Nepal's traditional trade was with India (see table 12, Appendix). In the 1950s, over 90 percent of its foreign trade was conducted with India. Goods moved by land for at least a few hundred kilometers through India, and a good relationship with India was essential for the smooth transport of goods to and from foreign countries (see Relations with India ch. 4 India , ch. 5). Most of Nepal's basic consumer goods were imported from India, and most of its agricultural exports went to India. India also met the basic needs of Nepal's industries with supplies of coal, cement, machines, trucks, and spare parts.

The March 1989 impasse in negotiations for trade and transit treaties with India seriously damaged Nepal's economy (see table 13, Appendix). The transit treaty had allowed goods from third countries entering at Calcutta to pass through to Nepal and exempted them from customs and transit duties. The treaty allowed trade to transit at twenty-one border points, and primary commodities were essentially duty-free in both directions. Imports from India had no quantitative restrictions and low tariffs.

As a result of the breakdown in negotiations, only two trade and transit points remained open--both in eastern Nepal. Nepal's exports to India were subjected to high tariffs, and imports from India also carried increased costs. The dispute was not solved until June 1990 when Kathmandu and New Delhi agreed to restore economic relations to the status quo ante of April 1, 1987.

Although India remained an important trade partner in 1991, foreign trade with India has been on the decline vis-à-vis other countries since 1960. Trade with India decreased from more than 70 percent in 1975 to about 27 percent of total trade in 1989. However, the trade deficit with India in this period increased at an annual rate of about 11 percent.

To increase exports, Kathmandu introduced some fiscal and monetary measures, including the Export Entitlement Program and the Dual Foreign Exchange rate, along with cash grants, income tax rebates, and low tariffs. Until the trade and transit dispute of 1989, exports had increased by 11 percent or more per year since 1975. Nepal's major exports were clothing, carpets, grain, and leather goods. In 1989-90 the carpet industry was responsible for producing 54 percent of Nepal's exports. In FY 1988, India received 38 percent of Nepal's exports the United States 23 percent, Britain 6 percent, and other European countries 9 percent (see table 14 table 15, Appendix).

Imports increased at a faster rate than exports. Since the 1970s, the foreign trade deficit had increased in most years. Nepal's primary imports were petroleum products, fertilizer, and machinery boots and shoes, cement, cigarettes, iron and steel, medicines, salt, sugar, t8bc tea, and textiles were the other chief imports. India supplied 36 percent of imports, Japan 13 percent, European countries 4 percent, and the United States 1 percent in FY 1988. Receipts from service and transfer payments were insufficient to finance trade deficits. This imbalance has resulted in an increase in the current account deficit (see table 16 table 17, Appendix).

In March 1989, the government introduced the Open General License as a step to support the Structural Adjustment Program. It included inputs for existing industries--raw wool, cotton yarn, and cotton fabrics. The program also allowed supports for petroleum products, coal, tractors, buses, and trucks, as well as for some household items, such as ovens and toasters. In May 1990, however, Kathmandu deleted all goods except raw wool, cotton yarn, petroleum products, coal, and newsprint from Open General License imports.

The government also introduced an auction system for the import of goods. The goods were classified in three categories: industrial raw materials, semiluxury items, and luxury items. Premiums were assigned and foreign exchange quotas allocated for each category. The premium for raw materials was lower than that for luxury items.

Data as of September 1991