Exploring Nepal’s Untapped Export Potential

Nepal remains a heavily import-dependent country with an exceptionally low number of products being exported (refer to Figure 1). The gap in the import-export trends is due to Nepal’s stunted productivity, slow industrialization, and lack of a conducive trade environment. Combined with a variety of existing complexities, the gap continues to widen due to a lack of adequate infrastructure which hinders economic progress and innovation. Identifying infrastructural barriers and addressing them accordingly will improve export-oriented activities, thereby boosting Nepal’s trade-sector performance.

Increased exports would not only improve the economic functionaries, but would also create about 220,000 new jobs. Creating new jobs and minimizing risks in the trade sector would further lead to growth in productivity along with economic recovery and growth in the aftermath of COVID-19. In the past 20 years, Nepal’s exports have remained stagnant, with only an average of 4% growth since the turn of the century, making it one of the 20 countries with the least dynamic exports.

Figure 1: Nepal’s Trade Performance (FY 17/18 – FY 21/22)

Source: Ministry of Finance

Export Potential

According to a 2021 report from the World Bank, Nepal has the potential to increase its exports twelve-fold which is USD 9.2 billion. In the past five fiscal years, Nepal has made significant progress in the number of goods and products it has exported, but at the same time, the country’s trade deficit has widened owing to dependence on imported goods. Had Nepal been able to keep up with the South Asian average growth since 2000, its unrealized export potential would have been lower by 73%.

There have been several export promoting initiatives that Nepal has taken in the past, which has resulted in the increase of commodities production and exports. The Nepal Trade Integration Strategy in 2010 provided grounds for export sector development and a trade-driven Nepali economy. The strategy prioritized production of goods with export potential such as honey, medicinal plants, and silver jewelry, whereas the demand for these goods increased from 49% in 2013 to 81% in 2015. One of the ways this was achieved was by strengthening the business environment that promoted trade facilitation, and investments.

Additionally, the Bangladesh, Bhutan, India, and Nepal (BBIN) Motor Vehicles Agreement, passed in 2015, is aimed at promoting an easier flow of passengers, cargos, and vehicular traffic between the four countries to lower transportation cost and time. With increased connectivity, businesses are encouraged to invest, innovate, while generating employment opportunities.

For Nepal to maximize its exports, there are several key areas that still need to be reformed. Nepal needs to be active in economic diplomacy to harness much-needed capital, promote exports through digitization, incentives for exporters, increase digital trade, and lastly, develop upgraded infrastructure and streamline efficient process to ensure inexpensive and fast facilitation of exports. In fact, Nepal has instilled a framework in place to improve exports, but problems arise during execution of these frameworks as the manual transfer and facilitation of exports has met with several hard infrastructure problems within Nepal, and between its regional trade partners.

Increasing the production and distribution of exports would have a significant impact on Nepal’s economy. It would increase employment opportunities with the creation of “good jobs” in higher value-added activities in the exporting sector. It would also allow access to a global consumer base for Nepali goods, leading to less dependency on a single partner, and increase the profitability, and competitiveness of its goods and commodities in the global market.

Inadequate infrastructure and transportation as export barriers

 Lack of proper infrastructure is a primary cause of concern when it comes to barriers to harnessing export potential. Poor and unavailability of infrastructure cause a lack of connectivity and high transaction cost that leads to disruptions and inefficiency in the transportation of goods and commodities. Overall, this makes trade more time-consuming and expensive. The 2018 Logistics Performance Index, ranked Nepal 114^th, placed behind its regional partners such as Bangladesh and India. The report claimed that Nepal needs to improve its infrastructure planning, service provision, and facilitation of cross-border trade and transport to provide a conducive environment for trade.

Developed countries can credit their economic growth to trade liberalization, successful construction and utilization of proper infrastructure making trade and transportation much easier. However, Nepal is geographically exceptional due to its landlocked position, rugged topography, lack of access to trading ports, and weak infrastructure which restricts it from increasing exports and leveraging potential. The limitation of proper infrastructure disrupts prospects of industrialization, production, and distribution of goods.

The challenge of harnessing cross-border export can be further accounted to substandard transport facilitation and networks that hinder regional movement, leading to a lack of economic integration. Additionally, Nepal’s inability to engage actively with its neighbors in the north can be credited to the tall Himalayan range. However, there are nine points of connectivity with Tibet, only a few remain operational. The Rasuwagarhu- Syaphrubesi road leads directly to China’s border, serving as a major point of connection and export channel between the two countries, however, the neglect of this infrastructure has caused it to worsen over time. These channels have immense potential to facilitate exports if utilized properly, but maintenance is imperative.

In 2016, one-third of manufacturing firms claimed that abysmal road networks and lack of connectivity served as a major export constraint. In 2018, 75% of firms in Nepal reported that the lack of proper infrastructure such as fast transportation systems, well-maintained roads, and telecommunication networks remain a significant obstacle to their objective to expand. The lack of efficient flow of goods negatively impacts trade and export-import shipments as Nepal’s trade sector is not able to exploit its economies of scale.

Furthermore, Nepal’s lack of access to sea trading ports increases the transit-related costs by 15% to export goods compared to countries that have access to the sea. To add to that, the undersupply of electricity and energy force compnies to work below their optimal capacity as compared to companies that can easily afford to buy electricity, thereby increasing the cost of production. Compared to India, which has adequate infrastructure, and diverse forms of transportation, Nepal’s cost of exports is significantly higher with the same trading partners. For Nepal, the cost of trading with Bangladesh is 272.9%, Bhutan is 191.8%, and China is 192%. However, for India, the cost of trading with Bangladesh is 121.03%, Bhutan is 99.6%, and China is 100.3%. Despite these countries neighboring Nepal, the costs of trade continue to remain high.

Way Forward 

To maximize Nepal’s exports, it is important to identify and reform infrastructural constraints existing in the Nepali economy. Government policies that are dedicated to improving the current state of infrastructure and encouraging private sector investment would not only improve the flow of exports, but also improve the supply chain, and give people access to jobs, and new markets for commodities. Further to this, public investments will be vital to the development of new and better infrastructure, but it is also imperative to include private sector participation for efficiency through management expertise, advanced technology, and competition.

While developing new infrastructures, it would be beneficial for Nepal to facilitate a connectivity-driven strategy transforming Nepal from a landlocked country to a land-linked country. Considering the costs of trade already being high within Nepal, the country can utilize its strategic location between India and China. By improving connectivity through regional cooperation and integration, Nepal’s improvement in areas of infrastructure, transport, and telecommunications project would reduce costs. Lower costs due to better infrastructure development would increase Nepal’s competitiveness of exports in the world market and allow the country’s economy to perform much better.