A Financial Future for Nepal

[This is a part of the work entitled A Financial Future for Nepal: Creating an International Financial Services Center developed by Collins and Associates, 63-8 Commercial Wharf, Boston, Massachusetts 02110, USA. The experts working on the document were Joseph H. Collins, Donald S. Hutchinson, Walter D. Weksetein, 1996].

Introduction
In 1995, His Majesty's Government of Nepal announced plan to create an International Financial Services Center in Nepal. The Government believes that the creation of such a Center will bring new resources and expertise to Nepal, thereby accelerating growth of the entire Nepalese economy. Such a Center will help fill the gap between domestic savings and the investment Nepal needs to promote economic growth. By improving Nepal's financial infrastructure, attracting outside capital and upgrading the skills of the Nepalese people, it will lay the foundation that all modern economies require. By combining government support with the energy and resources of the private sector, it follows the strategy for growth adopted by successful East Asia governments. 

The first step in this project is the passage of the International Financial Center Act of 1996. This legislation establishes the principles for future legislation and creates the administrative framework to develop and submit specific legislation to Parliament. Of equal importance, it makes a clear statement to the world's financial markets that Nepal is committed to attracting foreign financial institutions. 

As architects of this concept for Nepal, Collins & Associates have been responding to numerous questions regarding this development strategy and its potential effects on Nepal. This document is an attempt to respond to the most commonly asked questions and to clarify major components of this project. 

Because we never stop learning or trying to improve, we welcome any comments which will assist us in our efforts to bring accelerated economic growth and greater social justice to Nepal.

Joseph H. Collins
President,  Collins & Associates

 1. What is an International Financial Services Center?
It is a city or country which encourages international financial institutions to physically locate within its borders, and permits them to use it as a base from which they offer financial services such as banking insurance, mutual funds, and investment banking to individual companies and foreign governments throughout the world. 

Typically, international financial services companies conduct business only outside of the host country. Their local activities include hiring employees and the use of local services. The extent to which they may offer services or invest in the local economy is tightly controlled by the host government. 

Financial services companies choose to locate in convenient locations that offer good air access, modern telecommunications and have a friendly, pro-business government. In the case of Nepal, all previous governments and their political parties have already made the policy commitment to attract foreign investment. This will further be confirmed by the passage of the Financial Center Act, permitting Nepal to develop tax regulations and other legislation designed to attract such businesses. 

Historically, Nepal has been "land-locked" and at an economic disadvantage for manufacturing and trading activities. Today, the communications satellite is the seaport that Nepal never had, turning its isolation into an equal access opportunity throughout the world. As an International Financial Services Center, its geographical position and time-zone location will become important economic assets. These competitive advantages and others are further discussed in the Answer to Question 8. 

The rapidly expanding economies of nations that surround Nepal have a growing need for investment capital and financial services. A modern International Financial Services Center based in Nepal can help meet these needs. This creates a unique opportunity for Nepal to both prepare for and prosper in the twenty-first century. 

Other nations, such as Cambodia, Vietnam, Mauritius and the city of Shanghai, have seen this opportunity and are attempting to become international financial centers. Fortunately, Nepal has advantages none of these potential competitors can match.

 2. What will be the Economic Impact on Nepal?
Countries with successful international financial service were studied to determine the impact of those centers on their economies. The economies of Switzerland, Singapore, Malaysia and Hong Kong are complex, with manufacturing, mining and other factors obscuring the impact of financial services. Bermuda, the Bahamas and the Cayman Islands are successful financial centers with simpler economies of a size similar to Nepal.[1] While these countries have smaller populations and smaller agricultural sectors, they share with Nepal the factors of: an important tourist industry, little manufacturing, and few natural resources. 

It is clear from the below that international financial services make a major contribution to the economies of these countries. This contribution is made not only by the direct impact of the international companies but also comes from their demands for services and employment which cascade through the economy, creating a strong multiplier effect.[2] 

In the case of Bermuda, international financial companies create an astonishing contribution of US $ 792 million twice in current contribution of tourism, Hotels and restaurants to the economy of Nepal.[3] 

The government revenue from fees and licenses of international companies is deliberately kept small (in order to attract business), but is dwarfed by the increase in tax revenue resulting from the economic activity created by these companies within the host country. This revenue comes from taxes on the wages of employees of the international companies and on those of employees of companies providing services. Revenues are also received from income taxes and sales taxes on the overall increase in the economy. 

In the case of Bermuda, that government receives US $ 31 million in revenue from fees and licenses versus US $ 150 million received from taxation on the related economic activity a multiplier of almost five. 

Bahamas Bermuda Cayman

Gross Domestic Product

$ 3,300

$ 1,554

$907

Contribution to GDP from International Finance as a percentage of GDP

500

15%

792

51%

163

18%

Government Revenues

Frees & Licenses Economic activity

8

N\A

31

150

25

N\A

All numbers are based on 1994 in millions of US dollars
(Sources: Central Bank of the Bahamas, Ministry of Finance Bermuda, Economic and Statistics office, Cayman Islands.)

Newly established Mauritius is not included in the above table, because statistics were not available on the contribution made to GDP. However, Mauritius does show a rapid rate of growth. Its financial center began operations in 1992 with government revenues from fees and licenses of US $ 205,000, and grew rapidly to a projected US $ 5 million in 1995. 

Clearly, a successful financial services industry will have a very significant impact on the economy of Nepal. As a result, His Majesty's Government of Nepal will receive progressive increase in revenues, allowing further investment on social services such as education, clean water and health, thereby sharing the benefits with all sectors of Nepalese society 

3. Will this Center Create Jobs in Nepal?
Creation of adequate human capital is basic to economic development. An International Financial Services Center in Nepal will create employment opportunities at all skill levels. (See Answers to Questions 4 and 5.)

International financial services companies will be required to hire and train Nepalese employees as a condition of their entry into Nepal. This requirement will be monitored and enforced by the Accreditation Committee. 

The number of people employed directly by international financial services companies is shown below. These are the same countries selected for comparison in the Answer to Question 2.

 Bahamas Bermuda Cayman

EMPLOYMENT

Direct Employees

771

2,214

1,800

Related business services

2,837

5,671

4,611

Total financial-related services

3,608

7,885

6,411

All numbers are based on 1994 figures.
(Sources: Central Bank of the Bahamas, Ministry of Finance Bermuda, Economic and Statistics office, Cayman Islands.)

According to the 1991 Census, less than 2% of the Nepalese workforce is classified as "professional and technical." However the number of Nepalese university graduates has more than doubled between 1985 and 1995, leading to under-employment and lack of opportunities in this group, contributing to the "brain drain" and a loss of talent to Nepal.

Many of the jobs to be created in the International Financial Services Center will be "skilled." As more skilled job opportunities become available in Nepal, this will reduce the "brain drain" and encourage Nepalese who are working abroad to return home to live and work. This will make use of Nepal's investment in university-level education and increase wage levels. For example, the average wage of Bahamians employed by financial service companies in 1994 was US $ 34,373.

The new jobs will not be limited to skilled professional and clerical workers. The Answer to Question 2 shows that the effects of a financial services center ripple through the economy, creating a multiplier several times that of the initial impact. This creates new jobs in all sectors in construction, transportation, food, lodging, clothing and services. These jobs are over and above the financial services jobs shown in the table above. 

In addition, increased access to capital and increased employment will also expand the economy, further increasing employment.

 4. Are There Other Benefits for Nepal?

The rapidly growing East Asian nations serve as a clear as a clear lesson in how economics transform themselves from underdeveloped to rapidly developing economies. Despite their many differences, these high growth economies all displayed several fundamental similarities. First, their governments developed an international orientation and imported the resources they lacked internally. Second, they created a strong financial and legal infrastructure to support international activities. Third, they made use of the improved infrastructure to develop and expand their entire economy. That infrastructure in many ways is even more important to the development of a modern economy that the conventional "hard infrastructure" of roads and bridges.

 In this way the Asian "tigers" developed and accumulated a solid base of both human and physical capital and an infrastructure for growth.

 Human capital and skill in Nepal will be increased by:

The energy and power of these skills and ideas will spread throughout Nepal, raising competency, greatly increasing the pool of human capital and knowledge, upgrading the infrastructure, encouraging formation of new businesses and benefiting the entire economy. 

Physical capital in Nepal will be increases by:

This creation of both human and physical capital will have a positive, compounding effect on all economic activity throughout Nepal. Economic research proves that the standard of living and the ability to provide social justice in a society is enhanced by the creation of human capital and knowledge.[4]

 In addition, at the national level, Nepal will secure a more independent role in the international community, being seen in a new light and gaining prestige as a source of investment funds and financial skills for its neighbors. 

5. Why should Nepal act now?

Is now the right time?
Heavy demands for capital, caused by rapid growth in Asia, coupled with the uncertain future for Hong Kong, creates a need for a new financial center in the area. The recent success of Mauritius and interest expressed by Cambodia, Vietnam and others confirm both the opportunity and the need. It would be a lost opportunity to let another country become that center.

In further study necessary?
The concept has been raised several times within His Majesty's Government of Nepal during the last five years, but this is the first time that it has been broadly discussed, reported in the press, and formally proposed for enactment.

Extensive research has been done understand the impact such a center would have on the Nepalese economy. The results of this study are briefly summarized in the Answers to Questions 2, 3 and 4 above. The most detailed study made on the effects of an International Financial Services Center on a host country was undertaken by the government of Bermuda in 1995.[5] This study was presented to His Majesty's Government of Nepal as further evidence of the dramatic positive influence such a center contributes to the host economy.

Are controls in place?
Research confirms the need for effective control and regulation of the foreign companies. After passage of the Financial Center Act, specific regulations are planned to govern and control the foreign companies and to upgrade the financial infrastructure of Nepal. Further studies and evaluation will be an ongoing process as the Center evolves. His Majesty's Government of Nepal and Parliament will review each step in the process.

These controls will be development by international experts hired to represent the interests of Nepal, drawing on the experience of successful financial centers. This resulting legislation will be tailored to address the specific financial service sectors as they come to Nepal. Additional details are provided in the Answer to Question 9.

What about current labor skills in Nepal?
Initially, international companies will bring their own skills and expertise to Nepal. However, they will be required by the Financial Center Act to hire and train Nepalese citizens as a condition of their rights to operate in Nepal.

The entry of foreign companies into Nepal will begin a cycle of upgrading local skills, not only for employees within the international companies but throughout the Nepalese economy. This in turn will increase and upgrade the demand for a wide variety of local business services, international communications and computer-related skills.

The sooner this process begins, the sooner Nepal will enjoy the benefits.

6. What Results can be Expected and When?
The economic effects will be felt in stages short, medium, and long term. Although the Financial Center Act creates the initial framework further laws will need to be enacted and implemented for each segment of the financial services industry. The benefits will be seen and will compound as more and more financial institutions come to Nepal.

The process begins with the entry of the first financial services company.

Short-term (one to three years)

 Medium term) three to six years)

 Long term (six years and beyond)

 7. Will Existing Plans for Development be Affected?
Unlike most large development projects, which require substantial capital investment before benefits are obtained, the creation of an International Financial Services Center will not require significant financial investment from His Majesty's Government of Nepal. As a result, there will be no diversion of government funds from current of future economic development or social programs in Nepal. In addition, there are no adverse effects or demands on natural resources or the environment. 

Existing plans for development will be unaffected. Rather, the economic expansion brought about by the International Financial Services Center with resultant increases in government revenue, and access to new sources of capital will actually increase the funds available for development plans. 

8. Why will Financial Services Companies Come to Nepal?
There are numerous why financial services companies will come to Nepal. These reasons include:

 Flexibility
While eager to invest in Asia, international companies are hampered by restrictions placed on international transactions by their own governments and by the maze of international law that affects them. Most countries impose banking and monetary regulations on the international activities of their "home" corporations restricting or raisins the costs of international transactions. In addition, when corporations do business across national boundaries, they encounter differing laws and national policies which further their ability to invest outside their own countries.

 In many cases, in order to achieve flexibility, financial services companies, while conducting business and investing in one country, will often locate in a different country, such as Nepal. 

Nepal will create a new legal environment, separate from its domestic laws, which will offer international companies the flexibility they require. In return, Nepal will receive the powerful economic brought by these companies to a host country. 

Political Stability
Companies seek to base their financial activities in a politically stable and neutral country that offers the least restrictive legal and regulatory environment from which they may conduct their worldwide financial activities.

Changers of government in Nepal will not discourage foreign companies if they believe that the commitment to democracy and the rule of law is irreversible and has broad support. 

Integrity and Corruption
Nothing is more important to international financial institutions in their selection of a country for investment than confidence and trust in the integrity of the officials of that country. In addition, the reputation and integrity of Nepal and its citizens must be protected. 

His Majesty's Government of Nepal recognizes that corruption subverts economic and social development. Any corruption undermines respect for institutions, damages the fabric of society and subverts attempts to improve the economy of the country. 

For these reasons a separate section of the Financial Center Act is dedicated to the prevention of abuse, and strong provisions, including criminal penalties, are included to discourage corruption. 

Confidentiality
In accordance with accepted international banking custom, the Financial Center Act provides assurances that confidentiality of financial transactions will be protected. Confidentiality is the accepted practice for all financial centers, with Switzerland being the best known example. Confidentiality is also a means of limiting government interference and regulation. However, as is the case with Switzerland, these provisions do not provide sanctuary for the sale of narcotics or the laundering of illegal funds. 

Competition from Other Financial Centers
Nepal will face significant competition in attracting international financial companies. The economic advantages of having such a center are well recognized and Nepal must compete effectively with other countries. Two of the newest competitors, Mauritius and Labuan Island, began operations within the past five years; others, such as Vietnam and Cambodia, are considering the process. 

In an attempt to summarize Nepal's potential for attracting international financial services, Collins & Associates compared Nepal with fourteen basic factors shared by successful offshore centers. Nepal rates well in most categories. Not any one of these factors alone is decisive, but their cumulative effect makes Nepal attractive to foreign financial companies. What is of new significance for Nepal is that its strategic geographic location, long believed to be an economic disadvantage, will become an important competitive advantage in this project.

 Of all the competitive factors, legislation is by far the most important. The Financial Center Act of 1996 is the necessary first step in the process of creating an International Financial Services Center. The Act establishes the principles for further legislation and creates the committees to develop and submit that legislation. 

Characteristics of a Successful Financial Center

Geographic Location

1. Physical and cultural proximity to Asian markets. [GOOD]

2. Direct air access with Bangkok, Hong Kong, New Delhi, Shanghai, Singapore, Dubai, London, Frankfurt, and Paris. [GOOD]

3. The Nepalese business day overlaps most major world financial markets, permitting same-day transactions.[6] [GOOD]

4. Attractive cultural and leisure activities for business visitors. [GOOD]

Political Factors

5. A viable nation-state in the international community. [GOOD]

6. A politically stable democracy. [ADEQUATE]

7. An active pr-business policy environment. [GOOD]

Legal

8. Specific legislation to attract international financial services. [AVAILABLE VIA LEGISLATION]

9. A modern body of trust, banking, and corporate law with a common law   tradition.  [AVAILABLE VIA LEGISLATION]

Business Environment

10. A pool of professional, managerial and office expertise. [NEEDS   UPGRADING]

11. Law cost of local employees, service, and housing. [GOOD]

12. International telecommunications capabilities.[7] [GOOD]

13. Urban facilities: hotels, office space, etc. [ADEQUATE]

14. English understood, both in business and in government. [GOOD]

9. Can Nepal Lose Control or be Exploited?
Many countries have become successful centers of international financial services, such as Switzerland, Bermuda, the Bahamas and Luxembourg, without being exploited by foreign interests. These counties have developed expertise, crated special regulations and have gained tremendous experience in attracting international financial institutions while developing their own economies.

Rather than being exploited, these nations have developed and maintained a reputation for integrity and competency, which has increased their stature in the world community.

Future legislation for Nepal will draw upon and include the best experience of successful financial centers. For example, a future Nepalese foreign banking act could be based on the Swiss Banking Act. Nepal will be advised in this process by international experts working in conjunction with lawyers for His Majesty's Government of Nepal. As a result, Nepal will be protected by the safeguards and experience developed and used by these highly respected financial centers.

Other safeguards are provided in the Financial Center Act of 1996, which requires that any foreign financial entity seeking registration in Nepal apply to the Accreditation Committee. This committee, chaired by the Minister of Finance and including members from the Rastra Bank and the Ministry of Industry and Commerce, will control the application, approval, monitoring, and auditing procedure for any such applicant. In addition, the schedule of fees paid to His Majesty's Government of Nepal will be established by legislation and monitored by the Accreditations Committee. If a Registered Financial Entity (RFE) fails to comply with any of the regulations required by this committee or its controlling legislation, its registration may be revoked and the entity will lose its status to operate in Nepal. Thus, Nepal retains complete control over who will or will not be able to conduct business within its borders.

In addition, the Financial Center Act specifically prevents Nepalese citizens, or domestic corporations, form opening or using an account with a foreign bank or financial institution operating under that Act. This prevents the use of such an account for any purpose by Nepalese citizens, or corporations, including the transfer, deposit or withdrawal of funds. Should Nepalese citizens' use of accounts or ownership in RFEs later prove desirable, this exclusion can be amended by legislation at that time.

10. Will Nepalese Companies Fact Increased Competition?
The Financial Center Act is intended to attract foreign financial services companies to Nepal. These companies will provide international financial services to their customers outside Nepal. Their local activities will consist of hiring and training Nepalese employers and using local services The Act severely restricts their activities within Nepal. For example, they cannot own real estate, accept domestic deposits or grant domestic loans, nor can they invest directly in Nepal. These restrictions eliminate competition with domestic Nepalese companies.

However, there is considerable potential for cooperation. For example Nepalese banks could syndicate loans with international financial institutions, bringing access to both capital and financial expertise. In turn this will increase the funds available to Nepalese companies and further contribute to the development of Nepal's economy.

The goal is therefore to encourage cooperation, stimulate the local economy and increase the availability of funds to that economy, without creating competition for Nepalese businesses.

11. Will International Financial Services Companies Pay Taxes to Nepal?
The primary activities of these international financial services companies will take place outside Nepal. For example, US companies may want to invest in Asia, but channel funds through Nepal, as they presently do through Mauritius. Defining the income and hence the tax attributable to Nepal can therefore become complex and difficult to measure. In addition the prospect of paying additional taxes to Nepal may easily discourage such companies from using Nepal altogether, since many other host countries do not tax international financial transactions.

Of course, the employees of such companies will pay income on their salaries to His Majesty's Government of Nepal. Taxes will also be paid by Nepalese companies and their employees providing services to these international companies. Typically this secondary tax revenue and other contributions to the economy of the host country far exceed the potential revenues from direct taxes; see the Answer to Question 2.

To avoid these complications many financial center charge fees and licenses rather than attempt to calculate and impose taxes. These fees can be quite significant once the center is well established. For example, The Cayman Islands receive US $ 25 million a year from fees and license. This strategy of fees and licenses, rather than taxation, is the approach contained in the Financial Center Act.

12. Will Nepal's Neighbors Object?
Nepal's is surrounded by some of the largest and most rapidly growing economies in the world. Because of their growing need for capital to fuel the growth of their economies these countries are relaxing their restrictions on direct foreign investment. This capital can come only from developed countries.

Financial managers in the developed countries prefer to invest in countries such as India through a third country to achieve flexibility in their actions and to reduce taxes. For example, funds flowing into India through Mauritius make that small island the fourth largest source of external funds for India. This has not adversely affected relations between these two countries; to the contrary, 'India....... has been (very) quietly encouraging the process."[8]

Serving as a source of capital to other nations and earning a reputation as a nation with internationally recognized financial expertise can only be viewed as a positive change in Nepal's relationships with all of its neighbors.

Certainly, neighboring countries would be concerned if Nepal attracted untaxed income from other countries, ignored money laundering, or became a haven for money derived from illegal sources. This would be extremely harmful to Nepal's efforts to become a first-class, internationally-recognized center for financial services. The Financial Center Act of 1996 directly addresses the potential for illegal activities and specifically provides procedures, legislation and criminal penalties against bribery and the use, or the laundering of money derived from illegal sources.

13. Why should All Political Parties Support the Financial Center Act?
All the governments of Nepal the UML, the Nepali Congress, the Coalition of the Nepali congress, with the Rastriya Prajatantra Party and with the Nepal Sadbhabana Party face the same challenge in developing the economy with limited resources. Whichever political party comes to power must overcome the problems of poverty, unemployment and socio-economic inequalities. Solutions to these problems require huge financial resources. Although His Majesty's Government of Nepal's need for resources has increased substantially over the years, the amount of foreign aid and domestic revenue has not kept pace. Foreign aid has become uncertain, foreign private investment has been disappointing and His Majesty's Government has had to rely more and more on external borrowing.

The Policy Commitment Act provides a credible opportunity for Nepal to expand its economy and provide new revenues to meet these continuing social needs. The arguments for passage can be summarized as follows:

All political parties recognize that:

1. Nepal needs a new powerful stimulus to its economy.

2. Continuing dependence on foreign assistance is unsound.

3. New development should avoid large capital demands which increase Nepal's debt burden and perpetuate the cycle of poverty.

4. New development should spring from real economic forces and be built on a market-driven foundation.

This opportunity transcends political differences:

5. The opportunity to provide financial services to investors exists today. Other nations have recognized this opportunity and currently profit from it.

6. Economic research demonstrates the economic benefits an international financial center transfers to the host economy.

7. All the necessary expertise exists to create such a center in Nepal. It is available immediately at no significant cost to His Majesty's Government of Nepal.

8. It is an extension of the policy of economic liberalization and foreign investment, agreed to by all governments, i.e. Nepali Congress, the UML, and the Coalition.

Political Cooperation is necessary in order to:

9. Reaffirm the stated policies of all parties that Nepal supports foreign investment.

10. Send a clear signal to the outside world that Nepal is united in its support for an International Financial Services Center.

11. Take action on deliver real results for the Nepalese people without delay.

Establishment of a successful International Financial Service Center creates a real opportunity for Nepal and its citizens to improve their economy and define the nation's role the next century. An opportunity of this magnitude calls for the total support and commitment of all of its political parties.

Section 2: A Financial Future for Nepal 

I. An Opportunity for Nepal
The tremendous growth of the Asian economies creates a need for a new international center of finance for the region. Nepal, with its traditions of law and non-alignment, and its central location, already has many of the attributes needed to become that new center. 

As an international center of finance Nepal will not only secure a more independent role in the international community, but will also become attractive for all forms of investment, including those needed for its current domestic growth. 

The implications of becoming such a center are explained below along with a draft of the Enabling Legislation required to launch this project. 

This proposal in no way diverts any resources from current expansion policies, nor does it place any additional strain on the environment, but in fact builds upon the core strengths of Nepal and its people.

 II. Current Economic Policy
The economic policy of the government of Nepal, under the Nepali Congress and the United Marxist Leninist parties, recognized the importance of economic liberalization in Nepal. The Nepali Congress government was committed to "make foreign investment attractive by framing a timely, liberal, and open policy[9]." The UML government stated that it "firmly stood for liberal economic policy in the nation's interest[10]." In its budget speech of 1994, the UML government stated that "encouragement will be given to such foreign investment that supports the nation through the transfer of technology, employment generation and increases in productivity."

The economic policy of the previous governments was directed toward attracting investment within the national boundaries of Nepal. The attempts to increase economic activity followed the traditional twin strategies for developing countries, i.e., a growing emphasis on exports as engine for growth and technological transformation in the domestic economy. These policies were not directed toward any specific industry, but rather were a first step in creating an active pro-business environment. These first steps are extremely important and are a necessary beginning. They are, however, only a beginning toward entering the highly competitive world of international business.

With respect to Nepal, there remain major obstacles in implementing this current economic policy. In summary, they are:

  1. In the competition to attract offer direct investment within Nepal, many developing countries offer a wider range of incentives which would be expensive to duplicate, and have geographical or other strategic advantages.
  2. More-developed national offer direct financial subsidies or grants, low-cost loans, or other direct financial assistance to attract foreign investment. Nepal does not have the capital to offer similar incentives.
  3. The process of industrialization is capital-intensive for the host government, requiring large infrastructure improvements in transportation, power, water, etc. While some foreign aid is available, there will be large capital demands and an additional debt burden placed on His Majesty's Government of Nepal.
  4. Heavy capital demands in Nepal divert funds from other societal needs, such as education, health facilities, environment projects, etc. 

With the above disadvantages, Nepal will have a difficult time relying solely on the traditional approach to economic growth. However, becoming an international financial center adds a new, powerful dimension for achieving economic growth. 

III. "Invisible Trade" An Opportunity for Nepal
The most important trend in international economics is the rapid growth in world trade. This growth is occurring despite major obstacles which tend to restrict international trade.

 First, while most governments issue policy statements encouraging international expansion for their citizens and domestic corporations, they enact legislation which products the opposite effect. Most national regulatory authorities impose restrictive bank and monetary regulations on international transactions. Examples of these regulations are: exchange control, capital requirements, reporting standards, and financial market regulations. Government has a legitimate role in regulating economic activity, but many of these requirements, upon closer examination, produce no real benefits. The result is a restraint on economic activity and the imposition of higher costs on allowable transactions.

Second, the existence of differing national policies and laws creates cross-national differences which also tend to discourage international economic activity. Examples are: differing tax policies, types of allowable business entities, incorporation procedures, and the rules and systems of supervision. Thus, there exists today a maze of regulation and conflicting national policies which exerts a negative or limiting effect on effect on cross-national economic activity.

In contrast to this physical, or "visible", movement of raw materials, technology, and production across national boundaries, another sphere of economic activity defined as "invisible" international trade can be identifies. It is "invisible" because it is not the physical activities described above, but rather the financial activities that support such trade. (Specific examples are listed below in Section XI.) "Invisible" trade operates freely across national boundaries as a result of the computer and telecommunications revolutions. Companies engaged in such trade are free to locate and operate in any country that provides the least restrictive environment for their activities.

These activities could, for example, be the worldwide investment activities of wealthy individuals, multinational corporations seeking an inexpensive and less regulated environment in which to complete international transactions, or investment companies seeking greater freedom and flexibility of investment alternatives than is permitted in their "home" environment. Examples of these types of activities are listed in Section XI.

Although it is impossible to measure its exact size, this sphere of economic activity has been described follows:

"As much as half of the world's stock of money either resides in, or is passing through, tax havens, making them an essential catalyst for world trade........ off-shore-based private bank deposits have accumulated perhaps a trillion dollars. And the largely offshore-based mutual fund industry has a similar amount under management."[11]

It is within this sphere of "invisible" international trade that an opportunity exists for Nepal.

IV. Can Nepal Attract "Invisible" Trade?
In an attempt to summarize Nepal's potential for attracting "invisible" trade we compared Nepal against fourteen basic factors shared by successful by successful offshore centers. Nepal rates well in most categories.

Of the factors below, legislation is by far the most important. The Enabling Act drafted by Collins and Associates is the necessary first step in the process of creating an international financial center. Such legislation will not only prepare Nepal for its new role but will also send a clear signal to the international financial community that Nepal is "open for business."

Characteristics of a Successful Financial Center

Geographic Location

1. Physical and cultural proximity to Asian markets. [GOOD]

2. Direct air access with Bangkok, Hong Kong, New Delhi, Shanghai, Singapore, Dubai, London, Frankfurt, and Paris. [GOOD]

3. The Nepalese business day overlaps most major world financial markets, permitting same-day transactions.[12] [GOOD]

4. Attractive cultural and leisure activities for business visitors. [GOOD]

Political Factors

5. A viable nation-state in the international community. [GOOD]

6. A politically stable democracy. [ADEQUATE]

7. An active pro-business policy environment. [GOOD]

Legal  

8. Specific legislation to attract international financial services.    [AVAILABLE VIA LEGISLATION]

9. A modern body of trust, banking, and corporate law with a common law tradition.  [AVAILABLE VIA LEGISLATION]

Business Environment           

10. A pool of professional, managerial and office expertise. [NEEDS       UPGRADING]

11. Law cost of local employees, service, and housing. [GOOD]

12. International telecommunications capabilities.[13] [GOOD]

13. Urban facilities: hotels, office space, etc. [ADEQUATE]

14. English understood, both in business and in government. [GOOD

V. Training Managerial and Office Professionals
Nepal's only significant limitation in the preceding table appears to be the limited number of professionals, managers and clerical workers needed by financial entities. Initially the demands for these personnel can be met from the current workforce in Nepal. However, as more and more financial entities locate in Nepal, the demand for such workers will grow. Specific plans can and should be made to accommodate these future needs.

 The expansion of skilled, professional labor pool of Nepalese citizens can be ensured by:

1. Requirements that all foreign companies hire and train Nepalese citizens.

2. Allocation of portion of revenues derived from foreign companies to the expansion of courses in business in schools and colleges. Examples would be computer science, financial management, international banking etc. The intention would be to create not only clerical jobs but also those for middle and upper management.

VI. Nepal is ideally located for working with major financial centers

The chart shows the corresponding times in major financial markets.

The example, at 9 am in Kathmandu it is 12.15 pm in Tokyo. When it is 5 pm in Kathmandu it is 11.15 am in London.

Kathmandu offers the widest window for communications with each of the above financial markets.

VII. Competition
As in very industry, competition exists from other nations in attracting foreign financial activities. A pattern of regional clusters of competitive nations has evolved around similar time zones and regional markets. The Asian competitors are briefly outlined below.

  1. Hong Kong and Singapore: Established centers already offering a wide range of support and services to international trade, but which are increasingly subject to regulation and political pressures. In addition, in these centers the costs of conducting business are extremely high. China's recent announcement that it will impose a "new political structure" on Hong Kong after July 1, 1997, may cause a significant "flight of capital." This would provide an enormous and timely opportunity to attract foreign capital leaving Hong Kong to a newly formed international financial and trading center in Kathmandu.
  2. Vanuatu and Nauru: Independent island states in the Pacific Ocean offering many tax advantages but lacking major strategic considerations.
  3. Labuan Island: Malaysia's offshore tax haven has had some success, confirming the region's need for such a center. However, its remote location and limited accessibility are major disadvantages when compared with Nepal.

Collins and Associates have carefully examined and considered the laws and regulations now in use by these and other competing financial centers. Such laws are major factors in attracting foreign financial entities. The approach proposed by Collins and Associates, commencing with the Enabling Act (attached), and followed by legislation designed to meet the specific needs of selected financial institutions, will ensure that Nepal will have a strong competitive advantage in attracting those institutions.

VIII. Benefits to Nepal
In view of Nepal's immediate need for economic development, this proposal offers the most rapid to improvement of the Nepalese economy. Following only a conventional approach to development will take decades to have a measurable impact on the living standards of Nepal or provide visible signs of progress. A bold set of enabling policies and laws commencing with the proposed Enabling Act (attached) and the climate so signaled will attract foreign financial entities and provide rapid benefits to the economy and people of Nepal.

Advantages to Nepal of establishing a successful international trade and financial services industry are:

  1. Provides major new sources of revenue for His Majesty's Government of Nepal, from the overseas activities of foreign corporations based in Nepal.
  2. As an internal center of finance, Nepal will secure a more independent role in the international community and gain its attention and respect.
  3. The incentives required to encourage foreign entities to locate in Nepal, or establish a legal presence in Nepal, do not require capital incentives or significant investment from His Majesty's Government of Nepal.
  4. A prosperous financial services industry, by necessity, will create a competent professional infrastructure of business-related and legal services. These skills will be helpful in encouraging and servicing any expanded economic activity in Nepal.
  5. "Invisible" trade activities promote a wide range of additional economic activities with increased business travel and tourism as obvious examples. The number of conferences can be expected to grow substantially as companies become aware of the business and leisure attractions of Nepal. The increased volume of business travel would greatly benefit the travel and tourism industry by requiring increased employment, higher quality services, and new foreign investments.
  6. An international reputation for expertise in banking and financial services will radically improve the image of Nepal. This will greatly improve the ability for both new and existing industries to obtain financing and grow in Nepal.
  7. International trade requires first-class telecommunications capability. The influx of communications technology financed by private sources will assist in modernizing the communications systems in Nepal.
  8. Unlike other forms of investment, development as an international center of finance place minimal demands on the environment of Nepal.
  9. The provision of preferential treatment of foreign companies need have very little impact o existing Nepalese businesses and society. Indeed, an emphasis on the development of financial services and international trade will have a much less disruptive impact than any other forms of development. The challenge may then be to ensure that the benefits derived from these financial developments and investments be made available to the people of Nepal, such that they will be widely recognized and supported.

IX. No adverse Impact on Current Revenues
In principle, the laws creating the international financial center will not apply, in whole or in part, to Nepalese citizens or to domestic corporations. Nepalese ownership of "invisible" trade companies will be expressly prohibited. This avoids creating a "tax loophole" for existing businesses.

Therefore there will be no loss of current sources of revenue to His Majesty's Government of Nepal.

Should Nepalese ownership later prove desirable, this exclusion can be amended by later legislation.

X. Legal Infrastructure
The corporate and commercial law of Nepal is similar to the Indian legal system, which is essentially based on the British Common Law system. As a result, reliance on judicial precedence as part of the existing legal system in applicable. This legal system in shared not only with the United Kingdom and India, but also the Cayman Islands, and many other financial centers. These facts, coupled with the existence of a direct participatory democracy, lead Collins and Associates to believe that a body of modern corporate statutory law could be crafted. This would allow and encourage foreign entities to operate from within Nepal and to rely upon the protection of law. Special-purpose legislation could be enacted to govern specific industries which the country is seeking to attract, e.g. banking trading investment activities, finance activities, mutual funds, and international sales activities. Such a framework would be immediately recognized as creating an opportunity by financial sophisticates throughout the world and would give comfort to international entities seeking to take advantage of Nepal's accommodative legislative environment.

XI. Which Businesses will be attracted to Nepal?
This legislation would be fashioned to provide an ideal environment for the activities of the following entities:

§  Foreign bank and trust companies or their branches.

§  International insurance and reinsurance companies or their branches.

§  Companies serving as the registered offices for foreign companies.

§  International holding and investment companies.

§  Foreign companies establishing an administrative or regional office.

§  International trading companies.

§  International finance companies.

§  Foreign real estate holding companies.

§  Patent and royalty companies.

§  Mutual funds.

§  Non-incorporated entities: partnerships and trusts.

§  International sales companies.

§  Special entities to allow nonresident pensions or deferred bonus plans.

Collins and Associates, in the course of developing this proposal, have already had discussions with a number of companies in the above categories. These are prime candidates to be contacted after the passage of the Enabling Act.

XII. Proposed Legislation the Enabling Act
An environment conducive to the creation of a "world class" trading financial services, and offshore banking industry in Nepal can be accomplished with the existing framework of the Foreign Investment and One-Window Policy of 1992. That policy and subsequent policy statement of the two preceding governments are important first steps to encourage foreign investment, but it should now be extended include "invisible" international trade.

This extension creating the framework for an international financial center can be started with the passage by the Nepalese Parliament of the attached Enabling Act. This act establishes the principles for future legislation and empowers the Minister of Finance to develop and submit specific legislation.

The prompt passage of this Enabling Act is crucial because it signals Nepal's commitment to becoming an international financial center and is the first step in that process.

XIII. Marketing Nepal as a Financial Center
Marketing Nepal as a financial services center requires care in the selection of lead companies in each segment of the financial industry. The proper choice will not only establish these companies in Nepal but their presence will create publicity and encourage other such companies to locate in Nepal.

Collins and Associates, as part of their research into the feasibility of creating an international center of finance in Nepal, have already identified and contacted companies who are prime candidates to be the first to establish financial operations in Nepal. These companies have assured us that they only await the passage of the Enabling Act to commence specific plans to locate in Nepal.

These lead companies have indicated a willingness to work with the legislature in Nepal in developing the details of legislation for their market segment. This will accelerate the process and set the ground rules for the next round of companies that are candidates to locate in Nepal.

Once the lead companies are committed, Collins and Associates plan to sponsor an International Conference to be held in Kathmandu to gain the maximum publicity with potential participants. This conference will feature the lead companies, by then established in Nepal.

Thereafter, Nepal can be broadly promoted as an international financial center.

XIV. Conclusion and Implementation
Collins and Associates believe this proposal is a natural extension of the liberal economic policies followed by both the Nepali Congress and the UML governments.

No other economic development proposal offers the promise of rapid improvement in the Nepalese economy and increased revenues with so little disruption to Nepalese society or the environment. Further, this proposal does not require any changes in existing development strategies.

Our premise is that the initial steps in implementing our recommendations can be accomplished at no cost to Nepal for the services of Collins and Associates. Mr. Collins has had a long-term personal interest in Nepal. His primary interest is to assist Nepal in its economic development in an area in which Nepal possesses many of the ingredients necessary for success. He is offering to finalize and implement the proposal, with the assistance of several senior associates, at no cost to His Majesty's Government of Nepal. We expect that subsequent funding can be obtained from participating companies interested in doing business in Nepal. Collins and Associates believe this can be accomplished without compromising the interests of Nepal.

For countries to be successful in economic development, they must market their core competencies. Nepal already possesses many of the attributes necessary to effectively compete with other financial centers for "invisible" trade. Briefly stated, the goal is to ultimately make Nepal the "Switzerland" of Asia. Success or failure will depend upon:

  1. Passage of the Enabling Act, as drafted by Collins and Associates, which signals to the international financial community that Nepal is committed to this policy.
  2. Continuing support and cooperation of His Majesty's Government of Nepal.
  3. Creation of the proper legal and policy environment. Through the implementation of the International Financial Services Act.
  4. Marketing of Nepal-based services to the world of international trade and finance.

Any comments and suggestions which will assist these efforts will be most welcome.    


[1] For comparison, the gross domestic product of Nepal in 1994 was US $ 3,266 million, virtually the same as the Bahamas.

[2] Ministry of Finance, Government of Bermuda "International Companies 1994, Their Impact on the Economy of Bermuda," by Brian Archer 1995.

[3] The contribution of the Gross Domestic product of Nepal in 1995 by tourism, hotels, and restaurants was US $ 396 million.

[4] E.E. Leamer, "Source of International Comparative Advantage: Theory and Evidence," Cambridge, Massachusetts 1984. 

[5] Ministry of Finance, Government of Bermuda "International Companies 1994, Their Impact on the Economy of Bermuda," by Brian Archer 1995.

[6] Nepal's ideal geographic location allows "same-day" transactions in every major Asia, Australasian, Middle Eastern and European market, from Sydney to London, and from Johannesburg to Moscow and Shanghai.

[7] Today's technology allows expansion at minimal cost, which could be financed by the foreign entities themselves.

[8] The Economist, Finance and Economic Section, September 30, 1995

[9] Foreign investment and One-Window Policy, 1992

[10] The Rising Nepal, 7 December 1994

[11] Euromoney, April 1991, page 73

[12] Nepal's ideal geographic location allows "same-day" transactions in every major Asia, Australasian, Middle Eastern and European market, from Sydney to London, and from Johannesburg to Moscow and Shanghai.

[13] Today's technology allows expansion at minimal cost, which could be financed by the foreign entities themselves.

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