Vidya Nath Nepal

President

Centre for Public Policy Dialogue and Former Special Secretary of Commerce

An NRB source says that in the first five months of FY 2009-10, export of goods has declined by 16.8 per cent while import of goods has increased by 30.4 per cent. This has created huge trade deficit of 48.6 per cent. Volume of trade deficit with India is higher than with the rest  of the world.

How do you evaluate the current trade situation of Nepal?

I have been observing the economy and policies for the last four decades. But the trade deficit was never this bad. Today, the deficit is in billions of rupees which is a painful situation. The import growth has spiralled while the exports have dwindled. Nepal’s value of exports for the year 2001-02 was more than Rs 45,000 million which reduced to only about Rs 41,000 million in 2007-08. On the other hand, imports in the same period increased from about Rs 103,000 million to Rs 154,000 million. Export to India remained almost stable while export to other countries decreased sharply. During this period, about 63 per cent of Nepal’s total exports went to India while about 59 per cent of its total imports were from India. Thus, Nepal’s total trade with India was about 60 per cent. The increased import has been largely for consumption materials rather than for raw material or industrial inputs. For example, gold and many other goods are imported into Nepal considering the Indian fiscal policy. Our liberal trade policy does not allow controlling imports. According to our law, we cannot prohibit any business, we can only restrict only a few items. Nepal is the most liberal country in entire South Asia in terms of its trade policy. We don’t have any import restriction and quantitative restriction. We have very small negative list for imports.

 

How do you compare the current situation with the past?

Current trade situation has grown very weak when compared to the past. Increasing trade deficit is evident. An NRB source says that in the first five months of FY 2009-10, export of goods has declined by 16.8 per cent while import of goods has increased by 30.4 per cent. This has created huge trade deficit of 48.6 per cent. Volume of trade deficit with India is higher than with the rest of the world. There is very little attention towards production of exportable goods. There is no favourable environment for that. Therefore the trade situation has worsened now. In 1996, a trade treaty was signed with India. In that treaty there were very little restrictions on export to India, the negative list was shorter and the rule of origin was not so strict. The treaty renewal in 2002 retracted such liberal provisions. The rule of origin was made tougher. Similarly, India exerted quantitative restrictions on some products. That disrupted our export. The political turmoil after 2002 and the resultant current transitional phase has led to poor trade situation compared to that of the past.

 

What are the main reasons for poor development of Nepali trade?

Trade has to be looked on the basis of import and export. The import is continuously increasing but that is not a reason to rejoice. To increase export, there must be an increment in investment for production. Investment can be both domestic and foreign. Forget about the foreign investment, even the domestic investors are not encouraged to invest. The main reason is the volatile and unstable political situation. Because of this, there are no new investment and production of exportable items. Apart from that, there are issues of labour, peace and security, industrial security and unstable policies that have put investors at bay. A policy must last for at least five to 10 years to attract investment. But in Nepal that is not the case. Government is changing frequently, and every change of government brings change in the policy too. Since last year, also the interest rate has sky rocketed due to liquidity crunch in the financial institutions. That has also affected the investment and thereby exports.

 

Nepal faces non-tariff barriers with its trading partners. How can such barriers be removed?

We are the member of WTO, SAFTA and BIMSTEC along with our trade partners like China and India. WTO’s policy states that the non-tariff barriers must not be exerted unless it is justified. There should be certain tariff barriers but very little. The trade must be gradually made free by removing the restrictions. The facility given to one country must be provided to other country too. In spite of this, agriculture based products’ export to India face a lot of non-tariff barriers. For example, when some agro-products have to be exported to India from either Sunauli or Birgunj, quarantine tests have to be carried out at a far away laboratory. That adds huge cost for exports. One of the main problems with export trade of Nepal is transit cost which is usually prohibitive. The transport cost from here to Kolkata, the main port for Nepal, is to the tune of 14 to 40 per cent of the cost of material. With such high cost how can we compete in the international market? Documentation barriers are also severe as the documentation process takes months and that further hinders the export. Internally too, we have constraints in trade facilitation. In Indian ports too, there are numerous problems like unavailability of ships and lengthy procedures. Such non-tariff barriers added to the tariff barriers are hindering our export. Though India has provided customs free export from Nepal to India in certain goods it levies special duties on them. Sometimes, state governments in India levy additional duties according to their local rule. A complaint on such case gets lost in the Indian bureaucracy and as a result, Nepal’s exporters face harassment.

 

Nepal also has severe supply side constraints. How can they be removed?

It is true. Though various bilateral, regional trade agreements like SAFTA and multilateral trade arrangements like WTO have been providing us access to different markets through manner similar to reduced customs duties, we are not able to benefit form that. Under SAFTA, hundreds of items can enjoy concessional entry into other countries. WTO has the philosophy of liberalisation of trade by reducing tariffs. Compared to the last decade, the customs duties have declined even for entry into India. The trade access we got through bilateral, regional and multilateral agreements have not been fully utilised due to supply side constraints. What can we export when we can’t produce goods here? There is no investment environment and the cost of production is high while labour productivity is very low. There are problems with lengthy documentation, labour issues, peace and security and increased interest rate. If we do not have any supply side constraints, our export would definitely increase.

 

Industrial and trade policies are not translated into acts and regulations. Even if they are enacted, they are overlapping and contradictory. Labour issues are never settled. Quality of infrastructure like transport, power supply etc is very poor. The ADB report of 2009 says the syndicate system of trucks is common in the country and the transport cost has increased as high as 55 per cent. Research and development aspect has been largely neglected. Technologies are outdated and innovation is non-existent. Institutions in particular are weak and ineffective. Private sector is not properly promoted by the government. Unless we can correct ourselves on these counts, supply side constraints will prevail.

 

Nepal enjoys numerous facilities under WTO regime as well as being an LDC. How can we utilise such advantages?

WTO believes in MFN (Most Favoured Nation) treatment. There should not be any discrimination under this system for any country. There was a Ministerial meeting held in Doha where it was decided that WTO would provide various technical assistance to strengthen the supply side of the LDCs to increase their export potential. Little has been done on that front and that is insufficient. WTO’s provision of differential treatment to the LDCs has not been effectively implemented. Facilities like ‘Aid for Trade’ are just for name. We have not received any sufficient amount on this account. There is a need for strong and effective negotiation from LDCs as a group which is lacking so far.

 

Our government through our embassies abroad should strengthen economic diplomacy to promote trade to respective nations by identifying suitable products. We have failed to do so. There are a few products that we can export to India. For example, Nepal can take huge benefit if producers concentrate on exporting vegetable ghee, cardamom, GI pipe and noodles to India. Tea and ginger are exported to India but it re-exports them. From our side, it is better to export our products directly to the final destination. Nepal should identify the negative net trade of a particular country and work on exporting such goods to those countries. We have failed to move ahead in this direction.

 

Investors are reluctant to increase investment citing unfavourable investment environment. How can trade be enhanced amid such problems?

The main reason behind investments remaining stagnant is political instability, frequent changes in policy, labour issues and security problems. Foreign investors seek easy exit if they do not see profits. There is difficulty in such exits and liquidation procedure takes years. Foreign investors can’t wait that long. Nepali raw material based industries would be sustainable in terms of export trade. However, that concept is not necessary to apply in international trade in the course of industrialisation. Hong Kong and Singapore are examples of countries that do not have their own big manufacturing units, but have benefited by exporting assembled products. However, if we can export goods by processing our own raw materials, we would have more comparative advantage and we would not have to spend foreign currency in importing raw materials. A study shows that Nepal’s products that have highest potential of export in the long run are tourism and hydropower. However, remittance is the biggest source of foreign exchange earnings currently. At the moment, around 80 per cent of foreign exchange earnings is through remittance. Tourism ranks second. Hydropower projects are capital intensive. Nepali capital is hardly enough to run even one Tamakoshi project.

 

The government should be proactive in providing all facilities mentioned in industrial and trade policies to increase production and promoting exports. However, private sector should also run businesses on the basis of corporate culture with new technology and increase their competitiveness. On an average, it takes about 31 days to clear seven procedures to do business in Nepal. This process time is the longest among the SAARC countries. Similarly, it requires 41 days to export products out of Nepal. Thus, the businessmen are suffering from over regulations, corruption, dishonesty, lack of transparency and political interference. According to WEF report of 2010, Nepal ranks the lowest among all SAARC countries in quality institutions. Therefore, the expectation is that the private sector will increase production and export in spite of the weak government. They have the initiative and the mission while the government is indifferent as well as inefficient.

 

A total of 19 goods and services are selected by the NTIS as priority products. How realistic is this selection?

They have selected 19 goods and services following a lot of studies. Among them, seven are from the service sector like IT, health, education and tourism among others. I feel we can do better in these service sectors and have the potential if there is good working environment. There are agro based products too but I don’t think they are sufficient. Since our production depends on imported technology, we must select products that generate high profit in low volume items. If we can focus in the coming decades on these 19 products by creating favourable environment for investment that would certainly benefit our trade prospects.