59 (21.1)

3 3..44 (8.5)

1996/97

29953917 (7.0)

5617478 (3.7)

187.54 (-3.1)

3 3..30 (-4.0)

1997/98

34950594 (16.6) 37748724 (8.0) 46836446 (24.0) 43430777 (-7.2)

6783025 (20.7) 8154920 (20.2) 11082558 (35.9) 11431246 (3.1)

194.07 (3.7) 216.03 (11.3) 236.62 (9.5) 263.21 (11.2)

2 2..87 (-13.0) 3 3..17 (10.4) 3.36 (5.9) 3.52 (4.7)

1991/92 1992/93 1993/94

1998/99 1999/2000 2000/2001

Quantity

Average Per Unit Price Rs. US$ 122.78 2 2..88 163.42 3 3..34 (33.0) (15.9) 140.51 2 2..86 (-14.0) (-14.3)

 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 zipper, foam, buckram

0.21

06

3.

Stitching

0.42

12

4.

Cutting, finishing, ironing, quality checking, labeling, packing

0.14

04

5.

Packing materials / labels / washing instruction

0.14

04

0.25

07

0.60

17

3.52

100%

0.53

15

Export Costs

6.

Clearing, forwarding, transportation, customs duty, visa, chamber, quota approval fees and unseen expenses

Overhead / Profit

7.

Factory management, maintenance & repair production logistics, utilities, administrative expenses, marketing and PR expenses, bank interests and p rofit

Total FOB Price Freight

8.

Freight cost for land sea transport to US  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 340 Men's Shirt Doz

USA 341 Blouse Doz

USA 342/642 Skirts Doz

ISA 347/348 Shorts Doz

USA 336/636 Ladies Dress Doz

USA 640 Rayon Men's Shirt Doz

USA 641 Rayon Blouse Doz

USA 369-S Shop Towel Kgs

USA 363 Terry Towel  Nos.

Canada 5 Trousers Overalls Shorts Pcs

Canada 7 Woven Shirt Blouses & Similar  Articles PCs

2000

Annual Quota

380089

1220891

331733

856127

263161

191297

431326

983454

7741604

Actual Quota

453990

520489

161817

869918

248468

134006

9413

982148

8293380

(100)

(42.63)

(48.77)

(100)

(94.42)

(70.05)

(2.18)

(99.86)

(100)

402896 22805C =380091

1119397 66902 6% 200353 9% =952142

351638 51367CF 51367SCF

905501

306848 11477 CF = 191298

202775

457208

1012958

8206100

219135

334555

Actual Quota

174254

263934

221760

878603

128064

49721

3165

964568

5376600

121054

16306

Utilization (in %)

(45.84)

(27.72)

(63.06)

(93.34)

(41.74)

(25.99)

(0.69)

(95.22)

(65.52)

(55.24)

(4.87)

Utilization (in %) 2001

Annual Quota

+54450S S6% +81675 S9% = 940892

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 Year 

Value of Garment Export to US in Rs. equiv US$

% Change in Rs.

in US$

Total Garment Export in Rs. equiv US$

% of US in Total Garment Export

% of Garment in Total Export to US

Total Exports 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 Code

Total No. of  Importing Countries

 Nepal's Share in %

Top 5 Exporting Countries with their % Share

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 Code

Total No. of  Importing Countries

 Nepal's Share in %

Top 5 Exporting Countries with their % Share

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.

European Union

Value in Million in Rs. in US$

% in Total Garment Export Qty. Rs.

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

2980

0.59

0.007

0.006

0.004

1361335

242.18

3.21

3.13

2.11

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

339390

39.29

0.52

0.78

0.33

13283

2.04

0.02

0.03

0.01

Finland France Germany

Italy Luxembourg  

Netherlands

Portugal

94500

17.79

0.23

0.21

0.15

3918

0.29

0.003

0.009

0.002

380744

35.15

0.46

0.87

0.30

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

Spain Sweden

 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 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. 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, 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

Textile

India India India Pakistan

Textile Polyester

Japan

Textile Silk

China

Garment

Austria France Germany Hong Kong/China India India India India India India India India India India India India Panama Switzerland UK UK USA Bangladesh China India India India Korea Republic Philippines Thailand USA

Status Operating Under construction Licensed

Investment in million Rs 142.66 85.36 58.41 81.43

Capacity in million Mtrs/Pcs 6.40 6.00 4.00 0.40

78.08

1.40

Approved

67.70

1.20

Operating

40.35 4.00 9.76 80.30 225.02 8.32 5.20 12.50 6.50 53.67 29.08 46.00 10.40 5.30 31.40 57.07 83.28 20.00 5.00 27.71 22.87 135.64

0.58 0.5 8 0.08 0.19 1.40 3.60 0.60 0.54 0.84 0.70 14.70 0.60 1.50 0.30 0.36 2.20 4.32 1.70 0.60 0.04 0.86 0.11 1.10

8.78 67.35 143.41 4.42 23.90 19.30 142.00 18.93

0.20 0.60 1.08 2.00 0.67 0.56 0.51 1.50

Under  Construction Licensed

31

Sector

Country

Knitwear

Japan

Pashmina

USA Bangladesh China China China China Finland Germany Hong Kong/China India India India India India India India India India India Japan Japan Korea Republic Switzerland UK USA China China China China India India USA India Korea Republic Philippines Pakistan Pakistan

Pashmina

Silk Cotton Knit Dyeing Zip Fastner Yarn Towel

Status

Approved

Operating Licensed Licensed Closed Operating

Investment in million Rs

Capacity in million Mtrs/Pcs

28.48

0.36

9.33 25.14 166.73 47.00 9.82 30.63 5.00 45.32 14.65 10.00 5.00 4.90 73 29.08 29.60 36.92 15.00 20.00 161.60 4.07 4.00 9.44 15.40 71.39 5.00 343.02 30.63 25.33 74.96 28.04 29.03 4.48 58.41 496.66 460.50 24.27 141.46

0.30 1.00 0.90 0.10 0.15 0.60 0.10 1.50 0.16 1.00 0.10 0.60 0.42 0.60 0.84 0.60 0.16 0.30 1.00 0.04 0.05 0.03 0.02 0.25 0.07 0.50 0.06 0.15 0.49 0.60 0.40 290MT 4.00pcs 3000MT 3663MT 0.96 pounds 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 fa ctories 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. f loor. 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 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.

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3. Garment Export Promotion Committee 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 Productivity and Economic Development 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.

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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.

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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.

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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 y ears 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

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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.

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

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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, 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 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.

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  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-àvis 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 exfactory price.

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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)

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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

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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

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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.

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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.

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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 of world's 14 highest peaks. 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 cent 10 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 Contributing Sector

Value in Million Rs. 1998/1999

1999/2000*

2000/2001**

% Change

Agriculture, Fishery, Forestry

132,373 (40.12)

142,908 (39.10)

144,420 (36.79)

1.06

Trade and Tourism (Hotel/Restaurant)

39,313 (11.91)

43,109 (11.80)

45,862 (11.68)

6.39

Community and Social Services

30,582 (9.27)

34,024 (9.31)

40,680 (10.36)

19.56

Financial and Real Estate

33,203 (10.06)

36,919 (10.10)

40,507 (10.32

9.72

Construction

39,313 (10.08)

43,109 (9.89)

45,862 (10.02)

10.02

Manufacturing

30,337 (9.19)

35,387 (9.68)

38,714 (9.86)

9.40

Transport, Communication, Storage

24,631 (7.47)

29,281 (8.01)

33,322 (8.49)

13.80

Electricity, Gas, Water

4,574 (1.39)

5,895 (1.61)

7,715 (1.97)

30.87

Mining and Quarrying

1,685 (0.51)

1,815 (0.50)

1,981 (0.51)

9.15

329,960

365,465

392,532

7.41

Less Imputed Value of Banking System

9,438

10,708

11,912

11.24

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)

GDP at Factor Cost

* 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 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

Gross Domestic Product (% change) (at producer's constant price)

5.0

3.0

4.4

6.5

5.9*

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

1999/2000

5.6

2000/01

7.4

Gross Domestic Product (% change) (at producers' current price)

12.7

7.2

13.7

11.0

7.8*

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

Gross National Product at current price (% change)

12.9

7.6

15.0

11.3

8.5*

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*

57

6.9*

11.5*

Indicators

1996/97

1997/98

1998/99

1999/2000

2000/01

7.5

3.9

9.0

4.1

1.5*

7.8

2.3

14.6

2.8

-2.8*

1986/87 = 1000 Gross Domestic Product Price Index (% change) Agriculture  

Non-agriculture Consumer Price Index (Annual average % change)

7.2

5.5

4.9

8.4

11.4

3.5

15.7

15.8

16.6

18.2

19.7

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

-

10.8

10.9

10.9

11.3

-

8.7

8.6

8.4

8.7

-

Gross National Savings

e

4.9

4.2*

Gross National Income Ration (%) Ratio of GDP (at producers) Current prices with (%)

Total Revenue Tax Revenue  

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 Revenue (%)

434.9

489.4

454.9

444.6

-

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

31.1

28.3

28.1

29.1

-

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 Credit of the Banking System (%)

65.1

66.3

67.4

69.3

69.9

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

-1650.8

-1518.9

-23.5

-562.7

-475.3**

320.2

1096.6

984.0

1443.4

351.1**

4854.1

6515.8

7665.1

9394.4

10760.8

57.0

67.9

68.5

70.00

74.65c

21023

21526

22040

22567

23107*

Debt Service (principal & interest repayments)/ regular expenditure ratio (%)

1999/2000

2000/01

Money Supply (% change)

Current Account (Rs. in Million) Balance of Payments (Rs. in Million) Foreign Exchange Reserve (Rs. in Million) Exchange Rate (US$ 1 = Rs…) d Total (in Thousand) + * ** a  b c d e

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

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

59