Trade deficitEconomic woes are not a priority for the political class on both sides of the aisle
Nepal’s trade deficit touched $11.63 billion during the last fiscal year 2017-18 that ended on July 15. Even if the most moderate estimates of unrecorded daily cross-border trade along the 1,800 km Nepal-India open border are taken into account, the total deficit would easily surpass the $15 billion mark—50 percent of the country’s gross domestic product (GDP). However, exports in the same fiscal year have barely crossed $0.76 billion dollars, taking the import-export ratio to 15:1. Out of these imports, about 69 percent of the goods came from India and 13 percent from China, while 57 percent of the total exported goods went to India and only 3.5 percent to China.
Such a skewed concentration of more than three-quarters of the total foreign trade of Nepal only with these two neighbouring giants, dominantly with India, exposes Nepal’s sheer inability to diversify its trade in the global market. Even more paradoxical is the fact that if we were to achieve our economic growth target, imports are poised to accelerate as imports of capital goods required for infrastructure, hydropower and manufacturing projects must grow commensurately. Further, an increase in imports of petroleum products, which already is the single largest commodity of Nepal’s imports, is inevitable to meet the needs of transitional power supply in potentially large development projects and transportation fuel nationwide.
Apart from the obvious adverse consequences of the burgeoning trade deficit on the country’s current accounts and balance of payments situation in the short run, it is increasingly posing a risk to the stability of both financial as well as external sectors of the economy in the medium as well as long run. As such, the government’s self-contentment in meeting the revenue target is essentially proving to be a farce, because more revenue collection means more imports, thereby, further widening the deficit in trade.
The trade deficit is growing at an annual average rate of at least 13 percent, which means that if not adequately offset by export promotion or import substitution, will double in the next five years and quadruple in a decade. Even if we had a very effective policy and institutional arrangements in place, sufficiently researched market studies and carefully identified potential export products that have both comparative and competitive advantages which, say, are able to offset the deficit of at least $2 billion per annum, it will take at least a decade only to halve the imbalance.
Unfortunately though, the gravity of such precariousness is scarcely realised at the highest policy-making levels. Nepal’s economic woes are apparently not a priority for the political class on both sides of the aisle—ruling and opposition. The eco-political space ideally should have been occupied by a dispassionate discourse on the country’s economy, development and prosperity now. But, even the scanty mention of these issues that ‘accidentally’ find a place in the power circles are often misguided, or, if not deliberate, are absolutely foolhardy and meant to deflect from the roots of the problem.
For example, in an interaction with the Morang Chamber of Commerce, one of the oldest chambers of the country, last Friday, Prime KP Sharma Oli said that he would talk to Indian Prime Minister Narendra Modi when he visits Kathmandu to attend the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) summit later this month, and dispatch a joint secretary-led delegation, ostensibly, to address the problem of Nepal’s trade deficit with India.
A domestic problem
This is exactly what the deliberate deflection is. The chamber in question, in fact, was requesting the prime minister to create an enabling environment for business and industries to help increase productivity. But the prime minister’s insinuation was that India is to be squarely blamed for Nepal’s herculean trade deficit. It is, however, not to suggest that there are no contentious outstanding issues between Nepal-India like non-tariff barriers surrounding phytosanitation, quarantine and product certification mainly on agricultural products. But, our real bottleneck is our own lack of productivity. Even if all these issues were resolved, exports of high volume, low value products that are worth only a few million rupees cannot offset even a fringe of the whopping deficit that already runs into billions of dollars.
The problem is intrinsically domestic. Low industrial productivity, non-economies of scale, poor quality of products and, above all, lack of institutional support are a few among a range of supply side constraints faced by Nepali industrial products. Policy flaws, rather a vacuum, are astounding. In the last decade, Nepal introduced two trade policies in 2009 and 2015 respectively. But the products identified by both of these policies were either handicrafts or agricultural products which were already being exported to a small niche market. Market research and innovativeness in identifying about two dozen ‘exportable’ products were clearly absent. In such a scenario, government-to-government level talks even at the prime ministerial level without our own product lines available for sale can be of very limited, if any, importance.
Similarly, the government’s experimental approach in setting up and mobilising trade promotion-related institutions have done more harm than good. At one point of time, there existed separate institutions for trade and export promotion. And product-wise promotion offices, for example, dedicated to carpet and felt products also existed. Recently, the Cabinet decided to quash all institutions formed under the Development Committee Act 1956 including the Trade and Export Promotion Centre. They have to establish their rationale to continue their existence. Such repeated thoughtless and sweeping actions, invariably after every change in government, have rendered even existing institutions completely ineffective.
The resigned approach of the private umbrella organisations is also not fundamentally different from the government’s imperviousness. Business community pressure groups are dominated more by traders than manufacturers. There is a deeply ingrained notion in Nepal’s business community that production of consumer goods, particularly FMCGs, can never be competitive to export to India or China. This may be true. But, if such goods meet local demand, they in turn can help in import substitution. This aspect is rarely considered.
The severe country-risk arising from a hopelessly ballooning trade deficit is impossible to mitigate until the political leadership owns up to the problem and works towards calibrating the entire trade and industrial policy regime so that it supports private entrepreneurship to boost manufacturing high value, low volume exportable products.