The statistics of the last 10 months (Shrawan 2082 to Baisakh 2083) in the field of foreign trade of Nepal show a positive outlook on the surface.

The increase of 14.25 per cent in total exports to Rs 248.96 billion can be taken as a pleasant indicator amidst a gloomy economy. But a closer look at the depth and components of this growth reveals more structural risks and policy weaknesses than enthusiasm.

The country’s import has increased by 15 percent to reach Rs 1692 billion, while the trade deficit has crossed Rs 1443.68 billion. This huge gap between exports and imports (ratio of 1:6.80) has raised serious questions about whether Nepal’s export growth is just an illusion or a technical adjustment.

The share of goods in the total exports is evident from the weak and dependent foundations of Nepal’s exports. A single commodity — soybean oil — accounts for about 41 percent of total exports — $101.27 billion. Palm oil exports also increased by 242 percent to Rs 6.61 billion.

Although these figures are technically linked to Nepal’s export accounts, their contribution to the real economy is minimal. Crude oil is imported from countries like Brazil, Argentina and Malaysia and exported to India through low-level processing (value addition).

This can be called a price rise crisis. Even the slightest change in India’s customs policy or the rules of the South Asian Free Trade Area could cause this billions of dollars of trade to fall at any time. The decline in the export of vegetable ghee and zinc oxide in the past is a glaring example of this.

In the past years, Nepal had shown great hope in exporting genuinely self-sufficient and high value added commodities such as iron, steel, cement and plywood. However, the export of iron and steel declined by 75.45 percent during the review period. Similarly, the plywood industry, which is expanding rapidly, has seen a decline of 27.60 percent.

The decline is due to a variety of factors, including non-tariff barriers. Non-tariff barriers, delays in quality certification and high cost of production within Nepal (high electricity tariffs, freight and policy instability) are the main reasons for this. Also, the raw materials from Nepal can easily go out of the country and in some cases, the raw materials coming from outside are also VAT and the exporter will not be able to get the VAT refund.

Nepal’s exports are not based on domestic raw materials and labour but are based on international tax rates. The government should pay special attention as the decline of real productive industries such as iron and steel is reflecting the country’s booming industrial base.

Geopolitical trade imbalance: Exports to China are almost nil:

On a domestic basis, Nepal’s trade imbalance is becoming more alarming. India’s share in total exports has risen to 82.09 per cent, illustrating Nepal’s monopoly market dependence. In contrast, exports to northern neighbour China fell sharply by 41.71 percent. China’s share in total exports has shrunk to just 0.56 percent (Rs 1.39 billion).

The fact that Nepal imports goods worth billions of rupees from China and exports have almost come to a standstill proves that the trans-Himalayan trade strategy has failed. It seems that Nepali products are finding it difficult to reach the Chinese market due to technical barriers at border points, language problems and strict standards of Chinese quarantine. In addition, China has the highest number of business expos in recent times.

It seems that the government has been able to adopt measures including strategic partnership to get Nepali entrepreneurs involved. Nepal’s situation in exports has not increased as expected due to the lack of effective work of trade and export promotion bodies.

Despite the potential, Nepal has lagged behind. According to a survey conducted by the World Bank, Nepal has the potential to export more than Rs 12 trillion annually. Now we have been able to export only 22 percent of our potential. In addition, if the violence of palm oil is reduced, it will be even less.

Bright Side: The Rise of Agricultural and Original Products

Amidst this adversity, the performance of agricultural commodities is encouraging. The high growth of cardamom export by 71.22 percent and ginger export by 107.15 percent proves that Nepal’s original and organic products have a strong potential in the international market. Similarly, the export of woolen carpets, felt goods and readymade garments to the third countries increased by 9.48 percent.

What can be a practical solution for increasing exports?

Deferral policies will no longer be enough to reduce Nepal’s trade deficit and ensure sustainable and real export growth. I think the government and the Ministry of Finance are also sensitive to this. For this, the following short-term and long-term strategic steps can be taken. Some issues have also been addressed in the budget of the fiscal year 2083/084. The government should take effective steps to increase domestic production and productivity by being proactive in creating export-friendly environment to implement the issues addressed and move ahead in a policy manner.

It would be effective if we could export the raw materials by emphasizing on value addition instead of exporting. Today is not tomorrow for this. Special support from the state is needed.

Instead of sending agricultural products such as cardamom, ginger, tea and coffee to India in raw form, special grants or concessional loan tax exemptions can be made to industries that are processing, grading, labeling and branding in Nepal.TAG_OPEN_em_67

} Industries based on imported raw materials, such as soybean or palm oil, should be discouraged and at least 30 percent local value added should be mandatory.

The main reason for the high cost of Nepali products is high energy and transportation costs.TAG_OPEN_em_65 For export-oriented industries, depending on the nature of the industry, measures should be found to subsidize electricity tariff and reduce the cost of transportation. To reduce logistics costs, a network of dry ports and cold storages can be expanded and made available on major trade routes.

Economic diplomacy should be given priority to resolve trade problems with India and China. Bilateral agreements should be signed to recognize the quality certification of Nepal’s laboratories by Indian and Chinese counterpart agencies, as well as to take technical and physical support from India and China for the capacity building of laboratories. Which also builds confidence in them.

To take real advantage of China’s ‘zero customs policy’, the embassy in Beijing should be activated to make the list of Nepali goods in line with Chinese standards. Lately, the Embassy is also going to organize Nepal-China Business Forum. It should be continued.

A special incentive package should be brought by revising the items included in the Nepal Trade Integrated Strategy and putting information technology, ready-made food items, beverages and other items in the list of high priority.TAG_OPEN_em_62

In order to break the physical limitations and geographical challenges of the export of goods, the process of bringing in foreign currency should be simplified by bringing the export of software, digital services and freelancing into the formal channel. There should be an easy payment gateway.

Nepal’s export trade is currently at a critical crossroads. This is not the time to rejoice in the unusual growth seen in some limited commodities and markets. The development of industries based on indigenous raw materials, technology and labour is imperative to translate the current numerical growth of exports into structural transformation. Unless the state shows concrete policies, strong infrastructures and strong political will for import substitution and export promotion, the vicious cycle of Nepal’s trade deficit is deepening.

For this, the current budget has tried to address it to some extent. It has an impact on the implementation aspect. The government needs to pay special attention to this. At the same time, the government should pay special attention to bring export policy. We can take a big leap forward if the government can move ahead by prioritizing the next 5 years as the export year by setting up an export promotion fund and mobilizing it effectively.

Ramasudan Timilsina, Executive Director, Federation of Export Entrepreneurs{