Energising EXPORTS

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Energising EXPORTS

Nepal has not been able to see exports as an important driver of economic growth, job creation and inclusive development.


--BY RUPAK D SHARMA

When Uday Chapagain, owner of Gorkha Tea Estate, shed the conventional production of orthodox tea and went organic in 2009, his harvests fell by around 40 percent. He was told beforehand that his output would drop once chemical fertilisers and pesticides were replaced with compost and manure. So, he was not worried, as his ambition was to “deliver quality tea to the international market that would, as a by-product, generate better income”.

But many farmers that Chapagain has met do not think the same. “They’re worried about yields and are not sure whether it’s worth taking the risk,” says Chapagain, who has dedicated around 600 ropanis of land in the eastern Nepali district of Ilam to tea farming.

Organic farming has been gaining traction across the globe, as it does not involve the use of chemical or synthetic substances. Instead, insects such as ladybugs, plant derivatives such as neem oil, and animal and plant wastes are used to maintain soil fertility or fight pests. This not only creates ecological balance but keeps health hazards at bay, as consumption of anything laced with chemical or synthetic substances for a long period is not deemed beneficial for humans. What’s more, organic farming preserves antioxidant properties inherent in the orthodox tea, enhancing the taste and quality of the cuppa.

But organic farming may not be everybody’s cup of tea as it entails a rigorous process especially in applying compost and manure. “In conventional farming, one person can easily fertilise the plants grown on a ropani of land in a day,” explains Chapagain, who produces 60,000 kg of organic orthodox tea per year. “But in an organic farm of the same area, you’ll need 30 people to do the job because multiple processes are involved. This is another factor that is holding off farmers from taking up organic farming.”

Nepal produced 24.1 million kg of tea on almost 17,000 hectares of land in the last fiscal year, according to the National Tea and Coffee Development Board. Of this tea, 8.2 million kg, or 34 percent, was orthodox. But less than five percent of this orthodox tea is organic, says Chapagain.

Moving up the value chain
Some of the leading producers of organic orthodox tea in Nepal besides Gorkha Tea Estate are Guranse Tea Estate, Himalayan Shangri-La Tea Producers, Jun Chiyabari, Kanchanjangha Tea Estate, and Mist Valley Tea. These tea estates started off as producers of conventional orthodox tea. But as they grew older, they moved up the value chain, producing superior products, like organic orthodox and other specialty teas.

Improvement in value chains generally leads to production of sophisticated products. These products cost more but there are customers who do not hesitate to pay premium because of the quality. No wonder, big tea producers, like Rakura Tea Group, are also planning to jump on the organic bandwagon to cater to high-value customers who are willing to pay extra for quality products.

Nepal has been exporting high-quality tea to countries such as Germany, Czech Republic, the US and Japan. Nepal, for example, exported 51,584 kg of tea to Germany in the last fiscal year, earning Rs 79.2 million. This means each kg of tea, on average, was sold for Rs 1,535. This earning is almost seven times more than that generated from India, where 10.8 million kg of tea was sold in the last fiscal year for Rs 2.5 billion, meaning each kg fetched just Rs 230.

Income generated from India is low because the tea is unpackaged and is sold to vendors in Kolkata, who package and re-export the produce to other countries under the brand name of Darjeeling and Assam, says Chapagain, who entered the tea business in the mid-1980s. If Nepal could expand production of quality tea, add value, and sell it in the international market, Nepal’s export earnings from the product, which stood at Rs 2.8 billion (approximately USD 24 million) in the last fiscal year, could easily surpass that of Sri Lanka, which generated USD 1.1 billion in 2020, Nepal’s tea producers say.

Tea is one of the few Nepali products that could rapidly drive up Nepal’s export earnings, as it is the second most consumed drink in the world after water and its consumption is growing globally. Global tea consumption stood at 6.3 billion kg of tea in 2020, according to Statista, a provider of market and consumer data. This figure is projected to jump to 7.4 billion kg by 2025.

“Nepal has a very high potential in grabbing a bigger share of the international tea market because its bushes are young and the soil productivity is high. These factors help generate better yields,” says Chapagain, who has been playing an active role in shaping conservations and policies surrounding the tea sector.

Not a storm in a teacup
Tea is one of the top 10 foreign currency earning commodities for Nepal, but its share in the global tea market is not even one percent. Some of the names that are well known in the global tea market are Darjeeling, Ceylon, Assam, Chinese and Japanese. Yet Nepali tea is gradually carving a niche for itself because of its smoothness, aroma and aftertaste. These qualities have drawn some excellent reviews from tea connoisseurs and purveyors and led Nepali products to bag awards in international tea championships. But there is a catch: the quality of Nepali tea is not consistent like the product of Darjeeling, which borders eastern Nepal.

This is because Nepali tea is grown on smaller plots by small-scale farmers where production processes are not uniform. Darjeeling tea, on the other hand, is grown on extensive areas of land leased from the government by a limited number of industrialists. The upside of Nepali tea production model is that it has benefited over 14,000 small-scale farmers, whose incomes are rising in tandem with the tea sector’s growth. This is unlike in Darjeeling, where tea gardens generally hire daily wagers to carry out most of the work. This has restricted earnings made by tea producers from trickling down. Some tea producers say this story behind Nepali tea needs to be sold in the international market to drive up sales. But others say this will only attract sympathetic buyers, so focus needs to be on making the quality consistent.

“Nepal fails to supply the same quality of tea year after year because there is no uniformity in plucking the tea leaves, which is an important step in production,” says Rabi Rathi, executive director of Rakura Tea Group, which owns three tea factories in eastern Nepal.

Harvesting tea leaves, according to Rathi, is an art, which entails plucking two leaves attached to a bud. So, the idea is to pluck the leaves when they are young, without letting them overgrow. “I’ve seen farmers delivering the entire branch of a tea plant with five to six leaves hanging from them,” says Rathi. “Those harvests generate more revenue for farmers because they weigh more, but they are not ideal to making the perfect cup of tea.”

Another problem that has hit the quality of Nepali tea is excessive use of pesticides. “Small-scale farmers use these chemical substances haphazardly, eroding the quality of tea,” says Rathi, adding, “These are two areas where federal, provincial and local governments must set standards. Otherwise there won’t be consistency in quality.”

Weak export base
The problems identified by Rathi are not unique to the tea sector. Every Nepali export item sold in the international market has faced quality issues. Exporters then seek government support – to set new standards, introduce favourable regulations, provide incentives, ease administrative processes, or facilitate supply of raw materials and inputs like fertilisers – to overcome the problem. But the government assistance often comes too late or does not come at all. This creates obstacles for enterprises intending to grow a global footprint. Ultimately, goods are exported to markets such as India without adding much value, which generate very little income. Look at the condition of high value agricultural products, such as cardamom and ginger, produced in Nepal. Most of the farmers sell these products in raw form mostly in India at a tiny fraction of what they can fetch from other markets. Had Nepal been able to process and package them, much more value could have been added. This could have created more employment opportunities and raised the income of farmers as well.

This shows Nepal so far has not been able to focus on product and process development, which has prevented formation of a strong export base. For example, there is lack of transport and energy infrastructure to support exports; quality of institutions to raise exports is inferior; taxes are imposed on raw materials and intermediary goods without doing much study; there is no focus on using latest technology to enhance productivity; and very little attempt has been made to build strong linkages with international markets. All these shortcomings have prevented Nepal from cashing in on opportunities that come its way.

Readymade garments, for example, was once Nepal’s biggest export item. Its contribution to total exports stood at about 49 percent in fiscal year 1999-2000. The exports of readymade garments collapsed after the abolition of the multi-fibre quota regime on January 1, 2005, leading to a slump in sales in the US, the buyer of almost 80 percent of Nepali products. Nepal then lobbied hard for preferential access to the US. But at the same time, it did not focus on enhancing the skills of workers, upgrading technology, reforming labour and tax policies, and reducing logistics and other transaction costs. Bangladesh, on the other hand, introduced various reforms and took advantage of its cheap labour to resurrect the industry. These measures have helped Bangladesh to become the second largest exporter of garments in the world after China, whereas Nepal still never gets bored talking about reviving its readymade garment sector even after all these years.

Another area where Bangladesh has advanced rapidly is pharmaceuticals. The South Asian country took advantage of the patent waiver facility extended to least developed countries to advance its pharmaceutical sector. It is now the only least developed country that can produce vaccines. Nepal was eligible for that waiver too. But it could not tap the opportunity. Nepal’s inability to respond quickly when opportunities knock on its door has made its export basket narrow. This has made exports unstable and weak, and has given rise to breed of exporters that focuses on making easy money.

Short export life
Just look at the top export commodity of Nepal in the last fiscal year. It was palm oil. Ironically, Nepal does not even have a single palm farm. Yet Nepal exported palm oil valued at Rs 18.3 billion to India in the last fiscal year, accounting for almost 19 percent of total merchandise exports earnings. The export of this commodity, all of a sudden, has plunged to less than half a million rupees in the first nine months of the current fiscal year after India halted its imports at the stroke of a pen.

Exports of the commodity had grown entirely because of duty differences. Nepali exporters spotted a duty arbitrage opportunity after India started imposing a duty of 40 percent or more on imports of crude and refined palm oil from Indonesia and Malaysia, the world’s two major palm oil producers. Imports of palm oil from Nepal, on the other hand, were subject to zero taxes under the South Asian Free Trade Agreement. This prompted Nepali exporters to import crude palm oil from Indonesia and Malaysia, process and package it, and export it to India, with very little domestic value addition. But exports crashed after India suspended import licenses. Since then, Nepal’s exports of soybean oil to India have surged. Nepal exported soybean oil worth Rs 28.8 billion in the first nine months of the current fiscal year, accounting for 30 percent of total merchandise exports. Exports of soybean oil are expected to meet the similar fate of palm oil, because India holds the power to revoke the permit anytime.

Perhaps, this is the reason why Nepal’s exports do not last long. Only four out of 10 export flows that start each year survive past the first year, according to the World Bank’s latest report. On average, the country’s export spell is about 2.7 years, 10 percent shorter than Cambodia’s three years. This has raised questions on sustainable development of Nepal’s exports (both goods and services), as their contribution to GDP has now dropped to five percent from 10 percent six years ago.

Exports gone south
Nepal has made an attempt to make exports sustainable by launching Nepal Trade Integration Strategy (NTIS) 2016, which provides a roadmap on value chain development of four agro and forest products (cardamom; ginger; tea; and medicinal and aromatic plants); five craft and manufacturing products (all fabrics, textile, yarn and rope; leather; footwear; chyangra pashmina; and knotted carpets); and three services (skilled and semi-skilled professionals at various categories; information technology and business process outsourcing; and tourism). The overarching goal of this programme -- built on Diagnostic Trade Integration Studies 2004 and NTIS 2010 -- is to create a business-friendly legal and regulatory framework, and raise the access of the private sector to trade facilitation services, thereby enhancing competitiveness and trade performance.

But exports of merchandise goods listed under NTIS 2016 have not been encouraging. Exports of all commodities enlisted in NTIS, except for those of medicinal and aromatic plants, fell in the last fiscal year. In aggregate, their exports fell by almost 19 percent apparently due to the Covid-19 pandemic. But even a year before the pandemic, exports of goods listed in NTIS had gone up by a mere two percent, with exports of cardamom, ginger, tea, leather items and footwear recording negative growths. Also, services exports have not achieved sustained growth as envisaged, according to Ratnakar Adhikari, executive director of the Geneva-based Enhanced Integrated Framework at the World Trade Organisation, which is supporting NTIS’s implementation in Nepal.

“The NTIS faced three major problems,” says Adhikari. “First, key requirements to address binding constraints to trade growth such as upgrading infrastructure, enhancing use of technology, and investing in human capital have not been the major focus of NTIS. Second, there is still a serious lack of coordination within various ministries let alone the private sector. Third, there are problems in addressing seven cross-cutting issues identified to provide a boost to exports such as building trade capacity, creating a conducive environment for trade and investment, ramping up trade and transport facilitation, and strengthening standards and technical regulations.”

These constraints have not only affected NTIS items, but almost every product that Nepal intends to sell abroad, limiting Nepal’s export growth to four percent per annum, on average, since 2000. The repercussion of subpar export growth could be seen in diversification of both exports and export destinations. Nepal, for example, exported 1,167 product varieties to 146 countries in 2009. By 2017, product varieties fell to 1,093, while the number of countries these goods were exported to dropped to 124. Nepal therefore features among the 20 countries in the world with the slowest export growth in the past two decades.

Missing exports
As Nepal’s exports are floundering, the gap between Nepal’s actual exports and potential exports is widening. A working paper of  the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) says that Nepal’s merchandise export potential stood at USD 2.31 billion in 2017 as against the actual exports of USD 741 million in that year. This meant Nepal had not even tapped into a third of its export potential in that year. The World Bank recently used the same economic model to find out Nepal’s new export potential. It found Nepal’s export potential, estimated at around USD 9.2 billion per annum, is 12 times more than its actual annual merchandise exports. If the report is anything to go by Nepal is under-exporting by over USD 2.2 billion to China, by about USD 1.2 billion to India, by about USD 800 million to the US, and by about USD 700 million to Japan. Nepal’s “missing exports” are substantial across all sectors. Of note is the high level of missing exports in final apparel products (over USD 1.2 billion), as well as intermediate and final processed food (USD 800 million and USD 500 million, respectively), says the World Bank report. If Nepal is able to increase its exports to its full potential of USD 9.2 billion, an additional 220,000 jobs could be created, notes the report. This means retaining about two-thirds of the Nepalis who migrate every year to countries in the Gulf and Malaysia.

“Tapping into Nepal’s potential requires overcoming substantial challenges related to low levels of foreign direct investment, high trade costs, lack of accredited laboratories to certify agricultural exports, and inadequate digital infrastructure,” adds the report.

Nepal has been intending to overcome some of these challenges by establishing special economic zones. Over the years, at least 14 locations across the country have been identified to establish SEZs where export-oriented enterprises would be subject to a more liberal tax regime and favourable business environment than elsewhere. But so far only one SEZ has been built in Bhairahawa.

Special zones have played a crucial role in ramping up industrial development and attracting foreign investment in China, Bangladesh, Honduras and Mauritius. These special zones provided the necessary infrastructure, an array of incentives, and supportive legislative and administrative frameworks for the private sector to grow, while working as a facilitator to complete various bureaucratic processes on behalf of enterprises. For example, Bangladesh Export Processing Zone Authority helps enterprises to obtain licenses and approvals, and its recommendations are taken very seriously by other government agencies. But in Nepal the only SEZ has not been able to provide the services it has pledged.

The special zone in Bhairahawa was supposed to provide a ‘one-stop-service’ to obtain tax concessions and other benefits, register and renew companies, obtain visas, and complete administrative processes. But no such service is available. The SEZ was also supposed to allow enterprises to import plants, machinery and equipment against the bank guarantee equivalent to custom duties those imports draw. The bank guarantee should have been released following installation of imported plants and machineries. But operators of plants in Bhairahawa SEZ still have to deposit the amount equivalent to custom duties, thanks to lack of coordination among government agencies. What’s more, the special zone still does not have a dedicated supply of electricity.

No wonder then that the special zone, spread over 52 bighas and containing 69 plots ranging from 1,400 to 3,700 sq m, is largely vacant even after two decades of its establishment. At present, only three factories are operating there and six are under construction. Agreements have been signed to set up around 22 factories, but it is not known when they will set up plants.

New opportunities
The problems faced by the special zone in Bhairahawa are identical to the ones experienced by India. The first SEZ established in India in 1965 and six more founded in 1980s failed to yield desired results because of rigid policies, unattractive incentives and lack of a single window facility. By 2000, SEZs merely accounted for five percent of exports and 0.2 percent of employment in India, says a 2015 Asian Development Bank report. Then in 2005, India formulated a comprehensive SEZ Act “to overcome institutional hurdles and facilitate SEZ investment”.  By 2014, Indian SEZs were accounting for 26 percent of exports and 4.2 percent of employment.

There is always room for Nepal to learn from the mistakes made by India to streamline the operation of the special economic zone. But again special zones are not a panacea for all the problems that Nepal’s exports sector is facing. So improvements should be made in other areas as well. Nepal’s Achilles heel has been its inability to raise the flow of foreign direct investment, which as a proportion of GDP stands at below one percent largely because of unfavourable policies. FDI enables countries to integrate into global value chains, helping create a virtuous cycle for exports.

Foreign investment in the fast-moving consumer goods segment, for example, has significantly raised exports of fruit juice from Nepal, turning it into one of the top 10 export items over the years. Foreign investment in the cement sector, on the other hand, has not only made Nepal self-sufficient in cement and clinker production but paved the way for the country to explore possibilities of exporting the surplus. Nepal must attract foreign investment in an array of sectors, which could raise the possibilities of selling new products in the international market. One such sector could be digital economy, as some of the IT companies in Nepal are already providing world-class services to renowned international companies. Even upgrading skills of people growing tea, cardamom and ginger and introduction of new technology in these sectors could help Nepal generate more foreign currency.

When exports go up, firms are exposed to competition abroad which leads to transfer of knowledge as well as technology. This transfer of knowledge and technology can enhance productivity, which, in turn, could raise output. Nepal must see exports as an important driver of economic growth, job creation and inclusive development.

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