The Ministry of Finance’s Macroeconomic Updates for the first quarter of this fiscal year show some positive indicators. Reducing Nepal’s import bill while increasing exports is at the centre of discussion. The statistics show that the country’s total exports rose from 8.03 percent during the first two months of the last fiscal year to 25.9 percent in the same period this year. Similarly, imports have declined by 1.2 percent. Moreover, the report shows a reshaping of the pattern of trade with its neighbours: when total import from India might be decreasing, the same from China has increased by 39.2 percent. This may be due to the fact that the Nepal-China border in Sindhupalchok has opened after being closed in 2015 following the devastating earthquake.

However, the economy was not able to curb the import of petroleum products and vehicles despite increment in electricity production. The statistics on remittance and foreign employment show that both are in upward trend this quarter: applications for foreign employment have been increased by 5.3 percent despite the government’s quest to restrain human capital flight and remittance. These numbers have economists failing to agree about the state of Nepal’s economy.

Some argue that the economy is getting back on track. But others don’t share this viewpoint at all. Unless Nepal witnesses a significant upswing from the industrial sector, the positive indicators could be because of a temporary agricultural stimulus due to a timely monsoon. For example, statistics show that due to the favourable monsoon last year, the country has imported less agricultural products such as rice and grains during this economic period. Overall, though, the recent statistics indicate some positive aspects of the Nepali economy. Yet, the trade deficit (which is about 40 percent of the GDP) is still going to be a nightmare unless Nepal builds a strong tradable sector.

How to cut the deficit

Nepal has long been constrained between two economic giants, China and India. Statistics show that more than 80 percent of imports are from these two countries only. Further, India holds a larger chunk of the trade pie—more than 60 percent. Similarly, from the export point of view, India (above 65 percent) and the United States (about 12 percent) are the major markets for Nepali goods. The goods Nepal exports are carpets, handicrafts, and agricultural products such as palm oil, tea, fruits and juices etc. On the other hand, Nepal imports almost everything from abroad; the major goods are petroleum products, metals such as iron and steel, gold, rice, and pieces of equipment and other gadgets. What can be construed from this is that Nepal does not have a competitive advantage in balancing the trade—the nature of the products we import are beyond our capacity to produce.

Nepal would need a huge amount of investment to be able to strengthen its capacity, which in turn would require a massive injection of foreign direct investment. But, the problem is that the government has been unable to attract foreign investment, despite hosting the Investment Summit this year. The institutional deficiencies, tax policies, corruption, and the small size of the market are restraining Nepal in being able to fix its problems in the industrial sector. Therefore, the country has to focus on the areas in which it can gain a competitive advantage. In doing so, Nepal has to focus on agriculture and small & cottage industries in the short-run, and hydropower projects in the long run. For example, all things left equal, just significantly reducing the import of agricultural products and by reducing petroleum imports by 20 percent (and substituting it with domestic power) could cut Nepal’s trade deficit by 10 percent. If the agro sector begins to become competitive to the point of being export-ready, the deficit can be reduced even further. More importantly, to make this happen we have to deal with our neighbours strongly.

Dealing with India and China

India is a significant trade partner. Nepal has different bilateral agreements with the southern neighbour to make trade hassle-free. But these agreements never seem to get implemented. Different non-tariff barriers imposed by Indian Customs on Nepali agricultural products are not only reducing our export but also discouraging Nepali farmers to produce. The result is Nepal’s reliance on imports. When the Nepali government imposed some barriers on the import of vegetables from India, mainly due to the risks associated with the overuse of pesticides, the government was forced to waive the restrictions within 48 hours due to high-level pressure from the Indian government. But, at the same time, Nepali products have been facing stronger barriers for years. India has also been reluctant to allow Nepal to trade with Bangladesh through its land. Let’s not forget that Nepal is a major market for Indian products and services. This means that we have a strong bargaining chip. So, the government needs to table such issues in the appropriate way.

Trade between Nepal and China has faced difficulties. The recent statistics show that total export to China has decreased by 17.4 percent this year in comparison with last year. But the Chinese market should not be ignored. The governments’ failure in tabling the trade issues with Xi Jinping during his recent two-day visit indicates that it has not been taking this issue seriously.

Although there may be geographical and cultural barriers, the way China views Nepal has changed a lot; Xi’s recent visit can be seen through this lens. China could play a significant role in reducing the widening trade deficit, especially through agriculture. For example, China is the largest importer of Soybeans in the world, and Nepal has fertile lands to produce it. Similarly, being a major player in tea production in the global market, Chinese investment and technology can be used in Nepal to make our tea more sellable. Likewise, China can support Nepal in strengthening small and cottage industries. In fact, the Nepali cottage industry is lacking resources to compete with Chinese and Indian industries. Nepal should woo Chinese investors to invest in such industries to enhance production capacity. This will not only help to reduce the trade deficit but also curb human capital flight. Besides, Nepal can export different types of herbs to China, Yarchagumba just being one of them.

Being an agriculture-based economy, Nepal has to use agricultural products to deal with the ever-growing trade deficit. For this, the government must employ policies and subsidies to promote the sector. Our priority should be to reduce the import of products that can be produced in Nepal, such as rice, grains, fruits, vegetables, among others. Similarly, Nepal should not be a market for substandard products made by our neighbours: if needed, anti-dumping policies should be imposed. In the long run, Nepal has to focus on improving manufacturing industries with the help of foreign investment. For this, the country needs structural changes in institutional deficiencies, taxes and duties, employment and other related aspects.

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