The government is mulling over increasing cash incentives to exporters from the existing two percent to four percent of the total value of exported goods. This is a welcome step as it will promote export, helping the country narrow down a ballooning trade deficit.

Nepal recorded a trade gap of a whopping Rs917 billion in the fiscal year 2016-17, which ended on July 15. This trade deficit is 35 percent of the country’s gross domestic product. Nepal’s trade gap is widening every year because of a lethal combination of a growing dependency on imported goods as well as an inability to diversify the range of exportable items. As a result, a big chunk of the money sent home by Nepalis working abroad is being used to settle import bills, exerting pressure on the country’s foreign exchange reserves.

Considering this, the plan to raise cash incentives is expected to encourage enterprises to scout for potential markets abroad that can absorb Nepali goods.

The government introduced this cash incentive scheme to promote exports through the budget of fiscal year 2010-11 for goods with domestic value addition of 30 percent or more. The scheme was introduced as only a limited number of goods were being exported, that too from only a handful of sectors. The scheme was also aimed at promoting the manufacturing sector, a major job creator in the country.

At the time the scheme was launched in 2012, 85 percent of Nepal’s total exports were absorbed by five countries, with 80 percent of those goods finding a market in India. Yet the incentive structure has not been very successful in raising the country’s exports. This is also because traders are taking undue advantage of the scheme.

For instance, many traders have been found importing yellow lentil from India and exporting them to other countries after labelling them as products of Nepal. Even such unscrupulous traders are currently receiving the cash incentive. Malpractices such as these are preventing the country from diversifying the range of exportable items and introducing Nepali products in newer foreign markets.

If the government intends to raise the cash incentive, it must plug all loopholes. It should also revise the eligibility criteria and extend incentives to those who deserve it. The government should check whether Nepali goods are being shipped to markets beyond traditional export destinations such as the US, Germany, Bangladesh, China, the UK, Turkey, France, Japan and Singapore.

If these measures are not taken, the scheme will fail and will only serve to pour taxpayers’ money down the drain.