Purushottam Ojha

Secretary

Ministry of Commerce and Supplies

Production and development of the right product at the right time and capacity to supply it to the destination market in an efficient manner are crucial to enhance supply side capacity. Therefore, identification, selection and development of products in which Nepal has comparative and competitive advantage is the major issue in the development of Nepal’s trade.

 

A total of 19 goods and services are identified as priority items for trade by NTIS (Nepal Trade Integration Strategy). How sustainable are these 19 products?

Yes 12 goods and seven services are identified. They have been identified after careful scrutiny of their potential for development along the value chain and their linkages with poverty alleviation. These products possess immense potentialities of backward linkages within the country. These are products and services in which Nepal has comparative and competitive advantages. To sustain trade in the future, contributing to overall economic development by making trade more inclusive, it is important to increase employment and government revenue. Identification and selection alone cannot meet our objectives. We have to create necessary environment in the country to develop these products in a manner that will ensure sustainable trade in the future. Most of these products are related to agriculture. It is important to enhance the productivity, productive capacity and product quality in them. For this, we have to go on adopting good agricultural practices, integrated pest management and quality control mechanism. At the same time, we need to focus on improving the quality of infrastructure, for example in tests and certifications to ensure acceptance of the products in the international market.

 

It is said that improved supply-side performance is the key to achieving sustained economic growth. What is hindering the improvement in supply side capacity?

Over the years, we have been enjoying increased market access in various destinations as tariff barriers are being lowered. However, there are certain non-tariff barriers that are hindering the export from the least developed countries (LDC) like Nepal. We have to address these issues as well. Production and development of the right product at the right time and capacity to supply it to the destination market in an efficient manner are crucial to enhance supply side capacity. Therefore, identification, selection and development of products in which Nepal has comparative and competitive advantage is the major issue in the development of Nepal’s trade. The causes for the hindrance in improving the supply side capacity include lack of adequate infrastructure - particularly transport infrastructure, energy supply, rising problems of labour unrest and law and order situation.

 

How can we overcome these supply side constraints?

There are certain barriers for increasing our trade capacity as I mentioned earlier. We need to address these important issues to attract more investment and improve investment climate that will eventually help overcome supply side constraints. It is essential to bring more investment in the production as well as service sector. But it largely depends on political stability, law and order situation, industrial relations and adequacy of infrastructures. These need to be addressed in a coherent manner. We also need to increase our collaboration with development partners to get more support in the areas of economic cooperation and trade development. Enhancement of market access is crucial from the perspective of LDCs like Nepal since non-tariff barriers are being raised by importing countries in the name of plant and animal health, food safety, environmental concern and labour rights. Nepal is raising the voice against such barriers in bilateral, regional and multilateral forums.

 

Why hasn’t Nepal been able to benefit from trade despite having huge markets in the north and the south?

It is true that the economies of both our neighbouring countries are increasing by leaps and bounds. The GDP growth rate of China is almost in the double digits and India’s GDP is increasing by eight per cent annually. Statistics show that trade between India and China is also increasing and has reached US$ 60 billion. They are aiming at increasing it to US$ 100 billion in the next five years. Despite such increased industrialisation and trade activities in neighbouring countries, we have failed to benefit from this. We need to adopt appropriate policies within the country to link our trade and economic relations to get the spill-over benefit from our neighbouring countries. We also have functioning trade agreements with both these countries but we have not been able to harness the potential benefit of exporting our goods and services. There are certain inherent problems associated with it. There are several non-tariff barriers to our exports in India and China. We need to enhance our efforts to remove these barriers. We have entered into an agreement with the Government of PR China in April 2010 to provide duty free access to 4,721 products in six digits customs tariff line. However, our industries and exporters have not been able to fully utilise this opportunity. We have initiated the process for assessing the situation and the reasons behind non utilisation of market access opportunities. This would require a constructive dialogue and deliberation between the government and businesses on both sides. Besides, we need increased engagement with our neighbouring partners in the area of economic cooperation for enhancing productive capacity in sectors like agriculture, manufacturing, export trade and infrastructure.

 

Why hasn’t Nepali economy benefited from trade?

It is not true that Nepali economy is not benefiting from trade. But the question is about the level of benefit that we are harnessing. For this, we have to follow the path to sustainable and inclusive trade development. Trade is the output of total economic activities of the country. Trade cannot operate in isolation. Until and unless we develop our agriculture, forest, manufacturing and the service areas, trade cannot happen. All sectors of the economy should move towards the same direction and work in harmony so that there will be value addition in the export. Such a situation will help create employment, increase revenue to the government and bring more foreign currency. It will ultimately lead to the improvement in the macroeconomic situation of the country.

 

Why do you think Nepal has not been able to capitalise on WTO membership?

The WTO membership has brought both opportunities and challenges to Nepal. Opportunities - because we have market access to all member countries and we can engage in constructive dialogue in the international trade forum through WTO. At the WTO, we can raise our voice together with likeminded countries to get more support from developed countries to remove market entry barriers and enhance our trade capacities. Besides, there are challenges. Ever since the liberalisation of tariff under multilateral trading system, our products have to compete with products from other countries particularly in big markets like the EU, the US and even in India. Since the tariff rate is going down, other competing countries are finding it easier to enter into these markets. This has proved to be a major challenge to maintain our market share in these markets. We have lost the export of some products like carpet, garments and pashmina in the international market and vegetable fats in Indian market during the last decade due to this reason. Accession to multilateral trading system and regional trade arrangement is not the panacea to remove the problems of trade. Rather, we need to develop our capacity to face increased competition on one side and utilise the opportunities available under regional and multilateral trading system on the other.

 

Nepal currently has a huge trade deficit. How can this be lowered?

It is true that we are facing a huge trade deficit. During the last couple of years, exports have not increased and imports are galloping. In the last fiscal year, we had the record trade gap of around Rs 315 billion. Most imports are consumption items like petroleum, cars and gold. The gold does not directly contribute to enhance the economic activities. So, it is an alarming situation and a challenge for the policy makers. In the midst of such a precarious situation, the Government of Nepal has launched Nepal Trade Integration Strategy (NTIS)-2010 which seeks to identify and develop some key essential products and services to build our export base in a sustainable way. We must correct the deficiency which is hampering the growth of economy and the investment climate. We have to improve law and order situation, industrial relations and management of government-owned industries. We also need to develop adequate infrastructure and improve the regulatory regime so as to help in building confidence among investors. Similarly, streamlining of the transit procedure, incentives for industries like tax rebate, monetary and non-monetary incentives and improving governance systems are among the suggested reforms. Until and unless we improve our investment climate, it will be difficult to motivate and convince potential investors to invest in the industries or in any other sectors. Unless we have investment, we can improve neither international trade nor the supply situation within the country.

 

The relatively stronger trade sector of the past has diminished gradually over the last decade. What can be done to revitalise trading sector again?

During 1990s, we saw the growth of industries and trade in terms of export to India and other countries. But the industries we were nurturing during this period were not found sustainable. Carpet, garment and pashmina are no longer our niche products as many countries export similar goods. We were unable to improve the capacities of our industries in terms of economies of scale, quality and design of the products. The enhancement of productive capacities would require several steps as behind-the-border measures. One case in point is the development of Special Economic Zones (SEZ) for relocation of industries by providing one-stop services to industries in such zones combined with flexibility in labour regulations and tax rebates. The project for establishing special economic zones in the country was started some 12 years back but it is still in an indeterminate state as the development of physical infrastructure and creation of necessary legislation for regulating the zone is stagnant. Similarly, there is need to revisit laws related to the regulation of trade and investment regime, particularly the Industrial Enterprises Act and Foreign Investment and Technology Transfer Act (FITTA)-1992. The revival of Nepali trade will largely depend upon right choices of products and services in order to become sustainable. Efforts are to be made for maximising domestic value addition optimising the utilisation of human capital as well as other factors of production including land and natural resources which will culminate into healthy growth of economy. The growth of trade during 1990s was largely based on tariff arbitrage. When that arbitrage opportunity diminished, many such industries could not sustain. The Government of Nepal is now realigning trade through the manifestation made in NTIS-2010, Trade Policy-2009 and the current Three-Years Interim Plan (TYIP). Now, the challenge is to implement them in true spirit.

 

There are special privileges like zero tariffs  for LDCs. How can we benefit from that?

Nepal enjoys zero tariffs in many countries that belong to the Organisation for Economic Cooperation and Development (OECD). The European Union provides duty free access to the products from LDCs under the Everything but Arms (EBA) initiative. Countries like USA, Canada and Japan provide Generalised System of Preferences (GSP) facilities to many products from countries like Nepal. Besides, Nepali products also enjoy zero tariff facilities in Indian and Chinese markets. Therefore, it is not the problem of market as such. Nepal, together with other least developed countries around the world, is pleading duty-free quota-free (DFQF) market access in developed and developing countries right from Geneva to Washington DC. The most important aspect is to increase our supply side capacity and competitiveness. Since zero tariff is available to all LDCs, only those can export to these markets who are more competitive. This would require revisiting the trade and export policy with a focus on choices of right products, improvement in quality and diversification of design and reduction in the cost along the value chain. Being a landlocked country, the transit transport cost is generally higher. Simplification of transit procedures and reduction of cost of transit is vital for Nepali trade. 

 

A new concept ‘Aid for Trade’ has been gaining currency. What kind of reforms should Nepal make to get optimum benefit from it?

Aid for Trade is a new concept that emerged during the last decade. There is consensus and commitment among developed countries to support LDCs for trade development. There is a notion that LDCs need trade and not aid and this view is often expressed in various international forums. Developed countries and development partners should come forward to support product development programmes, development of trade infrastructure like inland clearance depot, container freight station, special economic zones, roads and other forms of transportation in order to enhance the trade capacity of the LDCs. Other possible areas of cooperation include enhancing the quality of infrastructure for test and certification of products, capacity building for trade negotiations and institutional development. All these require adequate technical as well as financial assistance. Pledges are made through international forums for aid for trade initiatives. However, the pace of implementation and the rate of disbursement are very slow. Some donors have played a tricky game just by renaming the regular official development assistance (ODA) as the aid for trade allocations which is not the spirit of these initiatives. Aid for trade is another stream of foreign assistance besides the regular allocation of ODA. In Nepal, we are considering creating a Fund for trade development in consultation with various development partners. An inter-ministerial task force is working on devising necessary regulatory framework for the administration of the Fund.  

 

The Government of Nepal has already taken steps for mainstreaming trade into national development agenda. Trade cannot be looked in isolation and is not a concern for the ministry of trade only. There are several entities and ministries associated with it. We have to bring them together to promote trade in goods and services. We are also aiming at getting adequate support from development partners to complement the national effort. If some products and services are important from trade perspective, they should get immediate attention for development and promotion. Support must go to the grassroots level, i.e. the enterprise level and the farm level so that benefits from export trickle down to the producers and growers. The assistance under aid for trade initiatives encompasses various sectors that contribute to trade development and thus various ministries and private sector entities have a role to play. The Ministry of Commerce and Supplies will work as the national focal point and coordinator for creating synergies of this effort.