Nepal has been making concerted efforts to make exports sustainable since 2004 with the launch of the Diagnostic Trade Integration Studies (DTIS). The programme, however, was not successful in achieving the desired results because of flaws in implementation. The government then launched a second version of DTIS titled Nepal Trade Integration Strategy (NTIS) in 2010 and a follow-up version of that work in 2016.
NTIS 2016, a five-year programme, 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 programme is geared towards enhancing export competitiveness by creating a business-friendly legal and regulatory framework and raising the access of the private sector to trade facilitation services. Yet the performance of the export sector has been subpar, with growth standing at four percent per annum, on average, since 2000.
NewBiz Editor Rupak D Sharma talked to Dr Ratnakar Adhikari, executive director of the Geneva-based Enhanced Integrated Framework at the World Trade Organisation, which is supporting NTIS’s implementation in Nepal, about the reasons for the slow growth in exports, ways to diversify exports, and measures that Nepal should take to make exports sustainable. Excerpts:
Nepal has been trying to promote exports in a planned manner since 2004 with the introduction of the Diagnostic Trade Integration Study (DTIS) and later the National Trade Integration Strategy (NTIS). But export items have not been able to move up the value chain. What went wrong?
Enhanced Integrated Framework (EIF) at the World Trade Organisation has been supporting implementation of trade integration strategies in Nepal and other least developed countries following the principle of national ownership. The EIF has a policy of not interfering in the works of governments across the globe. We do comment on the content of the report on trade integration strategies prepared by governments. But it is up to the individual government to decide whether to heed our advice. This makes NTIS a nationally-driven programme. The major flaw in Nepal’s NTIS is that it does not ensure adequate investment in three key areas: infrastructure, human capital and skills development, and technology, which are crucial to strengthen supply capacity. Enhancement in supply capacity generally helps countries to add value to products and expand trade.
Unfortunately, NTIS does not provide concrete plans to ramp up investment in the infrastructure sector to remove bottlenecks. Also, the focus of skills development component is very narrow, as it is limited to expanding IT education and enhancing the skills of people leaving the country for foreign employment destinations. Skills development is crucial to make exports sustainable because activities, such as processing, which raises the value of a product, require quality human resources. Quality of human resources also determines the chances of integration of Nepali goods into regional or global value chains. But Nepal does not have a very big pool of skilled human resources and it needs to focus in this area.
Technology is another area where investment must be increased. Use of low-quality technology may help in value addition to some extent but those gains will not last long because such goods will rapidly lose their competitiveness in the international market. So, these are some of the birth defects of NTIS. Yet the NTIS did contain some salient features in cross-cutting areas like standardisation, and trade and transport facilitation. So, we were expecting some good results.
Has Nepal been able to focus on implementation of those salient features?
Export growth of Cambodia, for example, has been exponential since it launched its Trade Integration Strategy in 2014 because it focused on implementation of the programme. In Nepal, on the other hand, policies framed after conducting rigorous research are not implemented in a desired manner. This is the major problem in the country.
This, however, does not mean Nepal has not done anything. Nepal’s exports of cardamom and tea, for example, are increasing. One of the reasons for this may be growth in production. Also, initiatives taken by the private sector have made some contribution. But at the same time, we cannot deny the supportive role, however small, played by the government.
You just mentioned the growing exports of tea and cardamom. But they are still being exported without adding much value. This is the same with exports of ginger. Why has the country not been able to tap this potential?
This again boils down to lack of investment in infrastructure, technology and skills development. EIF has approved a project to support tea exports from Nepal. It has not been formally launched yet due to the Covid-19 pandemic. So, I hope to share some good outcomes in the coming days. A programme that I’ve closely monitored is related to ginger. This programme was implemented by the Food and Agriculture Organisation of the United Nations on behalf of the Nepal government through financial support of EIF.
Some of the components of the programme included establishment of field schools to provide training to farmers to enhance productivity; introduction of a new variety of ginger; pest control and setting up of plants to wash and dry ginger. Everything was going well since the programme’s launch and ginger washing and drying machines were also installed under the public-private partnership modality with Nepal Ginger Producers and Traders Association (NGPTA) making due contribution of the land and taking responsibility for the operation of the plants.
But the programme faced a major hurdle during the phase of drying the ginger. The dryer came with a container where ginger that was washed had to be placed. But the dryer was designed in such a way that it blew air only from the top. So, it was not able to remove moisture from the ginger lying in the lower part of container. The only solution to this problem was to repeat the drying process for ginger sitting in the container’s lower part. This eroded efficiency, thereby increasing cost and reducing the competitiveness of the goods.
By the time EIF was flagged about this problem, the project had concluded. And EIF does not have the policy of injecting additional funds into the same project because we have limited resources and we encourage countries to leverage on resources made available to them.
How was the problem fixed?
We told the NGPTA and the government that EIF’s policy barred us from providing additional financial support. This meant the government had to mobilise funds itself. But we gave the government an option. EIF had provided funds for institutional support to the Ministry of Commerce, which was implementing the project. We suggested that the government divert that money to fix the problem. But that was not done as the government indicated that it had other priorities. So, I think the problem still has not been resolved.
Surprisingly, the private sector also did not show much interest to chip in the money, even though the financial gap was just around Rs 2.5 million. Had that investment been made, ginger could have been dried in an efficient manner and sold as value added products, such as ginger powder, sliced ginger or ginger candy, which could have fetched higher income when exported. This shows initiatives were not taken wholeheartedly to scale up ginger exports.
So, the problem in Nepal is not only about lack of resources but stakeholders’ inability to take ownership of projects; low interest in matters related to sustainability; overdependence on foreign funds; and absence of a monitoring mechanism.
Do you mean to say the private sector is equally responsible for low export growth?
I don’t want to generalise the situation. Look at some of the private companies that are exporting tea. They are doing extremely well because they are producing high-quality tea. Yes, these are isolated cases, but those with a vision are achieving great results as well. So, the entire private sector should not be blamed. But, yes, there are some private players who want the government to do everything for them so that they can make easy money.
Even in the case of ginger, NGPTA mobilised resources from Unnati -- a programme supported by the Danish government -- and added two more washing plants. I saw this myself during my visit to the plant in March 2019. But without proper dryers, value could not be added properly to scale up exports. So, it is also about how one sets priorities.
For years Nepal has focused on exports of a limited number of goods. But lately new sectors have emerged worldwide. Don’t you think it is time for Nepal to diversify its export basket?
Nepal should find new sources of growth to enhance value addition, increase exports in a sustained manner and reduce over-dependence on a single market. One area which can emerge as new growth source is digital economy. Nepal has been doing a pretty good job in producing IT graduates compared to other least developed countries. In 2017, Nepal was producing about 5,400 IT graduates per year. The number must have gone up now. These graduates can be used to provide services in the lower end of the artificial intelligence (AI) value chain. Of course, the work at the upper end of the AI value chain is still done by developed countries, but there are activities like data input or scrubbing that are done in the lower end and Nepal’s IT graduates are capable of doing those jobs. This will help Nepal to become a part of the global value chain.
I have visited a few IT companies in Nepal and they are producing software for renowned international companies. But Nepal needs to understand the requirements of the international market and chart out a plan to promote collaboration between private IT companies and academic institutions. This will also stem the outflow of migrants from Nepal.
Are there any other new sources of growth for Nepal?
Another area where Nepal needs to focus on is e-commerce. Currently, e-commerce is only being used to cater to domestic consumers in the country's urban centres. But this platform has the potential to contribute to export income as well. EIF, in partnership with the UN Economic and Social Commission for Asia and the Pacific, launched a programme in South Asia a year ago to build capacity of 500 women in selling products using online platforms. This small initiative can foster e-commerce in the region and raise exports. We can expand its operation based on experience from this project.
Another area where Nepal can perform well is pharmaceuticals, as it is eligible for patent waiver because of its status as a least developed country. We should have cashed in on this opportunity earlier like Bangladesh, but it is still not too late. We can invite investors from India and other countries to bridge the gap of financial resources and expertise. Lately, the concept of circular economy, which focuses on limiting waste and pollution, recycling, and use of renewables, is also gaining traction. Nepal can embrace it to create high-value products. Lastly, Nepal needs to reap benefit from its biodiversity as well.
By biodiversity, do you mean to say exports of medicinal and aromatic plants?
Yes. Nepal has a big reservoir of medicinal and aromatic plants. But we have not used these resources to maximise our income. For example, we are selling most of these resources in their raw form. We could generate additional income if we could convert them into essential oils. The value addition would not only create additional jobs, but reduce the number of non-tariff barriers, because exports of essential oils that meet international standards will be subject to less scrutiny than plants exported in raw form for which standards can be set haphazardly. Currently, the expected ratio of exports of raw medicinal and aromatic plants to essential oils is around 80:20. We can set a goal of changing that ratio to 30:70 in five years with incremental annual milestones.
The examples that you just gave to intensify integration into regional or global value chain also requires foreign direct investment. But FDI flow to Nepal is still less than a percent in proportion to its GDP. Isn’t this worrying?
The Covid-19 pandemic is likely to change the supply chain landscape. Lately, we have started hearing terms like ‘near-sourcing’, ‘re-shoring’ and ‘sustainable sourcing’, as there is a growing realisation that businesses must diversify their sourcing strategy. Japan and South Korea have started abandoning China and are relocating to countries like Vietnam and India. This presents an opportunity for Nepal to increase the FDI flow.
Of course, we lack infrastructure, technology and skills, but we can invite them to our special economic zone, where such barriers are minimal. We should focus on our strengths and invite foreign investors. At the same time, we need to develop coherent policies and build the capacity of our institutions. Nepal needs to thoroughly assess the barriers to foreign investment and design targeted capacity-building programmes to resolve the issues.