Correcting the Balance
Nepal faces a crippling balance of payments. Urgent measures are required to fix this before the country plunges into an economic crisis.
It has not been a walk in the park for Nepal on the trade front lately. The Nepal Rasta Bank’s (NRB) latest report depicted a shocking and worrying picture of the Nepalese trade deficit, which widened by 30.3 percent to Rs192.52 billion in the first five months of FY2012-13. A burgeoning trade deficit of 33.7 percent with India, Nepal’s key trade partner and neighbor, played a strong role in ballooning this deficit.
There is increasing consumption of petroleum products, chemical fertilizers, industrial raw materials, vehicles and spare parts, telecommunication equipment, edible oil and gold and imports of these products have also been rising, leading to a burgeoning trade deficit. The elasticity of demand for imports in the country is low, meaning that the demand for imported items is not affected much by changes in prices of the same. To the contrary, the opposite is true for exports from Nepal. The rising cost of production, on-going political instability and ensuing effects on manufacturing units has led to dwindling domestic production of goods translating into a greater reliance on imported products.
Other intrinsic issues related to Nepal’s infrastructure, a non-diversified portfolio of trade partners and minimal focus on value-addition for exportable goods have also kept the country’s trade account in an abysmal state. Road networks and power facilities are inadequate to meet industrial demands, resulting in greater reliance on the more expensive, imported petroleum or diesel. In addition, the in- complete road infrastructure causes serious delays in production delivery. Further investment in research for developing a diversified portfolio of value-added exportable goods does not seem to be on the exporters’ agenda who look for trade concessions from trading partners rather than strive to compete on an international level.
The South Asia Watch on Trade, Economics and Environment (SAWTEE) recently issued a report that concluded, “About 67 percent of total exports go to India and 66 percent of total imports come from India.” Landlocked and sharing a long border with India is not much help for the country as far as developing a more independent trade policy is concerned. Transit to the sea for Nepalese trade products is only possible through India, resulting in the country often being called ‘India-locked.’ Because of this, Nepal has been forced to adopt a trade policy that matches closely with India’s, with the latter’s trade stance is infamously restrictive. Non-alignment would mean greater smuggling across the border, even though the two countries’ comparative advantages are quite different.
However, trade between Nepal and China has been on the rise bringing a ray of hope for improvement in Nepal’s balance of payments. The Araniko Highway, connecting to the China National Highway, has been dubbed Nepal’s ‘second degree of freedom.” The first is the transit route through India to Calcutta.
Even though developing bilateral trade relations with China are essential for reducing the country’s dependence on India as a trade partner, the gap between imports from China and exports to the same has been widening, unfortunately, not in favor of Nepal. A local news portal, My Republica reports, “According to statistics compiled by the Trade and Export Promotion Centre, Nepal exported goods worth Rs1.21 billion to China and imported goods worth Rs30.59 billion from China in the first five months of the current fiscal year.” Examples of products that Nepal exports to China include a limited portfolio of goods such as paper and wooden and bamboo products. On the other hand, imports from China include textiles, machinery, spare parts, medicines, medical and electrical equipment in addition to more diversified products in larger quantities. In order to make the most of these bilateral trade relations, steps such as establishing industrial estates and commercial points near the border, export processing zones, warehouses and other infrastructural support, are necessary.
It is not as if the Nepalese government has been oblivious to the overall trade predicament. The Ministry of Commerce and Supplies plans to increase the country’s exports to over Rs100 billion in the coming three years (Rs76 billion for the last fiscal year). Planned measures include greater promotion of exportable products, expanding the services sector in the international arena, establishing a trade policy analysis mechanism as well as an international exhibition centre.
The Enhancing Nepal’s Trade Related Capacity (ENTRC) program was launched in 2006 in collaboration with the United Nations Development Program (UNDP) to help the country benefit from international trade opportunities through mechanisms such as studying trade-related issues, conducting feasibility studies for alternate transit routes and developing and disseminating export promotional material. Prior to this, Nepal worked diligently with the UNDP to integrate into the global economy. It consequently became the 147th member of the World Trade Organization (WTO) in 2004. In 2010, the Nepal Trade Integration Strategy ( NTIS) program was launched to develop the country’s export sector and bring reforms in export-oriented businesses over the next three to five years. Despite the existence of such programs and initiatives, traders have often complained of an apathetic attitude shown by the government. “The infrastructure at the Tatopani customs office should be improved, check posts on Araniko High- way should be enhanced, visa issues should be resolved and the use of Yuan at border areas should be legalized. There are dozens of problems that we face every day while trading with Chinese counterparts,” Keshab Bahadur Rayamajhi, the first vice president of the Nepal Trans-Himalayan Border Commerce Association (NTHBCA), told My Republica.
Besides the inadequacy of infrastructural facilities and the inability to implement and develop suggested strategies, these programs have only a minimal impact as far as promoting and enhancing exports is concerned. In addition, strikes and violence related to political instability and persistent labor issues further disrupt production and industrial activity, making it difficult to supply and distribute exportable goods.
Trade reforms and comprehensive industrial policies are imperative for improving Nepal’s trade account. Enhanced efforts to diversify the export portfolio through research and development and successful negotiations with neighbors to reduce trade barriers will ultimately correct the suffering external account of the country. Sijal Fawad is a Research Analyst at Daily Business Recorder and an external student of economics and finance at SOAS, University of London.