This worsening trade imbalance had compelled the government to devise measures to check the situation from further deterioration. Three years ago, it announced a direct cash subsidy to encourage exporters to boost exports. But that turned out to be ineffective.

It is saddening that both the government’s plans to tackle the acute problem of trade imbalance have gone awry. My observation is that the two approaches were chosen more to gain popularity for the government than for their rationality.

Just look at the much-hyped cash subsidy programme. Despite squandering millions of rupees for years, exports didn’t grow noticeably to reduce the trade imbalance. This was because the incentive had explicitly focused on exports to overseas markets which required extensive capacity building programmes for their promotion than direct cash subsidies. The subsidy too was a trifling amount of 1 percent of the export value. Initially, the subsidy ranged from 2-4 percent based on the value-added criteria of the exported products. So what can one expect from petty amounts in subsidies for boosting exports to overseas markets beset by a host of challenges? Neither did it really attract exporters nor aid the trading environment.

In a similar manner, it was irrational to overlook India which has been a major export destination absorbing more than half of the country’s overall exports. And India offered a huge potential for the growth of the market and diversification of products. In addition to that, subsidies could have boosted exports to India effortlessly as it gives the advantages of geographical proximity and preferential market access for Nepali exporters.

Meanwhile, import substitution has been recommended without deep thought and good homework. Perhaps the idea fascinated domestic manufacturers, but it has already been proven to be ineffective to curb imports and ease the problem. In an import dependent economy with a weak industrial base such as Nepal’s, protective measures like import substitution are undesirable in different ways. One of the drawbacks is that it can result in negative value addition. This is because the foreign exchange costs of the imported intermediate goods can, in many sectors, be greater than the foreign exchange value of the final products in which they are embodied. One unit of

foreign exchange saved by import substitution can cost more in terms of domestic resources than a unit of foreign exchange earned by exports.  Therefore, the notion of import substitution, which was once abandoned, should have been proposed with caution as our economy cannot switch to import competing manufacturing sectors that easily. And it cannot afford to control imports of essential commodities like petroleum products which do not have alternatives and account for a large chunk of the import bill at least in the short or medium term.

However, there is one crucial thing that seems to be possible in this regard. And that is linking import substitution with energy substitution which could be supportive in easing the trade deficit in the long run. This is because oil is Nepal’s single largest import and an important reason behind its massive trade deficit. Petroleum imports have grown with the development process and increasing

consumption expenditures in the country. The import bill for petroleum products has reached 20-25 percent of the value of the total imports of the country. In a shocking development, imports of gasoline and liquefied petroleum gas (LPG) have increased in an unprecedented manner in the last couple of years. Demand for petrol and LPG has more than doubled in five years.

Although it would not be possible to substitute petroleum imports entirely, there are options among domestic energy sources for industrial and domestic use. Therefore, the policy of harnessing alternative and renewable energy, such as hydroelectricity, solar and wind power which are abundant within the country, needs to be given further impetus at the national level. Such moves are crucial not only to counter the acute shortages of domestic energy supplies, but also to moderate the problem of Nepal’s trade imbalance. The problem of the rapidly growing trade imbalance cannot be taken care of in isolation. So the government should promote energy substitution, not import substitution.