Rebooting policies to capitalize opportunities in international trade
With the start of the new year 2080 BS, Nepal will have its new blueprint for revitalizing trade- Nepal Trade Strategy 2023- ready. NTS 2023, Nepal’s fourth-generation trade integration strategy, will be the guiding document for the country’s trade policy for the next five years.
NTS 2023 is being brought at a time when the country’s trade imbalance has become unsustainable with the rising imports that even posed a big threat to the country’s external sector and foreign exchange reserves last year.
This is the fourth time the government has worked on major policy initiatives to invigorate the country’s trade, particularly the exports.
In 2010, the government launched the Nepal Trade Integration Strategy (NTIS) with the aim to boost the country’s exports and check the widening trade deficit. However, exports have not grown as expected over the past 13 years.
While the country’s imports have been on the rise every year, exports have barely seen any increment and thus remain stagnant. The gap between export and import has widened every year which has rung alarm bells to the government and the policymakers.
The new trade strategy is being introduced at a time when the country is recovering from the external sector crisis. An import explosion drained foreign exchange reserves to alarmingly low levels, threatening the country’s external sector stability. The restrictive measures imposed by the authorities have improved the external sector but the threats are still there.
Economists and trade experts are unanimous that Nepal must improve its trade competitiveness and boost exports to avoid the repetition of the 2022 external sector crisis.
It’s been two decades since the government has been rolling out the trade integration strategy with the objective to increase and promote exports to narrow the trade deficit. But even after two decades, the growth of exports is far from satisfactory.
For instance, most of the export targets of NTIS 2016 have not been met. The share of export of 9 NTIS products in GDP in FY 2019/20 was 0.76 percent, way below the target of 4 percent set by NTIS 2016.
Various studies conducted over the years have shown that the limited export basket, high costs of trading due to poor transportation and logistics infrastructure, and inefficient trade facilitation have hindered the country’s export growth.
Expanding export to 20% of GDP
According to trade experts and government sources, NTS 2023 has set an ambitious target to expand exports to 20 percent of the country’s GDP which is currently at 4 percent. The document which is currently in the cabinet for approval has aimed to export goods and services worth Rs 2000 billion in the next five years. This target has been set based on the estimation that the country’s GDP will reach Rs 10,000 billion in the next five years.
The NTS 2023, prepared by the team led by former finance secretary Rameshore Khanal has identified the products, their export target, and measures required to achieve the target.
The new document has suggested 164 reforms based on 13 strategies to increase exports. As per the document, Rs 337 billion should be invested to carry out these strategic reforms.
Of the 13 strategies, the largest investment will be required for strategies no 1 and 12. Strategy no 1 is about developing a supporting macroeconomic and development policy with predictable characteristics while Strategy no 12 is about developing export capacity. NTS 2023 has estimated that Rs 82 billion is required for implementing Strategy no 1 while Rs 282 billion is needed for Strategy no 12.
While not many details of the NTS 2023 have been made public, experts and insiders say, the new document has sought to diversify exports, adding more products in the priority export goods category.
The line ministry, Ministry of Industry, Commerce and Supplies (MoICS) has proposed to add additional six items to the existing list of 12 priority export goods that were listed in the NTIS 2016.
Product diversification, according to trade experts will enlarge Nepal’s export potential. As per the draft of NTS 2023, three items in the farm products category, one item in the forestry products category, one item in the industrial products category, and three items in the small-scale enterprise products category have been added to the priority export goods list.
“The new Nepal Trade Strategy (NTS) 2023 involves a thorough analysis of potential trading items, export potential, and market destinations to identify items with high export potential,” said Madhu Marasini, Secretary at MoICS.
The new priority export goods are vegetables and fruits and their processed goods, spices and coffee under agricultural products, fragrant oil under forestry products, cement under large industry, and processed drinking water, honey, and chhurpi (hard cheese) under small-scale enterprises.
Skilled and semi-skilled manpower, IT-based services, tourism, hydropower, and construction services have also been placed as priority sectors/goods.
Since there has not been sufficient value addition and processing of listed goods in the past, trade experts pointed out the NTS should focus on policies regarding product-specific value addition of identified goods for promotion, development, market access, and export.
According to former Commerce Secretary Purushottam Ojha, an integrated approach toward implementation must be taken to make the new policy document a success.
Expanding the export basket & destinations
Over the past 2-3 years, Nepal’s exports have been largely dominated by two products, namely palm oil and soybean oil, neither of which are produced domestically. These edible oils are imported in crude form and refined in refineries in Nepal before being exported to India. According to industry insiders, many producers do not even refine the oils themselves; they import refined oils, repackage and label the products, and export them to India. This results in little to no value addition for Nepal.
Nepal’s exports have reached a historic milestone in FY 2021/22, surpassing Rs 200 billion for the first time, largely backed by the booming export of edible oils. Edible oils accounted for Rs 93.69 billion of the country’s overall export, with palm oil and soybean oil exports worth Rs 89.18 billion in the last fiscal year. This makes up around 45 percent of Nepal’s total exports.
Nevertheless, the export of edible oils declined significantly in the first half of the current fiscal year 2022/23. According to data from the Department of Customs and the Trade and Export Promotion Center (TEPC), the export of palm oil has plummeted from Rs 31.97 billion to Rs 13.08 billion, while the export of soybean oil has also dipped from Rs 34.26 billion to Rs 8 billion in the first six months of this fiscal year.
The exports of these products from Nepal have suffered since India lowered its customs tariff in October 2021 to curb rising inflation. A year ago, India abolished the basic import tax on the import duty on crude palm, soybean and sunflower oils after the price of edible oils in the international market skyrocketed in the wake of Russia’s invasion of Ukraine; the warring countries are among the largest producers of vegetable oils in the world. However, with the inclusion of a 5 percent agri cess and a 10 percent social welfare cess, the effective duty on crude forms of these edible oils is 5.5 percent in India. At the beginning of 2021, the effective customs duty on palm, soybean, and sunflower oils was as high as 35.75 percent. The Indian government’s removal of the import duty on these edible oils has eliminated the duty differential advantage that Nepali exporters had previously enjoyed for the last couple of years.
The sharp fall in exports this year also tells that Nepal has failed to diversify its export basket as well as export destinations. In FY 2021/22, 77.59 percent of Nepal’s exports were in India and 22.41 percent were in third countries, including China. The data from the Department of Customs shows the top five export destinations account for 92.12 percent of Nepal’s total export.
A study by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) in 2018 showed that Nepal has failed to use its trade potential fully. Nepal’s trade in South Asia is less than one-fourth of its potential as estimated by the UNESCAP South Asia Gravity Model of intraregional trade.
Various studies have shown that Nepal failed to use its trade potential due to high tariffs and para-tariffs, complicated and non-transparent nontariff measures (NTMs), constraints on trade in services, high costs of trading due to poor transportation, and logistics infrastructure, and inefficient trade facilitation. Trade and transport facilitation measures such as the efficiency of customs, quality of transport service, cost of transport, and border procedures, are among the major barriers to trade promotion.
According to Rajan Sharma, former president of the Nepal Freight Forwarders Association, the country’s export has also suffered since the exporters do not pay attention to the destination market trends as they lack knowledge in this area. “There has been no research to determine whether the government and private sector’s infrastructure can meet the requirements of our export markets,” said Sharma.
Exports say trade facilitation is another area that Nepal has to work on if it wants to increase its export as improvement in trade facilitation would substantially reduce trade costs. “As a landlocked country, Nepal faces challenges in transporting goods from the border to the port and vice versa. Therefore, there is a need to simplify the procedure for trade,” said Ojha.
According to him, upgrading the inland ports and logistics systems, simplifying customs procedures, and introducing automated clearance would significantly cut trade costs.
While the development of infrastructure such as border facilities, container freight infrastructure, and transportation facilities is essential, it is not sufficient for trade facilitation. “In addition to necessary infrastructure developments, Nepal must work on simplifying documentation, standardizing and harmonizing procedures, and adopting electronic systems to make the trade process more efficient,” said Ojha.
The data shows India, China, the US, Germany, the United Kingdom, France, and Turkey are the major export destinations of Nepali products.
According to Sharma, Nepal has failed to take advantage of trade agreements with China and the United States due to a failure to incorporate regional and multilateral agreements in bilateral agreements. “This has resulted in sluggish trade and the government’s mindset that multilateral agreements are more significant than bilateral agreements is not conducive to change,” said Sharma.
The much-talked-about Special Economic Zones (SEZs) are yet to contribute substantially to the country’s export expansion as Nepal is yet to see the proper functioning of these SEZs. Only two of the 14 proposed SEZs—Bhairahawa SEZ and Simra SEZ— have completed the construction phase. And, the Bhairahawa SEZ is also not fully operational.
Despite these shortcomings, there are also some silver linings. The breakthrough in energy export with India, the emergence of the IT sector in service export, and the beginning of cement export to India could play a huge role in offsetting the trade imbalance. Nepal has already earned over Rs 11 billion by exporting electricity to India in the last one and a half years.
Similarly, the two Nepali cement companies have exported cement worth around Rs 170 million in the first seven months of the current fiscal year. The government in the current fiscal year budget had approved the export subsidy scheme that was announced by the current fiscal year budget. The export subsidy procedure introduced by the Ministry of Industry, Commerce, and Supply has given cash incentives for exports of eight items. The FY 2022/23 federal budget has mentioned that an 8 percent export subsidy will be given to the exports of clinker, cement, steel, footwear, IT-based services, and business process outsourcing (BPO) services.
“NTS 2023 represents a micro-analysis of the export potential for Nepal”
Madhu Marasini, Secretary, Ministry of Industry, Commerce and Supplies
The new Nepal Trade Strategy (NTS) 2023 involves a thorough analysis of potential trading items, export potential, and market destinations to identify items with high export potential.
The strategy aims to expand the export basket by identifying new products such as cement, clinker, electricity, and IT products. To accomplish this goal, the government has consulted with the secretaries of the seven provinces and even the chief ministers to find the most exportable products.
Incentives will be given to encourage export, recognizing that export promotion is essential for Nepal’s economic growth and job creation. All ministries have owned the new document, which is essentially an export promotion strategy, as it recognizes the importance of promoting exports for Nepal’s economic development. The new document also considers the market potential in the destination market to analyze potential products for export.
Overall, the NTS 2023 represents a micro-analysis of the export potential for Nepal, providing a comprehensive strategy to expand the country’s export basket and promote economic growth.
“Exporters need to have knowledge on analyzing destination market requirements”
Rajan Sharma, Former President, Nepal Freight Forwarders Association
Exporting Nepali goods to international markets is crucial for the growth of the country’s economy. However, exporters do not pay attention to the destination market trends as they lack knowledge in this area. Furthermore, there has been no research to determine whether the government and private sector’s infrastructure can meet the requirements of our export markets. This has resulted in a haphazard export of Nepali products.
In an effort to promote exports, the Nepal Trade Integration Strategy (NTIS) has been developed, which identifies the strengths and weaknesses of Nepali exports after conducting a strength, weakness, opportunities, and threat (SWOT) analysis. However, there has been a lack of research on the role of the private sector, business support organizations, donor support, and the need for intervention of donors to boost exports.
While the NTIS has identified the weaknesses and strengths of Nepali exports, there has been no segregation of work. As a result, NTIS just remains a government document.
The Ministry of Industry, Commerce and Supplies has again geared up to bring the new Nepal Trade Strategy 2023. While sectors such as manufacturing, agriculture, and services have been segregated in the draft, there are several products within these sectors, making it a broad document for Nepal’s business nature.
India is Nepal’s biggest trading partner, and while the transit treaty has been amended, it remains unknown whether the problems of Nepali exporters have been addressed or incorporated. As the trade treaty is also due to be amended, Nepal has to negotiate well in this regard, but logistics must also be considered, not only the trade itself. Currently, India has imposed non-tariff and tariff measures, making it difficult for Nepal to expand its trade with its southern neighbor.
Nepal has failed to export cardamom, ginger, and coffee, among other exportable items, to Bangladesh due to a low negotiation capacity of the government. Despite coffee having great potential for export, receiving certification for the product for export purposes is difficult.
The Nepal Tea and Coffee Board has also not played a strategic role in increasing the production of cash crops like tea and coffee, which are captured by a certain group. However, the quality of Nepali tea and coffee is high, and these items can be sold in the international markets at a high rate without competing with products from other countries.
Nepal has failed to take advantage of trade agreements with China and the United States due to a failure to incorporate regional and multilateral agreements in bilateral agreements. This has resulted in sluggish trade and the government’s mindset that multilateral agreements are more significant than bilateral agreements is not conducive to change.
While Nepal is a signatory to agreements on trade, such as the South Asia Free Trade Agreement (SAFTA), Bangladesh, Bhutan, Nepal and India (BBIN) initiative, and Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), our trade with other countries in the agreements except India has been limited. It is vital that Nepal takes the necessary steps to address these issues to increase its exports and boost its economy.
“Nepal needs to have a comprehensive approach to trade facilitation”
Purusottam Ojha, Former Secretary for Industry, Commerce & Supplies
After 2000, Nepal embraced a fully open trade regime becoming a member of the South Asian Free Trade Area (SAFTA), World Trade Organization (WTO) and Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMISTEC). Despite these efforts, Nepal’s international trade was driven primarily by imports as the country did not have many competitive products for exports. Traditional export products such as carpets and garments which had been major export commodities since the 1970s, faced competition in the international markets as tariff rates declined while other countries like Cambodia and Bangladesh seized the opportunity to increase their production and compete in the international market.
Nepal did enjoy the Generalized System of Preferences (GSP) in European Union countries and the United States. But when the margin of preferences declined, the competitiveness of Nepali products also decreased. The government failed to make its products competitive in the international market, which resulted in Nepal being stuck in a ‘remittance trap’ where a significant number of Nepali youths worked in Malaysia, the Gulf countries, and Western countries.
The remittance-induced demands led to an increase in imports, and the government’s reliance on customs tariffs to meet revenue targets made it difficult to replace imports with domestic production. Nepal attempted to address these issues through the National Trade and Integration Strategy (NTIS), which had various policies that were not implemented due to a lack of mechanisms, manpower, and infrastructure. Although these policies looked good on paper, Nepal failed in their implementation, resulting in a lack of progress in addressing the country’s trade-related issues.
In order to promote trade and economic growth, Nepal needs to have a comprehensive approach to trade facilitation. The value chain of export-based services and products must also be looked at, with a time frame for implementation. Otherwise, we may have policies and documents, but not actual implementation.
A national trade strategy is a tool that can be used to promote exports. However, this should not only be the responsibility of the Ministry of Commerce, Industry, and Supplies but all stakeholders. Collaboration between the ministry and stakeholders is key to its success. The Nepal Trade Integration Strategy (NTIS) has identified some comparative advantage products in agriculture and forestry, but it is the responsibility of the Ministry of Forest and Agriculture to develop these products.
To facilitate trade, the Department of Customs has a critical role to play. Similarly, the Ministry of Physical Infrastructure is responsible for infrastructural development, which is necessary to facilitate trade.
The manufacturing sector is an area where Nepal can add value to its products. This can be done in areas such as cement, leather, garments, and carpets. Promoting the manufacturing sector is crucial, as it generates job opportunities. For example, the production of readymade garments requires thread, zippers, buttons, and other components, which provides employment for many people.
Regarding carpet manufacturing, raw materials are currently imported from China and New Zealand. However, if the government promotes sheep farming, these raw materials can be produced locally, leading to forex savings and job opportunities in mountainous regions. The meat produced can also be consumed locally or exported to further boost our trade.
It is important to note that for the last couple of years, Nepal’s export revenue has heavily relied on a few commodities such as soybean oil. This reliance on imported raw materials and the limited value addition to these products must be discouraged for sustainable trade. In the past, Nepal has benefited from the import and export of vegetable oil. However, it is essential to establish a mechanism that ensures sustainable trade and value addition to local products.
While the development of infrastructure such as border facilities, container freight infrastructure, and transportation facilities is essential, it is not sufficient for trade facilitation. In addition to necessary infrastructure developments, Nepal must work on simplifying documentation, standardizing and harmonizing procedures, and adopting electronic systems to make the trade process more efficient.
As a landlocked country, Nepal faces challenges in transporting goods from the border to the port and vice versa. Therefore, there is a need to simplify the procedure for trade. The Nepal-India Treaty of Transit provisions are cumbersome and require producing several documents, as well as clearance from multiple points. Hence, simplification is crucial. In 2018, Nepal introduced an electronic cargo tracking system, which has simplified trade to some extent. However, more instruments must be adopted to facilitate trade.
The bilateral trade treaty with India currently in implementation has its roots in 1978, and while there have been some changes over time, they have not been significant enough to keep up with the dynamics of international trade and the development of technology.
With the treaty set to expire in October of this year, there is a need for significant revisions. In terms of agricultural products, Nepal cannot compete with India. India heavily subsidizes its agricultural products, making it difficult for Nepal to provide subsidies to its farmers and compete at par with India. Nepal should levy taxes on agricultural products imported from India to address this issue, as cheap imports from India have already displaced Nepal’s own agricultural products.
Addressing the problems with India through a detailed review and revision of the existing trade treaty will go a long way towards resolving issues with both imports and exports. Even though the United States is far from Nepal, it is still Nepal’s second-largest export partner. The US government has provided duty-free access to 77 Nepali products since 2015, following the earthquake. However, Nepal has not taken any significant steps to utilize this facility. The arrangement is set to expire in the next two years, and the US government has notified the WTO to renew it. Nepal also has a mechanism called the Trade and Investment Framework Agreement (TIFA), which falls under the Trade and Investment Council. The council is supposed to meet every year, but the meetings are rarely held. In 2011, I led the first meeting in Washington DC.
Nepal should promote its products in the US through trade fairs, and there is also provision for American assistance for trade capacity building, which Nepal has not utilized. There are several opportunities to work with the US government to promote Nepali products in the US market.
With the availability of the Chinese market for 97 percent of the products after the agreements signed in 2010 and 2014, we have not been able to utilize the Chinese market. After 13 years, there has been no discussion or dialogue about the non-utilization of preferences. As a result, Nepal’s imports from China have increased while exports have decreased, with only Rs 700 million worth of exports last year. To address this issue, the governments of both countries need to sit together and review the situation, and work together to make the most of the Chinese market.
To effectively target the Chinese market, Nepal needs to focus on producing goods that do not compete with Chinese products. It is not possible to compete with China’s low cost of production for similar products. However, Nepal can export unique items like medicinal herbs, among others.
Nepal also needs to address non-tariff barriers to trade with China. There are language barriers that make it difficult for Nepalese traders to deal with their Chinese counterparts. In addition, there are various other barriers that need to be addressed.
Improving connectivity between Nepal and China is also essential. Due to the Covid-19 pandemic, the borders with China were closed for a long time, and Nepal needs to focus on building wider roads connecting China. There are six borders for trade between Nepal and China, but only two are connected by roads that are not in good condition. Instead of focusing on the expensive railways, it would be more helpful to facilitate trade by improving the road infrastructure.