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.

Southasia - - Nepal Economy - By Si­jal Fawad

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.

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