The volume of Nepal’s foreign trade increased substantially in the last decade, largely, due to skyrocketing imports over the years. The exponential growth of imports after trade liberalisation in 2004 converted Nepal to an ‘import-dependent’ country.
As per its commitment during accession to the multilateral trade regime when Nepal entered World Trade Organization (WTO) in 2004, import duties were gradually lowered over the years making imports cheaper than domestic production. According to Hari Bhakta Sharma, President of the Confederation of Nepalese Industries (CNI), the country’s industrial production witnessed turbulent times due to political uncertainties, armed conflict, frequent strikes, donation drive, labour unrest and erratic supply of power. “Many industrialists were forced to pull down the shutters on their manufacturing units and shift to trading business over these years,” said Sharma.
Lack of investment
Adverse investment climate in the country discouraged investors further creating serious challenges of job creation, high inflation and alarming trade deficit. Remittances became a major source for import financing as more and more youth turned to foreign shores in search of livelihood.
But as soon as out migration slackens, remittance growth is retarded thereby affecting the economy. Lack of investment in the production sector has stunted manufacturing. Agriculture base is distorted due to cheaper imports of agro products. With almost no tangible reforms in the foreign investment regime, investment is curtailed. As per the Global Competitiveness Index of 2017-18 unveiled by the World Economic Forum (WEF), Nepal ranks 130 out of 138 nations.
Lack of production base in the country makes it difficult to control inflation caused by the supply side. However, Nepal Rastra Bank – the central regulatory and monetary authority – through various instruments tries to tame inflation. The long political transition, frequent changes in government, natural disasters including the devastating earthquake have all contributed to the declining state of industrialisation in the country.
The government has launched a diagnostic trade integration strategy in 2010 called ‘Nepal Trade Integration Strategy’ (NTIS) to address supply side challenges by developing products and services that have niche market advantage. However, trade statistics show that NTIS products and services could not bring substantive changes in the sluggish exports. Revisiting the list of products and services of comparative and competitive advantage, the government has introduced NTIS (2016-2020) which focuses on product and service development, institutional efficiency, robust trade infrastructure to address the chronic supply side challenges faced by the country.
Experts believe that the government’s revenue policy thrives on imports with almost no control on it. Most developing and developed countries have import restrictions on those products that are hazardous for human and animal health and could adversely affect the environment, however there is no import restriction even on these as the country sorely lacks advanced quarantine services to test the quality of goods. It has been a decade that consumers have been demanding for anti-dumping and countervailing laws however, the government has turned deaf ears.
Commerce Secretary Chandra Kumar Ghimire said that until the revenue policy is not friendly towards the production sector, the country cannot make progress in bridging the trade gap. “Revenue policies are dominant to other policies: industrial and commerce,” he stressed. The government collects 44% of its total revenue from imports, according to the Department of Customs.
Shekhar Golchha, Senior Vice President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has stated that Nepal government has been attentive to championing WTO compliance instead of focusing on industrial development, agriculture commercialisation and job creation. “Developed countries and developing countries have been protecting their industries through tariff policies, non-tariff measures and through providing special protection to potential industries,” Golchha asserted, “But we do not even feel the need to restrict the import of those goods that are dumped in the country and such goods that are hazardous for human and animal health and degrade the environment.” He further stated that the government should bring down import tariff of intermediate goods to raise competitiveness of Nepali industries.
Trade liberalisation has helped boom the service industry of the country – a major contributor to growth. Contribution of the service sector (mainly wholesale/retail) trade has significant contribution in the country’s gross domestic product. Import itself cannot be defined as bad but it should support production, value addition and export. For example, neighboring Bangladesh imports mostly intermediate goods like fabrics to add value and export to the US, and Bhutan imports construction materials, machinery and equipment to increase future production capacity, however Nepal imports for current consumption and not for building production capacity.
Imports have raised excessive consumerism in Nepal. According to trade economist Dr Posh Raj Pandey, import of capital goods (that utilised for capital formation) has squeezed to below 15% and import of goods for consumption has increased dramatically.
To meet these challenges, the government is required to lower tariff on intermediate goods and should invite foreign and domestic investors into the production sector through tangible reforms that include reform in laws, and processes and institutional reform. Investors should be provided with fiscal incentives like exemption in income tax or others, and non-fiscal like subsidised credit from refinancing window of the central bank among others.
There is huge need to create jobs in the country and the government should promote investment in areas which are labour intensive and that have backward and forward linkages within the country or that can create maximum value addition in the economy. “Foreign investment in non-tradable sectors like real-estate, telecommunication and other service oriented sectors cannot meet the objective of the optimum value addition in the country, which is important for jobs and to spur economic growth,” states Finance Minister Yubaraj Khatiwada.
‘Imports must enhance production base’
The fiscal policy and monetary policy of the current fiscal 2018-19 has laid emphasis on accelerating the productive sector. These two policies of the government have ensured fiscal and monetary incentives to attract investment and channelise resources of the financial sector to the productive sector. Growth of the productive sector is almost stagnant since long as fresh investment, innovation, technology transfer was dismal. Imports are basically raising excessive consumerism which is the fault line of the economy. I believe that imports should promote production, lead to value addition and develop value chain in the country’s economy. The strategy of big industries relying on import-based raw materials instead of creating favourable ground for ancillary industries and backward linkages could be risky if the country faces external shocks that could result in decline in remittances. This is why we need to develop resilient, self-reliant and interdependent economy.
An economy should be sustainable environmentally as well as fiscally. Remittances have been lubricating our economy which has basically fuelled consumption. But it is not a lasting solution and we have to provide opportunities for the youth to work in the country by generating jobs. The trading community, which is thriving because of remittances, should shift their business towards setting up industries. Also, making money through trade deflection and arbitrage between prices does not work. While trading is less risky and a means to make a quick buck, our challenge is to show that industries can also be less-risky and entrepreneurship can be developed in industries and a degree of protection will be provided through a transparent tax system, customs, excise in production and exports wherever applicable; financing could be made easier; cost of doing business will be reduced and that could encourage private sector to come into this area.
Industries will get adequate protection, but it will not be an absolute or indefinite protection. Currently there are many cases of dumping and rampant import of low quality, cheap goods that are distorting the markets. Our protection will be in two folds — our products should be competitive in terms of both quality and price. We have binding rates in customs and limitations in value added tax (VAT) because there is no differential treatment in imported and domestic goods while levying VAT. The only window to protect domestic industries is excise. I do not mean there will be differential treatment on excise for domestically manufactured and imported goods, we have to slap equal excise duty for domestic and imported products as per the most favored nation (MFN) treatment and national treatment provision of the WTO. We have used excise as an intermediary approach to protect domestic industries, but it cannot be a long-term solution.
The whole approach of the government is to seek paradigm shift from investment in trading business to industry by channelizing all the productive resources towards the areas where we can generate output, income and employment.