The misuse of trade policy

Excessive trade deficit has always been a concern for Nepal. The ongoing pandemic and subsequent lockdown restrictions has brought the country’s balance of trade under additional strain with the cost of imports soaring due to disruptions in the global supply chain. According to the annual statistics report published by the Department of Customs, trade deficit grew by 27.26% in FY 2020/21, reaching NPR 1.4 trillion[1], as compared to the previous fiscal year. Once a big player in the global garment market prior to the expiration of the Multi-Fibre Agreement (MFA) in 2004, Nepal has since been unable to regain a foothold in international trade.

From FY 2019/20 to FY 2020/21, the country’s total import surged by 28.66% to NPR 1.54 trillion.[2] The agriculture goods import bill, in this regard, reached NPR 325 billion in the last fiscal year, a 30% increase of the FY 2019/20 amount.[3] As a result, the share of agriculture in the country’s total import bill has increased to 21%, as per the statistics published by the Department of Customs. This calls for amplified effort on the part of the state to push the nation towards self-sufficiency in agriculture while facilitating the export of agro commodities through capacity building and incentive mechanisms.

One of the contributing factors for the notable rise in the country’s import bill is the enlarged purchases of edible oils, soybean in particular.

The import of edible oil recorded a marked increment of 154%, from NPR 32.66 billion to NPR 82.90 billion in just a matter of one year. The annual import bill of crude soybean oil now exceeds NPR 53 billion with a total of 452,626 tonnes of crude soybean being imported in the past year.[4] In fact, this same commodity has also emerged as the top exported goods in a span of one year; around NPR 54 billion worth of processed soybean oil was exported in FY 2020/21. On the contrary, Nepal locally produced only 31,567 tonnes of raw soybeans in the same period, an amount which is too little to meet even the domestic demand.[5]

The increasing trend of soybean export – despite insufficient domestic production of the same – can be explained by the sizable profit margin that exists in trading of crude oils. Nepali traders enjoy a net profit of 45%[6], besides other profits, just by importing crude oils from other countries and re-exporting the processed oil to India at zero tariff. Under the South Asian Free Trade Area (SAFTA) agreement, Nepali exports to India benefit from tariff exemptions while non South Asian nations are liable to 45% tariff.

The contribution of soybean oil trade to Nepal’s economy is quite obviously inconsequential and does little to generate employment compared to other commodity exports namely cardamom and tea. According to a trade economist, while Nepali exporters are required to demonstrate a value addition of 30%[7] to avail themselves of the zero-tariff provision, the soybean trade fails to meet the specification and capitalizes on the given provision regardless.

The zero-tariff policy on Nepali exports as mandated by the SAFTA agreement has been extensively exploited by traders to engage in rent-seeking activities; they have been extracting profits without adding any value to the economy in the process of importing and exporting edible oils. Such action is counterproductive to the entire intent of the SAFTA agreement which is to alleviate trade deficits for countries like Nepal by promoting exports through the removal of trade barriers in the likes of tariffs. Instead, re-exporting edible oils has led to a further widening of the country’s trade gap with the purchases of the crude oils from other countries reaching an all-time high.

Moreover, whether such exports could be sustained in the long-run is doubtful at best. In fact, palm oil once used to be Nepal’s top export until the Indian government restricted its imports in 2020. Although the ban has been lifted, the volatility of these exports cannot be denied; if India were to impose restrictions on import of soybean oil to protect its domestic refiners, this will bring a complete halt to the soybean trade in Nepal.

In this regard, it is crucial for Nepal to diversify its exports – commodities as well as destinations. The country needs to utilize regional and multilateral trading agreements that is a part of,  in the likes of SAFTA, Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and World Trade Organization (WTO) to promote productive and sustainable exports and to strengthen its presence in the global market. In the meanwhile, domestic industries with export potentials must be provided with necessary resources by the government to enhance their capacity and productivity to compete internationally.

[1] Nepal Foreign Trade Statistics (2021), the Department of Customs

[2] Nepal Foreign Trade Statistics (2021), the Department of Customs