“Nepal needs effective strategy in logistics infrastructure and human capital development to benefit from its engagement with China”

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How do you observe the changing dynamics in Sino-Nepal economic relations?
Traditionally, we have been importing Chinese goods via Indian ports as the trade routes there are easier for us than the routes linking China. However, this scenario is likely to change gradually as China is investing heavily in infrastructure development in the Tibet to increase the region’s economic viability. One of the aims of its Belt and Road Initiative (BRI) is to gain access to the South Asian markets via Nepal. They have been working to this end. The construction of Shigatse – Kerung Railway, which has been slated for completion in 2025, shows their ambitions in this regard.

At a time when there is a heightened trade standoff between China and the United States and saturation in the European and US markets, China is exploring new markets for its products and services. During the negotiations for the Nepal-China Transit Treaty, the Chinese officials asked us to grant direct access to India and Bangladesh; the agreement was concluded using a proviso as Nepal could not immediately provide such an access to the northern neighbour given the poor road infrastructure. China’s global march has clear missions and economic strategy is the core component of their foreign policy at present. In think if we offer China the road access to reach India and Bangladesh, they will invest in Nepal’s infrastructure development. Nepal possesses the potential to become a transit country for China and India in the next 10 or 15 years. Now it is up to us how we are able to benefit from this. Nepal needs effective strategy in logistics infrastructure and human capital development to benefit from its engagement with China. Also, it is necessary to develop the inter-provincial trade and transactions within Nepal; we are yet to start work in this area. Logistics infrastructure has multidimensional and multiplier impacts in any country’s economic development. The manufacturing boom in China and India, for instance, was largely aided by the country’s logistics infrastructure development.

Where should be our focus to benefit from the growing Sino-Nepal economic cooperation?
First, the Chinese consumer market presents a huge opportunity for us. Second, China is no longerthe world’s cheapest labour market, so they are trying to phase out manufacturing and production facilities to nearby countries. We can benefit from their shift as our labour and several costs associated with manufacturing are relatively cheap here. Similarly, the increasing port access China has provided to Nepal can be beneficial to us as it offers us with the opportunity to access the Northeast Asian markets. Meanwhile, China can be the single largest tourist source market for us; Chinese travelers have become the largest spenders in the world. There are still a lot of things to do to promote our destinations in China and attract Chinese tourists.

The proposed Kathmandu-Kerung Railway has been touted as a game changer for Nepali economy. Is it so?
I don’t see any possibility of the construction of the proposed Trans Himalayan Railway in the short or medium term. Nonetheless, the feasibility study of the project will of course commence as per the 12-point agreement signed during Xi’s visit. We haven’t thought about the utilisation after the railway is constructed. We don’t know if the business generated by the railway will cover its operational expenses. I have found a great deal of concern among the Chinese government officials in matters like this. They assess deeply if their investment in infrastructure will be fruitful or not. Besides, there are geographical challenges  to construct the Trans Himalayan Railway. If Nepal has to develop as a transit country for China and India, we need to assure them that their investments here will be worthwhile and that they will benefit from investing in our infrastructure. Only then they will invest here. It is up to us to seriously think and work to prepare a strategy to demonstrate our areas of competitive advantage that will also benefit them.

Percentage wise, Nepal has the highest trade deficit with China. In this situation, what things are needed to be considered when we are targeting high volume of trade with the northern neighbour?
I doubt the figure related to Nepal’s trade with China. The deficit is much higher than what is being said because of the unbridled under-invoicing in our trade with China compared to other countries. Not only imports, but also our exports to China are under-invoiced. We have seen instances where Nepali carpets exported to China are quoted USD 20-25 per unit; it actually takes USD 150 to produce one square metre of a 100 knot-carpet.

Alongside increasing connectivity and trade facilitation, our focus should be on producing consumable items and other goods that are in high demand in the Chinese market. As I said earlier, manufacture and export of semi-processed goods to our northern neighbour will benefit us economically. We need a strategy to boost our exports to China.

We can export several products to China, particularly to its Tibet Autonomous Region. But the weak production capacity bars us to achieve the target. Last year when Nepali handicraft manufacturers went to China to participate in a trade fair, some Chinese importers asked them if they can supply 50,000 units of handbag of bamboo fiber made in Nepal which was very much liked by visitors of the fair. Nepali manufacturers replied they could not supply more than 10,000 such handbags even by collecting from all across the country. We lack plans to increase the capacity with a focus to export the products.When I was in the Ministry of Commerce and Supplies, I met some Chinese individuals who were looking to import different types of items from Nepal. A Tibetan businessman was even asking us if he can import elephant grass, commonly found in the Terai plains, to feed yaks in Tibet. According to him, the growing commercial farming of Yaks increased demand for such grasses that are primarily supplied from mainland China at higher transportation costs. Another Tibetan individual I met was looking to import buffaloes from Nepal due to increased demand of meat in the region. He told that 100,000 buffaloes can be exported to the region and they are even ready to invest in providing technical assistance to Nepali farmers for buffalo farming.  Similarly, there is also a very high demand of agro-products such as sugar and different types of herbs in Tibet.

The shift of China from labour and pollution intensive manufacturing plants to automated and eco-friendly production can be advantageous for us if we can attract some displaced plants of Chinese companies. I think we can focus on attracting companies for producing semi-processed goods that can be exported back to China. It is also necessary tothink about connecting ourselves to the regional value chain.

Citrus fruits have been added to the list of 8,000 DFQF items provided to Nepal by China. Do you think Nepal will be able to benefit from it?
The export of citrus fruits from Nepal to China had been discussed for the last couple of years. There was even a Memorandum of Understanding (MoU) signed between government officials of the two countries for exporting sweet oranges to China. The Chinese side had set a condition that the farming areas are declared as ‘pest free zones’ before the oranges are exported to their country. That MoU could not materialise due to our inability to fulfill this condition. This issue will again be raised when Nepal steps up to export citrus fruits to the northern neighbour. Hurdles like these are likely to come as we haven’t worked with a focus to export products.  

China has topped India as the largest FDI source country in Nepal with large amount of Chinese FDI commitments. How do you evaluate the trend of Chinese FDI in Nepal?
Compared to the FDI commitments Nepal receives every year, realisation of the pledges is relatively low. We do not have effective mechanism to follow-up on the commitments so as to remove the hurdles they face. Despite some improvements in the governmental level, several issues exist for foreign investors. Many hurdles I see at present lie at Nepal Rastra Bank; it takes around 75 days to open a foreign exchange account at the central bank which makes foreign investors unwilling to invest here.

It is obvious for any FDI receiving country to seek significant amount of money in investments along with transfer of technology. However, the government has set the minimum foreign investment threshold at USD 50,000. Allowing small amount of money in FDI won’t be beneficial for us in terms of enhancing productive capacity and employment generation; such investments will only displace our domestic businesses. Meanwhile, there are doubts that many such investments haven’t been invested as intended. It is said that the Chinese nationals who own restaurants in Thamel are also running freight forwarding and other businesses, violating the rules and regulations of Nepal.

Similarly, there are discrepancies in large scale FDI from China. It is gradually becoming a trend for big FDI projects to avail loans from Nepali banks in the name of consortium financing. Such practices are against the norms of FDI. It is also important that the government specify and prioritise sectors for FDI.

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