A new lease of lifeBoth the public and private sectors need to make effort to put readymade garment (RMG) policies into practice
Statistics over the past decades reveal a significant decline of exports from Nepal with no signs of improvement against the ballooning import bills. In recent times, the potential Nepali exports are not only losing their competitive edge but also preference erosion in the world market due to fewer unilateral concessions. Readymade garment (RMG) is a Nepali export item that has suffered preference erosion. The recent US initiative in favour of Nepali RMG through the signing of ‘Trade Facilitation and Trade Enforcement Bill’ (TFTEB) in December 2015 could resuscitate the Nepali garment industry. It is a provision that allows duty-free market access to selected Nepali RMG items to the US market.
The Nepali side had started lobbying for such a deal since 2001, and the first bill on the issue was recorded in the US Parliament in 2002. But the efforts intensified only after US Senator Dianne Feinstein reintroduced the bill ‘Nepal Trade Preferences Act’ in January 2015. Immediately after the earthquakes last year, she tabled an amendment to grant trade preferences to Nepal citing that the country was devastated and would need significant help in rebuilding. It is important to note that Nepal is not the only country enjoying such benefits; African countries have already been enjoying such benefits under the African Growth and Opportunity Act (AGOA) from the US.
Needless to say, the TFTEB authorises the US government to extend special trade preferences to Nepal. Duty-free market access will be provided for 66 different products, including shawls, scarves, certain carpets, leather products, headgears, travel goods, etc. Though these statutorily required reviews may take several months to complete, it is high time that Nepal adopted prudent measures to reap the benefits from the TFTEB.
Where we stand
The garment and textile industry had been very important to the national economies of Nepal, Bangladesh, Cambodia and Sri Lanka. After the American Opportunity Tax Credit (AoTC) in 2005, Nepal lost its competitiveness in the garment sector. Amid such major changes, countries—except Nepal—have adapted to shifting market conditions and internal pressures for improved labour conditions and products. They established forward and backward linkages over the years and developed their own niche. Bangladesh focuses on inexpensive T-shirts and other basic goods. Sri Lanka’s focus is on higher-end apparel. Cambodia’s garment and footwear industry expanded by 10.6 per cent in the first quarter of 2015 and now employs some 600,000 workers.
However, the situation in Nepal is quite different. The Nepali garment industry was flourishing until the phasing-out of the quota system with the implementation of AoTC in 2005. RMG exports dropped from an all-time high of Rs13 billion in 2000-2001 to about Rs5.5 billion in 2014-2015. Many RMG factories were closed down leaving only about 40 to 50 percent of them in operation.
A glimmer of hope
After years of slump, the Nepali garment industry is in tatters. But it has a reason to rejoice now, as US President Barack Obama signed the TFTEB allowing duty-free market access for Nepali RMG to the US; at present, the rate of duty in the US on such Nepali products is about 16 to 17 percent. In addition, the US has also promised to provide economic and technical assistance to Nepal’s RMG sector to help improve its competitiveness in the world market. The TFTEB is expected to give a new lease of life to the Nepali garment industry. One unofficial survey estimated that once the duty-free scheme is fully utilised, the garment industries of Nepal could employ approximately 400,000 people and export goods worth about one billion rupees. To this end, both the government and the private sector need to take appropriate steps and put RMG policies into practice.
High dependence on the import of raw materials; untrained, inflexible and abusive mid-level management; lack of facilities; political disruption; less productive labour market; unfavourable tax policies and incentives; lack of appropriate backward-forward linkage; erratic power supply; exchange rate fluctuation and costlier access to finance are some of the challenges facing Nepal’s RMG sector. Due to these challenges, it was tough to compete with the garment sector of other countries. Immediate arrangements of basic infrastructure and minimum facilities as sought by domestic entrepreneurs in tandem with fine-tuning backward and forward linkages would be the initial steps to kick-start export. This would also help lay a sustainable foundation for export trade in the long run.
Experience suggests that creating linkages is an important way to improve and sustain industrial competitiveness. Developing clusters, business associations and value chains would be important ways for Nepali industries to foster business linkages and expand market access. This also helps with improving specialisation and overcoming the disadvantages of being small. The World Trade Organisation (WTO) membership of Nepal in 2004 was a means of diversifying Nepali trade abroad. Surprisingly, exports of RMG from Nepal started to decline immediately after the membership with no other reason than the phasing-out of the quota system as a result of AoTC.
The new avenue opened by the US scheme is not a panacea for Nepal but it can help recommence our RMG market. Past experience heralds a rocky road ahead as both the players—public and private sectors—require cautious and noble efforts to utilise existing facilities. Therefore, there is an urgent need for a clear demarcation of the roles and responsibilities of the two players. Let us try to put our every effort towards creating a sustainable RMG industry. This needs extra dedication from both the private and public sectors. The private sector needs to be honest, creative and innovative. The public sector should support the private sector by having more facilitators and fewer regulators.
Koirala is joint-secretary at the Ministry of Peace and Reconstruction