A government audit report has recommended a rethink of the export subsidy policy as the cash incentive being given to manufacturers of export products is not having the intended effect of boosting trade.

The Ministry of Industry, Commerce and Supplies provides subsidies ranging from 3-5 percent of the value of export transactions for a selected group of products.

The annual report of the Office of the Auditor General released recently shows that the amount of cash subsidies given to exported goods reached Rs850.69 million in the last fiscal year ended mid-July, up from Rs720.26 million in the previous fiscal year 2019-20.

For this fiscal year, the government has allocated a Rs900 million budget to give cash incentives to exporters.

“The export figure has increased, but this is due to soaring exports of palm and soybean oils. The export potential of other goods has been decreasing. Hence, there is a need to review the policy,” the audit report said.

Jiblal Bhusal, director general at the Department of Industry, said the government has been providing cash incentives on the basis of exports of goods.

“We recommend to Nepal Rastra Bank to provide a cash subsidy for the industry that meets the export criteria,” he said. “And there is no possibility of claiming the cash incentive without exporting goods.”

The statistics of the Trade and Export Promotion Centre show that exports reached an all-time high in the last fiscal year. “Exports have not declined.”

But insiders say that if palm oil and soybean oil shipments, which Nepal does not produce, were excluded from the list of exports, shipments of goods like thread, woollen carpet, readymade garment, iron and steel, noodles and pasta, meat products, jewellery and other 28 products show a drop in the last fiscal year.

The audit report said that the export of thread has plunged by 25.8 percent, woollen carpet by 16.4 percent, readymade garment by 23.2 percent, iron and steel by 54.3 percent, noodles and pasta by 39.6 percent, meat products by 80.9 percent and jewellery by 65.7 percent in the review period.

According to the Department of Customs, total exports stood at Rs141.12 billion in the last fiscal year 2020-21, increasing by 44.43 percent compared to the previous fiscal year 2019-20. In the previous fiscal year, Nepal’s total exports stood at Rs97.70 billion.

But if the export of soybean oil is subtracted from the total export figure, exports in the last fiscal year come out to be less than in the previous fiscal.

The export of soybean oil, which has become Nepal’s largest export in just a year, alone accounted for 38 percent of total exports.

Nepal produces very little soybean oil of its own, in fact, just 31,567 tonnes of raw soybean annually, which is not enough to meet the requirement of even a fraction of its own population.

The country exported soybean oil worth Rs53.65 billion in the last fiscal year, increasing by 322.7 percent as compared to the previous fiscal year. Shipments amounted to only Rs12.69 billion in the previous fiscal year.

The export of soybean oil jumped sharply after India restricted the import of palm oil from Nepal.

Bhusal said that palm oil and soybean oil producers were not eligible to receive cash incentives under the export subsidy policy.

Tariff exemptions on Nepali exports to India under the South Asian Free Trade Area (SAFTA) agreement give domestic traders an advantage. Countries outside of South Asia are slapped with tariffs of 45 percent on soybean oil.

Trade experts say that importing crude oil and re-exporting it to India with zero tariff privilege enables Nepali traders to enjoy a net profit of 45 percent, excluding other profits.

They add that Nepali exporters need to fulfil the criteria of 30 percent value addition to enjoy the zero tariff privilege, but this is not reflected in the soybean trade.

Contrary to the audit report, exports of some products have increased. As per the Trade and Export Promotion Centre, exports of woollen carpet increased by 17.6 percent in the last fiscal year 2020-21 to Rs7.244 billion. Exports were valued at Rs6.15 billion in the fiscal year 2019-20.

Similarly, the export of readymade garments increased by 9.1 percent to Rs5.31 billion in the last fiscal year against Rs4.87 billion in the previous fiscal year.

Some traders said that exports of several products rose in the last fiscal year because of the backlog of orders in 2020 when Nepal’s overseas trade was crippled by the Covid-19 pandemic.

As most of the raw materials required to produce goods have to be imported, the Department of Industry certifies how much value addition has been done before recommending the company for an export cash incentive.

“By observing the value added document and what percentage of value is added in which process, the department recommends the industry to the central bank for export cash subsidy,” said Bhusal.

The Industry Ministry provides the export cash subsidy to the Department of Industry and it sends the money to Nepal Rastra Bank.

Bhusal said that the government has allocated Rs900 million to the Department of Industry to provide export cash subsidies in the current fiscal year 2021-22.

Hari Bahadur Karki, president of the Export Council of Nepal, said that Nepali producers exporting goods get the export cash incentive if they fulfil the requirements. “However, the process is cumbersome in terms of collecting documents.”

The lockdown imposed on different occasions also delayed the filing of applications and receiving the export cash incentives, said Karki.