Shoot oneself in the footNepal needs to put more energy into boosting exports to check the rising trade deficit
Nepal’s trade performance has not remained favourable for the last few decades. The trade deficit has been increasing annually. The subject has received frequent exposure in the newspapers which has helped to edify readers, policymakers and academicians interested in trade and development. Nepal is a small open economy which is traditionally agriculture based. It is worth Rs2.293 trillion annually, and foreign trade accounts for 29.5 percent of the national GDP. By understanding the role of foreign trade, the government has envisaged trade to be as a backbone of the economy.
Trade to push economic growth
Since the political context has changed and protracted political issues are being resolved through consensus, it has been realised that Nepal needs to move forward to achieve higher, sustained and balanced economic growth. The government of Nepal has set a national goal to graduate to the status of developing country by 2022 and reduce poverty to 18 percent. Accordingly, the trade policy has been designed to help achieve this national development goal. The Nepal Trade Integration Strategy (NTIS) 2016 was released with the view of implementing this policy. The Ministry of Commerce has released four national export strategies with the technical assistance of the International Trade Centre (ITC), Geneva. These four avenues—tea, coffee, large cardamom and handmade paper—and NTM (non-tariff measures) are expected to boost exports.
After Nepal’s accession to the World Trade Organisation (WTO) in 2004, many opportunities came along with challenges. We have market access to two emerging economies, China and India. Access to technical and non-technical assistance can be obtained through the WTO, UNCTAD, ITC and other international trade supporting agencies. Despite such opportunities, trade performance has not been moving ahead satisfactorily. The industrial sector, which accounted for 10 percent of the economy during the last two decades, has now shrunk to 5 percent. The agriculture sector and its contribution to the economy is gradually declining. It reached 29 percent this year.
Service trade accounts for more than 50 percent of the total trade. Agriculture, hydropower, service sectors (tourism, remittance, information technology and business process outsourcing) and small and medium-sized enterprises (SMEs) have great potential to reduce poverty and strengthen rural livelihoods. More needs to be done in the field of agriculture, service sector and entrepreneurship development by providing subsidies and technical and financial assistance. Trade-related programmes and activities are being conducted under the leadership of the Ministry of Commerce. However, the trade deficit has been surging.
Support needed to boost trade
Many member countries of the Organisation for Economic Cooperation and Development (OECD) like South Korea, Japan and Germany have achieved export-led growth in their development history. Nepal has included export-led growth in its trade policy. Some people have been saying that the Ministry of Commerce has done nothing to reduce the growing deficit. In fact, related line ministries such as the Agriculture, Industry and Energy ministries, and the private sector, production associations, SMEs, industries and farmers are all responsible for the drop in exports. Over the last 10 years, imports have been increasing rapidly while exports remain meagre.
Last year, imports totalled Rs984 billion while exports amounted to Rs73 billion. Imports outstripped exports by a ratio of 13:1. There are many reasons behind the swelling imports, such as low productivity, increase in consumption due to remittance and cheaper foreign agro products. Meanwhile, low exports can be attributed to supply side constraints, sanitary and phytosanitary measures, technical barriers to trade, standardisation, trade facilitation and lack of infrastructure.
Trade Policies 2009 and 2015 were prepared after holding wide consultations with stakeholders, policymakers, the private sector, production associations and development partners. However, there were some shortcomings which were not analysed or given due consideration while preparing the policy. For instance, it did not establish a research and development institute for product development to create a Nepali brand or form a trade analysis cell to conduct study, research and data analysis about multilateral trading systems. Likewise, a mechanism to impose trade restriction measures to control unauthorised trade or any form of unfair trade that injured our national industry in line with WTO principles was not set up. Due to these lapses, the outcome of the policy has been questioned.
The National Sector Export Strategy for four products is comprehensive, but there are many issues that need to be addressed to flourish in foreign markets. Examples of two products, honey and ginger, are relevant here. These two products were identified in the Trade Policy 2009. Honey exports to the European market went very well till 2004. However, after harmful residues were found during lab tests, the import of Nepali honey was banned in Europe.
Ginger exports encountered a different problem. Unfair trader involvement through technical, safety and compliance issues has hit exports besides forcing Nepali ginger producers to sell their products at a very low price. This may ruin commercial ginger farming forever. Moreover, the government must think about supporting farmer rights by controlling unauthorised trade to protect markets and entrepreneurship and eventually strengthen forward and backward linkages. The concerned authorities need to tackle the problems mentioned above in order to boost exports.
Neupane has a degree in International Trade and Policy from Ajou University, Republic of Korea