A Retrospective and Prospective View of Nepal's Foreign Trade

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A Retrospective and Prospective View of Nepal's Foreign Trade

Agricultural land, forest, and mining products were the basis of Nepal's foreign trade during and before the political change of 1950. After 1950, Nepal’s export basket started shrinking and was soon limited to export of few agricultural products.

--BY KRISHNA RAJ BAJGAIN

By the time of the Sixth Five-Year Plan, Nepal had become a net importer of agricultural products. Nepal's foreign trade deficit reached Rs 13. 40 trillion in Fiscal Year 2020/21. In this situation, along with the failure of the efforts made so far, the need for a radical change for the overall development of Nepal's export sector has been felt. In this case, investment in infrastructure development, emphasis on production of raw materials, enhancement of competitiveness of Nepali products, quality control and monitoring, promotional work, and all-round development of export industry (development of industry based on indigenous raw materials, labour, and skills) have been identified as the basic steps that Nepal must take to reduce the skyrocketing trade deficit. Further, there is a need to adopt a strategy of increasing export trade through substitution, transit facilitation, and establishment of special economic zones.    

The government needs to pay special attention to traders who are involved in export business and performing the herculean task of collecting the exportable products scattered all over the country and exporting them to the international market.    

The foundation of Nepal's foreign trade
In order to make Nepal's export trade competitive, Nepal had adopted the strategy of entering the foreign market by making maximum use of the domestically available resources in the first decade of the new millennium. At that time, agricultural products, timber and non-timber forest products, mining, handicrafts, manufactured goods, and coin supply based on domestically available raw materials were the mainstays of Nepal’s economy. The foundation of Nepal's foreign trade was laid on these three bases - agriculture, forest, and mining. Exporting goods from Nepal's Southern Belt (Terai) to India and exporting goods from the hills to Tibet was a feature of Nepal’s export tactics at that time.    

In 1770, according to the Tirhut customs collector's note, timber, wood-based finished goods, paddy, rice, grains, blankets, cotton, cardamom, orange, wax, medicine, resin, catechu, incense sticks, iron, rhino horn, skin, and birds (parrots, hawks) were exported to India. Falcons were also found to be exported to India.  One hundred years later, according to British Indian sources, grain, mustard seeds, animals, musk, Chiraito, wood, cardamom, chauri and yak tails, ginger, fragrant grass, feathers, and eagles were exported to India in huge quantities. Thus, for a hundred years, India seemed to have become the importer of Nepal's primary commodities. At the same time, the products of Nepal's mountainous area, such as Charesh, musk, woollen blankets, eagles, horses, cotton, cardamom, herbs, copper, iron, and other metals, as well as handmade and manufactured goods such as cotton cloth, wool products, utensils made from iron, copper, and bronze, Khukuri, shoes, Chura and paper, were exported to India. Raw copper and copper coins were exported from Nepal to India in large quantities.    

According to Colonel William J. Kirkpatrick who visited Kathmandu in 1793, until 1806, the copper, copper vessels, and copper coins used throughout India were supplied from Gorkha (Nepal), and Palpa was the hub of such supplies. Nepal used to supply copper coins throughout the plains of the Ganga. Most of the iron and iron products used in northern India were also supplied from Nepal. Until the Indian Railways reached the borders of Nepal, goods used to be exported through the rivers flowing towards India. According to Dr. Francis Hamilton, 400-500 manloads of goods were transported through the Koshi River by a single boat. Elephant exports were also an important part of Nepal's export trade at that time. Kirkpatrick estimates that in 1773 AD, about 200 to 300 elephants were exported to India from Koshi  Tappu alone annually. Gola (a form of export processing zone) was also established in the country to facilitate export trade.    

Not only raw timber, Nepal was also a solo exporter of processed timber products to the Indian market. A large base of wood-based industries has been established in the Terai region of Nepal. In terms of quality, Nepali products at that time were superior to other products in the world. The cotton produced in the hilly areas of Nepal was considered much better than the cotton of Bengal. Nepal's jaggery was also famous in the region. Similarly, Nepali iron was thought to be among the best in the world. According to Kirkpatrick, Nepal's hilly lands were valuable not only for agriculture but also for mining. Copper, iron, gold, and other mines were abundant in Nepal. The mountainous region used to produce a lot of wool. This profession was dominated by the Gurung and Limbu communities in particular. According to Kirkpatrick’s note, the quality of Nepal's copper is much higher than that of European copper. Rice, textiles, copper, and iron and their products and handicrafts were the major items exported to our northern neighbour at that time.    Even in the early part of the twentieth century, Nepal's export trade had not deteriorated that much. However, due to the shrinking role of Nepal in this region in the aftermath of the Sugauli Treaty, the export of metals, wool, and wood products from Nepal, almost stopped in the early twentieth century. Despite this, Nepal's trade with India was profitable till 1920-21. In 1900, Nepal's total exports to India amounted to Rs 23.6 million, while imports were worth around Rs 16.3 million. As a result, Nepal's trade profit with India stood at around Rs 7.3 million. Similarly, in 1913/14 and 1920/21, Nepal's export trade to India increased to Rs 42.5 million and Rs 59.7 million, whereas Nepal's import from India was limited to Rs 24 million and Rs 28.3 million, respectively.  

These facts and figures prove that Nepal was an exporter of raw materials before 1923. Nepal's export sector at that time proved to be a good mix of raw materials and processed goods. It is understood that exporting processed products based on domestic raw materials (agriculture, minerals, and forest) were the basic features of the export trade at that time. Nepali products with 100% value addition were produced to meet the market demand of India and Tibet, and these products were of higher quality than the products of other countries in the world. This proves Nepal's dominance in the export trade of this region. If we look at the history of Nepal, the Sugauli Treaty of 1816, the Nepal-British Treaty of 1923, and the Nepal-India Treaty of 1950 were aimed at gradually weakening Nepal's economy at that time and reducing Nepal's hegemony in trade in the region.   

Planned Development and Foreign Trade of Nepal
Political transformation in 1950 brought various sectors into the social, political, and the economic life of the country. Its worst impact was felt in the export trade regime of Nepal, upending Nepal's position from net gainer to net loser in international trade. By 1956/57, Nepal's export trade with India was Rs 95 million, while it was importing goods worth about Rs 160.90 million - a trade deficit of Rs 74 million.  

At the beginning of Nepal's first five-year plan, Nepal's exports increased to Rs 100 million, while imports expanded to Rs 170 million, leading to a trade deficit of about Rs 70 million. At that time, food, textiles, and cigarettes accounted for 50% of Nepal's total import trade, and grain and industrial raw materials accounted for about 65% of total exports. Metals and metallurgical products, which dominated Nepal's exports in South Asia, disappeared altogether from Nepal's export basket, while the manufacturing sector was displaced. Exports of livestock, timber, and timber products were also displaced. The deviation from the river-based transport system made transportation costs of Nepali products more expensive which further eroded competitiveness of Nepali products.     

Nepal's trade deficit was confined to Rs 600 million during the first five-year plan, while it reached around Rs 1.5 trillion at the beginning of the 15th five-year plan. Similarly, the export-import ratio of Nepal's foreign trade plunged to 7.5:92.5 in 2019/20, from 36:64 in the first year of the first five-year plan in 1956/57.  This vicious cycle of trade imbalances in Nepal's history of planned development era confirms that periodic plans completely failed to address issues in Nepal’s export sectors.

Bilateral and multilateral trade agreements and Nepal's export trade
Bilateral trade and transit agreements have been signed with various countries to facilitate the country's export trade, while most of the developed countries in the world have included Nepal in their list of most privileged countries. However, most of these countries have low bilateral trade with Nepal, and many countries have a huge trade surplus with Nepal. Similarly, most of the developed countries in the world, including India and China, and the European Union, have provided zero customs facilities for many Nepali products. Though multilateral and regional agreements such as the WTO, BIMSTEC, and SAFTA, of which Nepal is a member, have paved the way for easy access of Nepali products into the respective member countries, there are no signs of improvement in Nepal's export trade yet. Nepal's exports and imports in the year of Nepal's accession to the WTO, 2004-05, were worth Rs 58 billion and Rs 148 billion, respectively. Nepal’s exports in 2020/21 reached Rs 141 billion, while imports skyrocketed to Rs 1.5 trillion, resulting in a huge trade deficit of Rs 1.4 trillion.  

Policy provisions and Nepal's export trade
In order to increase Nepal's export trade with the commencement of planned development, the government has formulated and implemented export promotion policies from time to time. These policy provisions include the Bonus Voucher Scheme, implemented in 1962; the Dual Exchange System, implemented in 1978; the Single Exchange System, implemented in 1981; the Basket System and Nine Points Programme, implemented in 1983; the Industrial Policy, a series of commerce policies; and the Direct Cash Incentive, implemented in 1984.  The bonus voucher scheme was implemented in 1962 AD but failed to deliver expected results. The government then introduced the dual exchange rate in 1978 which was scrapped after just two years of implementation.    

Following the crisis in the Balance of Payment (BoP) situation in 1980, the government introduced the Economic Stabilisation and Structural Adjustment Programme (SAP). It was regarded as the first step towards liberalisation in Nepal. Along with this initial stage of Nepal's economic liberalisation, the policy of liberalisation was introduced in the trade sector as well. The New Trade and Industrial Policy and the subsequent Foreign Investment and Technology Transfer Act facilitated foreign trade to become more liberal and market-oriented with a wider role for the private sector in the national economy. In the following years, trade promotion and liberalisation efforts gradually gained momentum. Nepal became the first SAARC member country to ratify the SAFTA agreement in 1995. In 2004, Nepal became the first least developed country to become a member of the WTO through negotiations. But these efforts did little to promote Nepal's exports. In 2020/21, the country's export-import ratio was reduced to 7.4:92.6, while the trade deficit climbed to Rs 1.4 trillion in 2020/21. The country's total exports receipt was insufficient even to finance a single petroleum product.    

Trade diversification efforts
Though the bonus voucher scheme introduced in the Second Five-Year Plan has been the cause of many distortions, it played a pivotal role in promoting trade diversification with an eventual reduction in Nepal's dependence on India.  Similarly, the Third Five-Year Plan stepped up the trade diversification policy, paving the way for the signing of bilateral trade agreements with developed countries. Commodity development projects were also implemented, and Trade Promotion Centre too was established as a focal point of the government to diversify the India-centric foreign trade phenomenon. As a result, Nepal's foreign trade began to expand to many countries in the world. At present, Nepal has bilateral trade relations with more than 161 countries. However, the volume of trade has not increased accordingly.  The United States, Germany, the United Kingdom, Turkey, France, Australia, China, Japan, and Canada are the major contributors to Nepal's export trade. Similarly, China, Argentina, the United Arab Emirates, the United States, the United Kingdom, Indonesia, Australia, South Korea, and Canada are some of the major source countries in the import trade of Nepal. Nepal has a huge trade deficit with its major importing partners.    

Institutional Efforts and Nepal's Export Trade
Numerous institutions and agencies are functioning to facilitate Nepal's export trade. The Trade and Export Promotion Centre - the specialised agency to carry out Nepal’s export promotion activities - is not performing as expected. Export promotion has been identified as one of the five pillars of Nepal's economic diplomacy. However, the Nepali missions are focused on the core function of diplomacy. Had our diplomatic missions been a little more active, Nepal would not have lost its lucrative market for readymade garments in the United States and for hand-knotted carpets in Germany.   

Import Substitution and Foreign Trade Deficit
Nepal has adopted the policy of import substitution since the Second Five-Year Plan. But on the contrary, Nepal became a net importer of rice by the end of the Sixth Five Year Plan, losing its status as a world's major rice exporting country. The situation has become even more critical today.   

Current Scenario of Foreign Trade
According to preliminary data published by the Trade and Export Promotion Centre, Nepal’s total foreign trade increased by 29.9% to Rs 1680.96 billion in 2020/21, compared to 2019/20. Exports and imports accounted for 8.4% and 91.6% of the total trade, respectively. During the review period, Nepal's total exports increased by 44.4% and reached Rs 141.12 billion, while total imports expanded by 28.7% and stood at Rs 1.5 trillion.   

The Way Forward
Looking at the facts and figures, we can see that none of the steps taken in the past has improved Nepal's export trade. Problems are recurring with the same trend and frequency. Therefore, there is a need to bring a paradigm shift in Nepal's export promotion policies and programmes. To sum up, investment in trade related infrastructures, simplification of procedures, formulation of functional policy, and adequate subsidy and incentives are some measures that should be internalised in Nepal’s trade related policy measures to improve foreign trade.  

Mr. Bajgain is a Senior Officer at the Trade and Export Promotion Centre, GoN

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