Annual Report on Exchange Arrangements and Exchange Restrictions 2005
Chapter

NEPAL

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2005
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(Position as of December 31, 2004)

Status Under IMF Articles of Agreement
Article VIIIDate of acceptance: May 30, 1994.
Exchange Arrangement
CurrencyThe currency of Nepal is the Nepalese rupee.
Exchange rate structureUnitary.
Classification
Conventional pegged arrangementThe Nepalese rupee has been pegged to the Indian rupee at the rate of Nrs 1.6 per Rs 1 since February 1993. The reference rate of the dollar quoted by the Nepal Rastra Bank (NRB) is based on the average of the quoted buying and selling rates of commercial banks. Exchange rates of other major currencies are quoted on the basis of overseas markets. Buying and selling rates are quoted daily for certain other currencies, with quotations based on the buying and selling rates for the dollar in markets abroad.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketBanks provide forward exchange cover for trade transactions.
Arrangements for Payments and Receipts
Prescription of currency requirementsConvertibility between the Indian rupee and the Nepalese rupee is unrestricted in Nepal. All current transactions with member countries of the ACU other than India must be effected through the ACU. Payments for selected imports from India may be settled in dollars. Other imports and proceeds from exports to India must be settled in Indian rupees. Proceeds from exports to other countries must be received in convertible currencies. Commercial banks may transact in renminbi with Chinese tourists. Effective July 23, 2004, resident holders of foreign exchange accounts no longer need NRB permission to make payments in foreign currency to the government.
Use of foreign exchange among residentsCommercial banks may engage in interbank transactions in Indian rupees. Effective January 23, 2004, resident individuals may purchase Indian rupees and sell them to the NRB.
Payments arrangements
Regional arrangementsNepal is a member of the ACU.
Clearing agreementsYes.
Administration of controlPayments in convertible currencies may be made without permission, subject to the procedures prescribed by the NRB. All exchange transactions must be settled through ADs. Nonbank ADs are licensed to accept foreign currencies only for their services to foreign nationals.
International security restrictionsn.a.
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)
Controls on external tradePersons who have stayed abroad for more than one month and have an official source of foreign earnings may import up to 10 kilograms of gold.
Controls on exports and imports of banknotes
On exports
Foreign currencyForeign banknotes, other than Indian banknotes, may not be taken out by residents without permission. Nonresidents may take out any unconverted foreign banknotes they brought in.
On imports
Domestic currencyYes.
Foreign currencyResidents and nonresidents may bring in foreign banknotes freely but must declare amounts exceeding the equivalent of $2,000. No limit applies to Indian rupees.
Resident Accounts
Foreign exchange accounts permittedExporters are allowed to deposit up to 100% of export earnings in a foreign exchange account to cover trade-related expenses. Nepalese citizens earning foreign exchange from working abroad (except in Bhutan and India) for more than three months may also open these accounts. Commercial banks may accept deposits denominated in most of the freely usable currencies and are free to determine the rate of interest paid on deposits. Current accounts may be opened with a minimum equivalent to $500, and time deposits with a minimum equivalent to $3,000. Banks are free to determine the minimum balance on time deposits. Effective August 23, 2004, remittance agencies licensed by the NRB are permitted to maintain foreign exchange accounts.
Held domesticallyEmployment agencies are permitted to open foreign exchange accounts.
Held abroadYes.
Approval requiredPrior approval is required for commercial banks to open these accounts. Effective July 23, 2004, commercial banks may open foreign exchange accounts abroad with nonbank financial institutions for facilitating e-commerce payments.
Accounts in domestic currency held abroadNo.
Accounts in domestic currency convertible into foreign currencyNo.
Nonresident Accounts
Foreign exchange accounts permittedAccounts may be maintained in all specified convertible currencies, and balances in these accounts may be transferred abroad freely. Diplomats and foreign nationals, except Indian nationals, are free to open foreign currency accounts with Nepalese banks.
Domestic currency accountsNo.
Convertible into foreign currencyNo.
Blocked accountsNo.
Imports and Import Payments
Foreign exchange budgetNo.
Financing requirements for importsNo.
Documentation requirements for release of foreign exchange for importsCertain items imported from India are eligible for payment in convertible foreign exchange. On February 2, 2004, one item was added, raising the total to 42 items. Effective November 29, 2004, the total number of such imports is 63.
Letters of creditBanks are required to obtain information regarding the business credibility of suppliers before opening LCs in excess of the equivalent of $50,000.
Deferred-payment LCs of up to one year are allowed for all imports.
OtherImporters are allowed to make payments of up to the equivalent of $30,000 by draft or telegraphic transfer.
Import licenses and other nontariff measuresMost imports are covered by OGLs.
Negative listImports of arms, ammunition, wireless transmitters, precious metals, and jewelry require special permission from the government. Effective December 2, 2004, imports of live birds along with their nonprocessed meat products, eggs, and other bird-related nonprocessed items from all Asian countries except India, Bangladesh, Sri Lanka, and Bhutan are prohibited.
Open general licensesYes.
Other nontariff measuresQuantitative restrictions are in effect for the importation of poppy seeds.
Import taxes and/or tariffsThere are seven tariff rates (5%, 10%, 15%, 25%, and 40%, and two special rates of 80% and 130%). Most goods are subject to either the 15% or the 25% rate. Nepalese citizens returning from abroad who have spent at least 15 nights out of the country are permitted to bring in goods worth the equivalent of Nrs 1,000 free of customs duty and sales tax. Citizens with official sources of foreign exchange earnings and who have stayed abroad for one month or more are allowed additional imports without official documentation.
State import monopolyNo.
Exports and Export Proceeds
Repatriation requirementsProceeds from exports must be repatriated within 180 days of receipt. Exporters are allowed to accept deferred payments in export proceeds if they do not exceed the equivalent of $500 or 1%, whichever is higher. Approval of the NRB is required for amounts above the specified limit.
Surrender requirementsExporters may retain the export earnings on their foreign currency accounts with local banks.
Financing requirementsCommercial banks may grant preexport credits of up to 70% of the f.o.b. value of products to all individuals and institutions holding irrevocable LCs opened or endorsed by foreign banks and acceptable to Nepalese banks. Such credit may be provided for a maximum of three months; this period may be extended without penalty due to special circumstances beyond the control of the exporter.
Documentation requirements
Letters of creditExports to countries other than India are allowed only against irrevocable LCs or against advance payments by foreign banks.
GuaranteesExport consignments not exceeding $50,000 or its equivalent may be undertaken on the basis of a bank guarantee.
DomiciliationReexportation to India of non-Nepalese goods and reexportation to any destination of goods imported from India are prohibited.
Preshipment inspectionPreshipment inspection is not compulsory.
Export licensesExports of items having archaeological or religious value, old coins, narcotics, and explosive materials are prohibited.
With quotasThe export volume of selected ready-made garments to the United States is restricted by a quota system.
Export taxes
Other export taxesExport taxes are levied on 23 specific items and a 5% service charge—based on the f.o.b. value of the item in question—is levied on all other exports.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersEffective July 23, 2004, the limit on payments and transfers which do not require NRB permission is $1,000 (previously, $500).
Investment-related payments
Prior approvalPrior approval is required in the case of private sector loan amortization; approval is not required for foreign investors operating in Nepal to repatriate profits earned from their investments.
Payments for travel
Indicative limits/bona fide testThe indicative limit for Nepalese passport holders is $2,000 or its equivalent. Bona fide payments in excess of the limit are permitted.
Personal payments
Prior approvalPrior approval of the government is required for transfers related to medical expenses and costs related to study abroad.
Foreign workers’ wages
Prior approvalYes.
Credit card use abroadThe use of credit cards abroad is allowed under specific guidelines. Effective July 23, 2004, commercial banks are permitted to issue debit cards to be used abroad.
Quantitative limitsYes.
Indicative limits/bona fide testYes.
Other payments
Prior approvalYes.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsYes.
Surrender requirementsYes.
Restrictions on use of fundsYes.
Capital Transactions
Controls on capital transactionsYes.
Controls on capital and money market instruments
On capital market securities
Shares or other securities of a participating nature
Purchase locally by nonresidentsNonresidents may invest in equity shares of up to 25% of the capital of Nepalese companies.
Sale or issue locally by nonresidentsYes.
Purchase abroad by residentsYes.
Sale or issue abroad by residentsYes.
Controls on derivatives and other instrumentsNo such transactions have occurred.
Controls on credit operationsSpecified borrowers may borrow from abroad in accordance with guidelines.
Commercial credits
By residents to nonresidentsYes.
To residents from nonresidentsYes.
Financial credits
By residents to nonresidentsYes.
To residents from nonresidentsYes.
Guarantees, sureties, and financial backup facilities
By residents to nonresidentsYes.
To residents from nonresidentsYes.
Controls on direct investment
Outward direct investmentNepalese citizens, whether or not residing in Nepal, are not allowed to make any type of investment in foreign countries, except as specifically permitted by government notice. Exemptions include the purchase and sale of insurance policies abroad and investments abroad by any banking or financial institution incorporated in Nepal.
Inward direct investmentInvestments require prior approval in the form of a guarantee from the Department of Industry. Foreign investment is not permitted in cottage, small-scale, or defense-related industries. Foreign investors may hold 100% equity in large and medium-scale industries. Foreign securities firms are permitted to form joint ventures with local state exchange members, but their ownership is limited to 25% of the capital of Nepalese companies.
Controls on liquidation of direct investmentControls are in effect based on the provisions of the Company Act.
Controls on real estate transactionsControls apply to all real estate transactions.
Controls on personal capital transactions
Loans
By residents to nonresidentsYes.
To residents from nonresidentsYes.
Gifts, endowments, inheritances, and legacies
By residents to nonresidentsYes.
To residents from nonresidentsYes.
Provisions specific to commercial banks and other credit institutions
Maintenance of accounts abroadApproval of the NRB is required. Commercial banks may enter into interest rate swap arrangements with foreign banks and other financial entities without NRB approval.
Lending locally in foreign exchangeExporters, tourism-related businesses, and specific industries are entitled to such credits. Effective July 23, 2004, commercial banks are permitted to conduct interbank lending and borrowing in Indian currency.
Purchase of locally issued securities denominated in foreign exchangeNo such transactions have occurred.
Differential treatment of deposit accounts in foreign exchangeDifferential treatment is based on the type of currency.
Reserve requirementsYes.
Liquid asset requirementsYes.
Interest rate controlsYes.
Credit controlsYes.
Investment regulations
Abroad by banksEffective July 23, 2004, restrictions on commercial bank investments in foreign currency with maturities of one year or less no longer apply.
Provisions specific to institutional investorsn.r.
Other controls imposed by securities lawsn.r.
Changes During 2004
Arrangements for payments and receiptsJanuary 23. Resident individuals may purchase Indian rupees and sell them to the NRB.
July 23. Resident foreign exchange account holders were permitted to make payments in foreign currency to the government without NRB permission.
Resident accountsJuly 23. Commercial banks were permitted to open foreign exchange accounts abroad with nonbank financial institutions for facilitating e-commerce payments.
August 23. Remittance agencies licensed by the NRB were permitted to maintain foreign exchange accounts.
Imports and import paymentsFebruary 2. One item was added to the list of goods imported from India that were eligible for payments in convertible foreign exchange, bringing the total to 42 items.
November 29. Twenty-one items were added to the list of goods imported from India that were eligible for payments in convertible foreign exchange, bringing the total to 63 items.
December 2. Imports of live birds along with their nonprocessed meat products, eggs, and other bird-related nonprocessed items from all Asian countries except India, Bangladesh, Sri Lanka, and Bhutan were prohibited.
Payments for invisible transactions and current transfersJuly 23. The limit on payments and transfers that did not require NRB permission was raised to $1,000 from $500.
July 23. Commercial banks were permitted to issue debit cards to be used abroad.
Capital transactions
Provisions specific to commercial banks and other credit institutionsJuly 23. Commercial banks were permitted to conduct interbank lending and borrowing in Indian currency.
July 23. Restrictions on commercial bank investments in foreign currency with maturities of one year or less were lifted.

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