Background
Nepal lies at the center of two giant economies and carries a huge potential for trade and investment. The nation was sheathed under the protectionist industrial policy until 1985, where domestic firms were protected from foreign competition by imposing quota and high tariff. After Nepal entrenched trade liberalization in 1985, the economy sought to modernize by creating an appropriate environment for the private sector[i].
The open industrial policy of 1992 aimed to create a competitive environment for the private sector by decreasing the intervention of the government in fixing the price of goods. The policy was formulated with the aim of making agriculture and manufacturing sector robust to leverage the export business. Nepal exported agricultural products to India, which included rice, tobacco, jute and vegetable oils. Moreover, various raw materials such as hides, skins, herbs, bamboo products were also exported.
Nepal’s Trade with its Neighbors
In 1950, Nepal’s first formal trade treaty, the “Treaty of Trade and Transit” was established with India, which was renewed in 1999. After the treaty, tariffs were lowered that helped to exchange goods between the two nations. On the other hand, the “Sino-Nepal Treaty of Peace and Friendship” signed between China and Nepal in 1960 established formal trade linkages between the two countries. Having said so, China, India and Nepal’s trade relations expand beyond commodity trading. The triplets share a long history of civilization, culture, migration, and trade.
In April 2004, Nepal became the 147th member of the World Trade Organization.[ii] After being a member, Nepal gained the opportunity to leverage its trade and investment worldwide. As of today, Nepal comes across ratifying different international trade agreements. Recently, it has been a part of two big agreements, South Asian Free Trade Agreement (SAFTA) and the Bay of Bengal Initiative for Multi-sectoral Trade and Economic Cooperation (BIMSTEC).[iii]
Gaps and Opportunities in Foreign Trade
Nepal has seen a paradigm shift in trade relations to the context of social and economic aspects because of globalization, technological advances, and political interest. All of these aspects have led to a more conducive environment to promote trade in Nepal. However, external trade projects a bleak picture of the nation. After Nepal signed the WTO agreement, exports decreased from 28.3% to 6.9% in the period starting from2004/05 to 2016/17. In the corresponding period, imports increased from 71.7% to 93.1%[iv]. The trend of import has been rising exponentially over the past two decades, which has now been a threat to the economy. Nepali products face impediments in entering the neighbor markets whereas, on the other side, there has been an erratic rise in the demand for essential commodities in the Nepali market. Therefore, export performance remains weak due to supply-side constraints and low productivity. Nepal also bears high transit cost which further reduces the competitiveness of its products[v].
Figure 1 illustrates that food and live animal items are exported on a large scale in comparison to other items shown. Supply of tobacco and beverages is the lowest in terms of volume. Overall, the export share of all the items has significantly decreased over the years.
Figure 2 represents the volume of exports of Nepal to foreign nations beginning from the fiscal year 2014/15 to the period of 2018/19. Overall, the trade status presents the idea that Nepal supply maximum goods to India. India received the highest amounts of supplies from Nepal in the fiscal year 2014/15. In the fiscal year 2017/18, India imported USD 2.9 million worth of bran, USD 44.07 million worth of cardamom, USD 42.22 million worth jute products, and USD 43.09 million worth of juice from Nepal. Nepal’s export to China, another pertinent trading partner, in the corresponding period is negligible compared to India.
After the advent of federalism in Nepal, the trade deficit has aloft further. In the fiscal year, 2016/17 Nepal exported commodity amounting to USD 376.94 million to India, USD 15.47 million to China and USD 271.90 million to other countries. Similarly, in the fiscal year 2017/18, Nepal exported USD 423.8 million goods to India, followed by USD 26.18 million to China and USD 292.36 million worth goods were exported to other countries. As per the recent macroeconomic data unveiled by NRB, in the past six months of the fiscal year 2018/19, Nepal exported USD 250.44 million goods to India. Nepal exported USD 152.44 million worth goods to other nations which is higher than the goods exported to China in the first six months of 2018/19. Nepal managed to export only USD 10.10 million volumes of goods to China.[i]
Indeed, the Trade and Export Promotion Centre (TEPC) statistics state that Nepal experienced a trade deficit of NPR 454.47 billion in the first four months of the fiscal year 2018/19[ii]. If the current trend of import continues, Nepal might be facing a huge risk of the collapse of the foreign exchange reserve system. Accordingly, the nation could be in the state of emergencies where Official Development Assistance (ODA) would be the only means of surviving the economy. ODA would be a significant support to import the goods that are prominent for the regulation of the economy.[iii] To tap the opportunities and avoid erratic economic shocks, it is imperative that the USD 30 billion economy should emphasize on creating a business-friendly environment and unfold its economic potentialities by addressing its export impediments, which have been a major backdrop in setting the foot front in the global market.
Hurdles and Proposed Reforms
Outlook:
The prolonged period of trade deficit has hiked tensions in the nation and poses a considerable risk to the nation’s economy. In order to avoid the severe disruption to the national value chain, the deeply embedded dependency on the imports should be reduced. The trade imbalance in the nation should be controlled by focusing on the rise of productivity by recalibrating the capital of manufacturing industries.
Reference:
1.“A Review of Industrial and Trade Policy in Nepal: Research Brief”, SAWTEE. Accessed 13th March, 2019
2. Ibid
3. ibid
4. “Nepal Trade Policy Review: Report 2018, Ministry of Industry Commerce and Supplies”. Accessed 7th March 2019
5. Purushottam Ojha,”Non-tariff barriers facing South Asia: Case of Nepal”, Accessed 10th March 2019
6. “Nepal Rastra Bank: Current Macroeconomic and Financial Situation of Nepal”. Accessed 14th March 2019
7. Rising imports Cause Trade Deficit to Nepal.30 November 2018. https://www.nepalisansar.com/business/rising-imports-cause-trade-deficit-to-nepal/
8. Government taking Steps to address rising trade deficit, 18 December; https://thehimalayantimes.com/business/govt-taking-steps-to-address-rising-trade-deficit/
