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Drawing Closer To A Distant Cousin...And Warming Up To A Northern Neighbor (Int'l Edition)


Business Week International Spotlight on Nepal

DRAWING CLOSER TO A DISTANT COUSIN...AND WARMING UP TO A NORTHERN NEIGHBOR (int'l edition)

In the Durbar Square shopping area in Kathmandu, vendors sell swanky leather jackets from India, while others offer garlic and tomato sauce from China.

With recent market reforms, Nepal's trade ties with its two giant neighbors have started to warm. And with the call by Nepal's new communist government for more privatization and foreign investment, analysts say the question is not whether market reforms will continue, but how quickly they will be implemented.

Sandwiched between India and China at the foot of the Himalayas, this tiny kingdom remained largely sealed off from the rest of the world until a popular revolt in 1990 led to a multiparty system and market reform. After two years of turmoil, the economy has started to take off, with growth doubling to 7.8% last year.

In recent years, Indian businesspeople have found a welcome in Nepal. Eager to expand trade in northern India, yet worried about political instability and market restrictions there, southern Indian industrialists have set up shop in Nepal, where they enjoy special tax incentives. The goods are then sold in northern India.

Approvals for Indian industrial projects in Nepal skyrocketed nearly 700%--from $103 million in 1991-92 to $685 million in 1992-93, according to the Industry Ministry. Two-way trade has also flourished, growing to $7.2 billion in the first nine months of 1994--equivalent to the whole amount in the previous year.

But Nepal has long had close but uneasy trade with India, and remains wary of its larger cousin. For 18 months, the kingdom was nearly at a standstill as India--angered by Kathmandu's purchase of Chinese arms--blockaded the border. One Nepalese businessman explains it this way: "We're paranoid about the Indians. We're dependent on them, but they can screw us at any time."

Distrust of Indians is the reason the tiny Nepalese stock market--only 67 listings, with less than 30 actively traded--is closed to outsiders. Foreigners can list joint-venture companies, but they cannot buy shares. Explains one government official: "Indians are very well advanced. If we allow Indians to buy, then Nepali people will be left behind."

Stock exchange General Manager Madan Raj Joshi says the government's main reason for excluding foreigners is to allow time to assess the full impact of recent foreign-exchange convertibility policies. But the long-term plan is to open the market to foreigners. Says Joshi: "You should be competitive, no matter if you have the foreign investor or the local."

Nepal has had more distant relations with China. Geographically separated by the Himalayas, the two have traded mostly by way of Tibet. But China's recent market opening and its desire to maintain Tibetan stability through greater economic prosperity have increased Beijing's interest in trade with Nepal. Last year, the two countries agreed to liberalize Tibetan border trade, and the Chinese set up a representative office in Kathmandu last fall.

Chinese investment in Nepal--mostly state-owned producers of cement, steel, and machinery--has also grown, tripling to $20 million from $6.6 million, according to the Industry Ministry.

But trade volume with China is still negligible--even smaller than with Singapore or New Zealand--and the Chinese often fail to adapt to the Nepalese market. Outside Kathmandu, Chinese brick factories are stacked with unwanted blocks, the sizes too large for Nepalese standards.

Still, many Nepalese believe that continued Chinese and Indian market reforms will spur Nepal's own trade policies as well. Says Walter Diller, chairman of NIDC Capital Markets Ltd., a Kathmandu-based securities firm: "As long as India and China are moving toward market reform, everyone can see there are a lot of advantages involved, like industrial development, increased employment, more government tax revenue." And as Nepal pursues reform, its prospects for economic growth also look promising.EDITED BY JOHN E. PLUENNEKE By Helen Chang in Kathmandu


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