Small and medium-sized enterprises in Nepal: Examining constraints on exporting

Even as a number of developing countries have been able to reap the export opportunities presented by the rise of global value chains (GVCs), Nepal's export performance remains dismal. This paper examines the challenges and constraints faced by manufacturing small and medium-sized enterprises (SMEs) in Nepal, a landlocked least developed country, in integrating themselves into GVCs, with a focus on exporting. The paper combines the limited available secondary data, including firm-level information, with qualitative primary data. It finds that Nepal lacks a concrete policy framework for SMEs, let alone a strategy for their internationalization and participation in GVCs. Fiscal incentives are mostly not targeted at, or tailored to, the needs of SMEs. Incentives granted in one legislation being repealed through another has created policy uncertainty. Other major challenges include an inadequately trained/skilled workforce; onerous collateral requirements and high interest rates when accessing credit; an inadequately funded concessional export credit scheme, with an insufficient term length; procedural difficulty in accessing a cash export subsidy program; high tariffs on raw materials and intermediate goods coupled with an ineffective duty drawback system; the lack of an efficient arrangement for consolidating less-than-container-load cargoes; poor dissemination of information about existing incentives and facilities; inadequate provision of trade and market intelligence; restrictions on online payment solutions; and a weak capacity of the public administration to coordinate and implement trade and industrial policies. The paper makes policy recommendations in five areas: endowments, market access, logistics/trade facilitation, nontariff measures, and other cross-cutting policy issues.