BY Krishna Raj Bajgain
With a supportive environment for investment and a protectionist approach in the domestic market, a significant amount of imports could be substituted in five to ten years.
Nepal underwent significant changes in 2008 when a new political system was adopted, featuring a republic mode of governance, federalism, inclusiveness, and strong local governments. One of the main goals of this transformation was to improve the economic well-being of the people by promoting exports and reducing reliance on imports. The new Constitution of Nepal explicitly highlights the need to diversify and expand markets for products and services by developing and expanding industries and promoting exports through the identification of areas of comparative advantage. To put these provisions into action, Nepal made export promotion a major pillar of its economic diplomacy. The country formulated a Trade Policy in 2009, which was later replaced by a new trade policy in 2015. In 2010, Nepal also developed a Nepal Trade Integration Strategy (NTIS) to address export promotion-related issues, which was updated to NTIS 2016 to reflect changing circumstances. Various bilateral mechanisms continue to function at various levels to address issues where export promotion dominates negotiations.
The government has been providing a significant amount of subsidies for industrial inputs and incentives for exports to improve the competitiveness of Nepali products in the international market. SImilarly, trade policies and sectoral policies related to trade have been brought with the aim of streamlining trade procedures and facilitating export businesses. Further, the government has focused its investment on developing trade-related infrastructure to reduce trade-related costs and expedite the export process.
Nepal is fortunate to have generous support from its neighbouring countries and the developed world. As a least developed country and a landlocked nation, Nepal receives tariff and non-tariff relaxations in respected markets. For example, India has granted duty-free and quota-free (DFQF) market access to most of Nepal's exportable products, with only a few exceptions on a negative list. Similarly, China has also provided DFQF market access to over 9,000 Nepali products. Members of the European Union, Norway, Switzerland, and Turkey have granted zero-tariff access to Nepali products under the REX (registered exporter system).
Likewise, countries like Armenia, Australia, Belarus, Canada, the European Union (EU), Iceland, Japan, Kazakhstan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey, United Kingdom and the United States of America have granted preferential market access to Nepali products under the Generalised System of Preferences (GSP) instituted in 1971 under the aegis of UNCTAD .
The government has established the Trade and Export Promotion Centre (TEPC) as an excellent centre for market intelligence with highly skilled personnel. The Ministry of Finance has allocated a generous budget for export promotional activities, demonstrating its commitment to supporting Nepal's export sector. Development partners are also eager to engage in export promotion initiatives of the government and have offered financial and technical support. In addition, many commodity associations have focused their activities on enhancing the export-related capacity of their members.
Despite the various initiatives taken by the government and other organisations to promote exports, Nepal's export performance has been unimpressive. In fiscal year 2008/09, Nepal's export-import ratio was 1:4.2, but it declined sharply to 1:15.3 in 2017/18. Although there have been sporadic improvements in the export-import ratio, these have not been sustainable, as the increase in exports has not been the result of a sound export initiative. Similarly, the slight improvement in the export-import ratio 2021/22 is likely to meet the same fate as in previous years due to the sharp decline in the export of edible oil to India.
Nepal's import trade has also undergone some structural changes. In 2008/09, the agricultural sector accounted for 14.2% of Nepal's total imports, which increased to 19.7% in 2021/22. In contrast, the import of machinery and tools has shown a reverse trend. In 2008/09, the share of machinery, electrical goods, vehicles, and tools in Nepal's total imports stood at 24.7%, which decreased to 21.6% in 2021/22. The shares of base metals and its articles and chemicals also followed a similar trend. The decrease in the import of major industrial inputs reflects a dismal picture of industrial activities in Nepal.
When evaluating Nepal's export performance, it is important to consider the country's potentials and limitations. Nepal's industrial history, business culture, geography, and geopolitical situation all play a role in determining our prospects and limitations when setting export goals. Pursuing an export promotion strategy without a proper assessment of these factors can result in futile attempts. Simply relying on feelings, desires, enthusiasm, and the generosity of our international partners is not enough to achieve our goal of prosperity through export.
There have been conceptual weaknesses in Nepal's export promotion activities, and one of the reasons for the dismal export performance is the deviation from time-proven export promotion strategies. Nepali agricultural products are not as competitive in India due to similar geography, climate, and production practices. Developed countries are a more suitable market for Nepali handicrafts and manufactured goods. Nepal has an advantage in the international market in the fields of tourism and security. Despite Nepal's adoption of hydroelectricity as the main source of power for transport, kitchens, and air conditioning systems, power generated from Nepali rivers seems insufficient for domestic consumption. Data shows that per capita electricity consumption in Nepal is far below that of the developed world.
Nepal faces limitations in import substitution as well. Industrial activities such as mining and quarrying, which pollute rivers and contribute to the melting of Himalayan glaciers, and economic activities that harm natural habitats should not be allowed.
Given Nepal's prospects and limitations, there should be a reorientation of agricultural product exports towards the developed world and Gulf states where Nepali products can command higher prices. Efforts should also be focused on third countries to boost the export of handicrafts and manufactured goods. Nepal's export policy towards India should concentrate on attracting tourists from Bihar, Uttar Pradesh, and West Bengal to the scenic hill stations of Nepal. Similarly, Nepal can benefit from India's growing market for private security services. Promoting Himalaya-based tourism should be a top priority for exporting services to countries other than India.
Imports of agricultural commodities falling under HS classification headings 1 to 24 have been identified as the most suitable products for import substitution within a short period of time. Improving the production capacity of existing industries in Nepal can help replace imports of medicines, dyes, cosmetics, soaps, toothpaste, cleaning powders, plastic products, tires and tubes, belts, purses, bags, paper, and printed materials in a short span of time. A policy to promote natural fibres such as Allo as the national fibre and proper support for Nepali textile and apparel industries will help substitute the huge import of textile and clothing in Nepal.
With a supportive environment for investment and a protectionist approach in the domestic market, assembly industries for items like hand tools, agricultural tools, electrical appliances (pumps, TVs, refrigerators, air conditioners, and kitchenware), bulbs, wire, bicycles and motorcycles, watches, and glasses can be established, and a significant amount of imports could be substituted within a period of five to ten years. A similar strategy can be applied to substitute imports of furniture, toys, pens, pencils, pins, clips, forks, ribbons, stitches, fasteners, decorative lamps, and brushes.
In addition to the above initiatives, reforms in the existing structures, simplification of procedures, reduction of production costs, capacity enhancement of certifying agencies, exemptions in taxes, business-friendly financial arrangements, and remissions should be properly addressed to accelerate the pace of export trade. These are some of the remedies to break the bottleneck of stagnant exports and curb the skyrocketing imports.
(Bajgain is a Senior Officer with the Trade & Export Promotion Center. The views expressed here are his personal.)