For a country marred by an ever increasing trade deficit, trade in services appears a very plausible way to strike a balance in its international trade and generate wealth.
--BY SANJEEV SHARMA
Global trade, today, is undergoing a transformation with the balance fast shifting towards trade in services from trade in goods. According to the World Trade Organization (WTO), the governing body for international trade, trade in services now accounts for two-thirds of the global trade in value added terms. In 2017, global services exports totaled USD 5.28 trillion and goods exports amounted to USD 17.73 trillion.
At first glance, the size of the globally traded services may look smaller compared to the size of the goods trade, but the fact is that the services trade has become stronger in terms of value addition. The Trade in Value Added (TiVA), a statistical measure jointly developed by WTO and Organization for Economic Cooperation and Development (OECD) to consider the value added by each country in the production of goods and services that are consumed worldwide, shows that the services trade accounts for nearly 50 percent of the world’s exports, 70 percent of Global GDP and 60 percent of worldwide employment. Steadily, the growth of the services trade is outpacing the growth of the goods trade.
In 2017, globally, the services trade grew by 8 percent, while the goods trade grew by 4.7 percent. The evolution and proliferation of the information and communications technology (ICT) has been one of the key factors in terms of widely expanding the tradability of services.
In Nepal, the growth of the services sector accelerated during the post-1990 era of economic liberalisation. At present, the service sector is the major driver of Nepal’s economy, contributing 57 percent to the country’s GDP in FY2017/18 from 52 percent in FY2016/17 which was 26 percent in 1980. Manufacturing and agricultural sectors, meanwhile, make up around 14 percent and 28 percent respectively. According to the latest data published by the Central Bureau of Statistics (CBS), the service sector accounted for Rs 1,567.35 billion out of a GDP of Rs 3007.25 billion in FY2017/2018. The manufacturing sector stood at Rs 385.73 billion and the agriculture sector at Rs 767.73 billion.
Basically, the service sector in Nepal comprises of subsectors such as banking and financial services, travel and tourism, communication services, IT enabled services (ITEs) and business process outsourcing (BPO), labour services, health, education, retail and transport. Despite the high growth, Nepal has not been able to tap the potential in the trade in services with other countries. Excluding the remittance inflow, the size of services exported is relatively smaller in the country’s external balance. In FY2017/18, the country received Rs 177.47 billion in services exports from Rs 158.26 billion in FY2016/17. In the first two months of the current fiscal year, the income amounted to Rs 27.30 billion.
Sector-wise Services Export Scenario
The Nepal Trade Integration Strategy (NTIS) 2016, the revised strategy comprising of nine goods and three services to promote the exports of high value products, has prioritised tourism (including leisure, business, education and medical) BPO and IT Engineering, IT and labour services (remittance generating services) as earmarked sectors with high export value for Nepal. Nonetheless, labour services and tourism are the only sectors performing well at present.
Travel and Tourism
So far, travel and tourism has remained the major source of foreign currency for Nepal for many decades. Visitor exports accounted for 28 percent of the country’s total exports in 2017. It is estimated to grow by 5.3 percent in 2018. From 2018-2028, visitor exports is expected to grow by 5.2 percent annually, accounting for 32.0 percent of the total exports. In 2015 and 2016, Nepal logged negative visitor exports, due to the twin impacts of the Gorkha Earthquake and political unrest in the Terai region.
After the end of the Terai turmoil in early 2016, the Nepali tourism sector not only revived but the arrival of tourists also reached an all-time high. In 2017, the number of foreign visitors in Nepal totaled 940,201. Similarly, in the first nine months of 2018, the number reached 772,798, up 19.8 percent from the corresponding period of 2017. With nearly 90,000 visitors coming to Nepal on a monthly basis over the last few months, the figure is expected to touch the one million mark by the end of 2018, which will be a record-high number for Nepal in terms of the arrival of tourists. It will be phenomenal if the government’s announcement of welcoming two million visitors in 2020 is realised.
Despite the high tourist footfall, the country has not been fully benefitting from visitor exports. For instance, over the last 10 years, the average daily spending of tourists has fluctuated with their decreasing length of stay in Nepal. In FY2016/17, the average daily spending was USD 52 which was USD 73 in FY2007/2008. Similarly, the average spending per visit of foreigners declined to USD 695 in FY2016/17 from USD 860.30 in 2007/2008. During the first six months of FY2017/2018, the average daily spending slightly increased to USD 54 but the average spending per visit declined to USD 680.4.
This ultimately means a dip in the income of the Nepali travel and hospitality services providers. This issue has arisen because the government and the private sector haven’t been able to persuade foreigners to stay and spend more by offering new tourism experiences. Alongside the soaring tourist arrivals, the current high value of the greenback has been offsetting the impact of the decreasing spending of tourists in Nepal.
Nepal is among the main labour exporting nations in the world supplying many job markets with low-skilled and semi-skilled workers. For the last two decades, remittance inflow has been the lifeline of the Nepali economy. The money sent by migrant workers working in job markets such as the Gulf nations, Malaysia, South Korea and India alongside other countries, has been the key factor for offsetting the adverse impacts created by the severe downturn in industrial and agricultural productivity due to the political instability and unfavourable business climate. The money earned from the export of labour has given rise to a frenzied climate in a range of economic activities including imports, domestic consumption, and transactions in real estate and stocks.
According to a report published by the Ministry of Labour in April of this year, the remittances inflow in the country in FY2016/2017 totaled Rs 699 billion, making Nepal the fourth country in the world with the highest proportion of remittances to GDP. In the last fiscal year, the country received Rs 755.05 billion in remittances. In the first three months of the current fiscal year, such inflow reached Rs 242.17 billion, an increase of 37.3 percent from the corresponding period of the last fiscal year. During the review period, net transfer income rose by 33.4 percent to Rs 270.73 billion. However, on the basis of work permits issued by the government, the number of Nepali workers going abroad for jobs fell dramatically by 36.7 percent compared to a year earlier. At the moment, the strong US Dollar is behind the higher value of remittances. In dollar terms, remittance inflow increased by 24.5 percent in the first three months of the current fiscal year compared to the corresponding period of the last fiscal year.
Already, there are signs that Nepal may face difficulties if it continues its overdependence on labour force exports. Until the US Dollar stays strong, things will relatively run fine in terms of receiving higher remittances inflow. Meanwhile, the consistent growth of remittances inflow is unsustainable in the long run for Nepal has not been able to identify new job markets and the existing markets are likely to get saturated in the foreseeable future. Nepal is also ill-prepared to absorb shocks in case of headwinds like volatility in oil prices and geopolitical tensions in the Middle East affect the macroeconomic stability of the nations that have become home to many Nepali migrant workers.
Over the last 15 years, ITEs-BPO has emerged as an industry with strong export potential for Nepal. The roots of ITEs-BPO in the country can be traced back to 1982 with the establishment of a company called Data System International (DSI). The company was a US-Nepal joint venture which commenced its operations mainly to cater to the software solutions needs of foreign clients. After the closure of DSI in the mid 1990s, Nepali IT startups stepped up in the area left by BPO. In the late 1990s and early 2000s, the establishment of medical transcription services and call centres heralded a new era of ITEs-BPO in Nepal.
At present, around 20 medical transcription companies and 500-600 call centres are estimated to be operating across the country. After 2000, several companies came into existence providing a diverse range of services from database management, management information system, healthcare data solutions, industrial and commercial software development, e-commerce, web design, big data, data analytics and animation along with development of mobile applications, digital content and video games components, among many others. After the mid 2000s, offshore units of some large foreign IT companies were also established in Nepal.
It is estimated that the total annual turnover ITEs-BPO companies in Nepal stands somewhere between Rs 8-10 billion at present. In its 2010 report titled “IT and IT-Enabled Services Industry in Nepal: An Assessment and Prioritized Recommendations”, the World Bank mentioned that Nepal exported IT services worth USD 10-15 million in 2007, which is far below the country’s actual potential. According to the bank, Nepal has the potential to export IT services up to USD 1.1 billion annually and generating employment opportunities for 40,000 Nepalis in the tech sector. “Government incentives and policies are not IT/ITES export-friendly in terms of both demand generation (Nepal brand promotion, tax holidays, etc.) as well as supply creation (talent and skills development),” the World Bank stated in its report.
Because of the secretive operational manners of the IT firms, it is difficult to determine the amount of their exports. The government has also not been able to record IT services exports due to its own limitations in data collection. However, the International Telecommunication Union (ITU), a UN agency working in the field of ICT development, in a report published in 2014 stated Nepal as a net exporter of communications services, with the value of communication exports rising from USD 58 million in 2010 to USD 355 million in 2013, averaging a 77 percent per annum growth in the period. Similarly, the Investment Board Nepal mentioned that export of ICT services reached approximately 51.7 percent of the total exports of the country in 2013.
Widening the Horizon for Trade in Services
At a time when Nepal’s competitiveness in the goods trade is quite low, there is a need for the government as well as the private sector to intensify their efforts in diversifying the services exports. The development of ICT infrastructures, increasing air and land connectivity and the expansion of the domestic services sector all present a lot of opportunities to generate cash. For instance, the financial sector can be an attractive avenue for the country’s services exports.
In May, Finance Minister Dr Yubaraj Khatiwada during a public function expressed that the time had come to work to export insurance services. “We have been importing services through the re-insurance. Now there is a need to export insurance and re-insurance services to narrow the deficit in financial services,” he said.
Nepal Reinsurance Company Limited (Nepal-Re), which is the only Nepali reinsurer, is already working as an exporter of insurance services. “We have re-insured insurance policies issued by 50 insurers of 30 countries,” Chirayu Bhandari, CEO of Nepal-Re informed New Business Age. According to him, the company earned Rs 750 million from the re-insurance of foreign insurance policies in the last fiscal year. “We have targeted to collect Rs 7 billion in premium from inside and outside the country,” he said.
Healthcare also carries the potential of being a service export. The Tilganga Institute of Ophthalmology (TIO), for example, has been attracting patients not only from neighbouring countries but also from East Asian nations. TIO has also been exporting intraocular lenses to countries including China, Pakistan, South Africa, Cambodia, Thailand, Sri Lanka and Vietnam. The institute has been producing and exporting high quality lenses since 1995. TIO, which exported 219,000, 158,000 and 263,000 pairs of lenses in 2014, 2015 and 2016 respectively, has set a target of exporting 700,000 pairs for 2018.
The opening of international-class hospitals has opened doors for medical tourism in Nepal. Some healthcare institutions namely, Norvic International Hospital, Grande International Hospital, Nepal Cancer Hospital and Nepal Mediciti Hospital are already providing services to foreign patients. The low cost of medical services in Nepal compared to the developed and many emerging economies makes it attractive for foreigners to get services here. In the healthcare segment, telemedicine can also be another exportable service.
Likewise, there are also opportunities in exporting education services. While the quality of public education is questionable due to the government’s negligence and politicisation of the system, the quality of education provided by private colleges, particularly those having foreign affiliations, have been received well in other countries. By improving the quality of local education and by increasing the number of academic programmes accredited by reputed foreign universities, Nepal can become an education hub to attract international students.
Though the size of services exports has grown noticeably over the past decade, Nepal is still in its infancy when it comes to trade in services. For Nepal, it is important to remove the bottlenecks in order to realise the potentials in trade in services. Strengthening the domestic services sector through measures like subsidising export-oriented businesses, providing human capacity development support along with putting efforts to remove tariff and non-tariff barriers to trade can be essential in heralding a new era of services exports.
In a 2018 report titled ‘A Glass Half Full: The Promise of Regional Trade in South Asia’, the World Bank has said that intraregional trade in services, such as tourism, education and medical services, and business services, is constrained by visa regimes, among other barriers. At a time when trade in services has become a top priority for the economies of the world, Nepal needs the right vision, strategy, plans and commitment to reap the benefits from high value exports.
Services Trade Integration
A Global Priority
The General Agreement on Trade and Services (GATS) has remained as the single set of rules and regulations to govern the worldwide services trade. As a result of the Uruguay Round, the multilateral trade negotiations spanning from 1986 to 1994, GATS came into force with the commencement of WTO in January 1, 1995. As per the framework agreement, WTO members are mandated to liberalise trade in services through successive rounds of negotiations.
GATS basically covers four supply modes of services delivery in global trade.
After GATS came into effect in 1995, more than 50 bilateral and multilateral agreements have been signed incorporating the liberalisation of ‘trade in services’. The proposed Trade in Services Agreement (TiSA) between the United States and the single market European Union (EU) is being looked upon as a milestone in expanding the horizon of the worldwide services trade. TiSA, which is currently under negotiations, is expected to cover 70 percent of the global services market and is aimed at liberalising trade in services including banking, energy, healthcare and transportation. The importance of the overarching agreement between the two largest markets in the world is further highlighted by the fact that the services sector comprises 70 percent of the USA’s GDP and about 75 percent of that of EU. Nevertheless, TiSA negotiators have faced criticisms after WikiLeaks, a non-profit media organisation which publishes classified and secretive information, in 2014 and 2015 leaked some documents revealing that the talks between the two parties are also aimed at privatising some public services.
After observing the successes of services trade in other regions and to cash-in on the lucrative oppurtunities, South Asian nations in 2010 inked the SAARC Agreement on Trade in Services (SATIS) during the 16th SAARC Summit held in Thimpu, Bhutan. Nevertheless, the implementation of SATIS has been sluggish like other multilateral trade agreements signed by South Asian countries in the past. The signatories to the agreement are yet to start the negotiations over the ‘Final Offer lists’ and ‘Schedules of Specific Commitments’ submitted by the member nations. Even after eight years of the formal signing, it is still not clear when SATIS will be implemented.
Increasing Trade Imbalance
The latest export and import data released by the Trade and Export Promotion Center (TEPC) is a stark reminder that it is getting harder for Nepal to find to find a pivot in its trade balance. According to TEPC, Nepal’s goods and services exports amounted to Rs 29.28 billion against mammoth imports worth Rs 483.75 billion in the first four months of the current fiscal year. As a result the trade deficit has swelled to Rs 454.75 in the review period from Rs 310.18 billion in the corresponding period of the last fiscal year. In FY2017/18, which ended in mid-July, Nepal registered an all-time high trade deficit of Rs 1,161.63 billion, an increase of Rs 177.56 billion from Rs 984.07 billion in FY2016/17. This was due to a 25.5 percent increase in the import bill of the country which reached Rs 1,242.83 billion in the last fiscal year compared to meagre exports of Rs 81.19 billion. It is not that exports are not growing. The growth of imports has largely outpaced the growth of exports.
The skyrocketing imports and sluggish exports have been adding pressure to the overall financial situation and the macroeconomic stability of Nepal. The latest data of Nepal Rastra Bank (NRB) clearly points out that ballooning imports is the key reason for the widening deficit of the Current Account Balance, a measure of the country’s goods and services trade and net income from foreign investments, along with a negative Balance of Payment (BoP), a measure of country’s transactions with the rest of the world. According to NRB, the Current Account Deficit (CAD) has reached Rs 81.96 billion in the first quarter of the current fiscal year from Rs 25.52 billion in the corresponding period of the last fiscal year. During the review period, a BoP deficit of Rs 35.42 billion was recorded, which was at a surplus of Rs 4.27 billion in the corresponding period of the last fiscal year.
For decades, Nepal has faced huge deficits in terms of the goods trade. This is attributed to factors such as low penetration of Nepali products in the international market and weak competitiveness of domestically produced goods, among others. Unfortunately, services exports also seem to have started to follow this trend. In the first quarter of the current fiscal year, deficit of the services trade has climbed to Rs 11 billion. During the review period, Nepal imported services worth Rs 38.32 billion, while the export of services totaled Rs 27.30 billion. The last fiscal year marks the end of the services trade surplus for Nepal which the country had been enjoying since FY2011/2012. In the first nine months of FY2017/18, a deficit of Rs 2.79 billion was registered in the services trade. However, services trade remained in the surplus area for the whole fiscal year. Besides commercial services imports, the growing number of outbound tourists from Nepal is being cited as the main reason behind this.
According to NRB, Nepalis visiting other countries as tourists have spent about Rs 29 billion in the first three months of the current fiscal year compared to Rs 15 billion spent by foreign visitors in Nepal. In the last fiscal year, Nepalis spent almost Rs 80 billion while travelling abroad, a jump of 40 percent from FY2015/16. Meanwhile, the total value added earned from the travel and tourism sector was Rs 177 billion in FY2017/18 from Rs 158.26 billion in FY2016/17. The increasing number of Nepalis travelling to other countries has added pressure to the country’s US Dollar reserve. The gross forex reserve came down to USD 9.75 billion in mid-September from USD 10.08 billion in mid-July, forcing NRB to impose limitations on the amount of US Dollars Nepali passport holders can exchange while travelling abroad, and the money Nepali businesses can send through telegraphic transfers (TT) outside the country for import related payments.