Nepali Times Asian Paints
CHANDAN SAPKOTA
Its The Economy
Lost priority, New!


CHANDAN SAPKOTA


Each time a Nepali delegation attends bilateral trade talks, one issue never changes: plea for duty free access and concessions. They seem to forget the fundamental factor that will enable us to export more is the ability to competitively produce goods and services in the first place.

It is not that tariff and non-tariff barriers are unimportant to increase exports. The fact is that these largely help in trade facilitation, whose importance is high only when we are able to boost production competitively. Sadly, this is not the case right now. Rather than begging for more concessions during trade talks, the primary focus should be on effectively tackling constrains faced by the industrial sector, improving investment climate, and then seeking bilateral assistance to enhance production efficiency. Otherwise, even if we get greater market access and concessions, we won't be able to fully utilise them.

For instance, at the Nepal-China Consultative Meeting on Monday, Nepal requested China to help decrease rising bilateral trade deficit, which reached Rs 45.7 billion in 2010-11, by offering favourable market access, among others. China already provides zero tariff facility to 4,721 export items of Least Developed Countries, including Nepal. Though some of the export items of interest to us are not included in that list, Nepal is simply unable to take advantage of the zero tariff facility on other goods. The reason is that even with such concessions our exporters are unable to competitively produce goods to compete with Chinese counterparts.

The only way China could help us narrow down trade deficit is by investing in the prerequisites for competitive production: supply of electricity and technology transfer in the agriculture and manufacturing sectors. Other than this there is very little China can do to decrease bilateral trade deficit because Nepal is rapidly losing the market pie to more competitive producers and is also importing more Chinese goods each year.

Similarly, during a meeting between commerce secretaries of Nepal and Bangladesh in July, Nepal asked Bangladesh to provide concessional market access to 146 products, to which the latter agreed in principle. Nepal has requested such concessions with almost all trading partners, including India and the US. The irony is that despite knowing that our producers and exporters will be unable to utilise such concessions without improvement in industrial relations and investment climate, we still plead for them by wasting resources and energy.

For instance, Nepal gets duty free access for almost all manufactured goods exported to India. Still we are unable to take advantage of it due to domestic production constrains.

A case in point is the export of iron and steel, whose total import by India was $8.3 billion in 2010. Of this, Nepal's share was just 1.22 per cent. Note that Nepal gets duty free access to the Indian market like no other country. The minor non-tariff hiccups in trade with India don't fully account for our inability to increase exports there.

Nepal has an unsustainably high merchandise trade deficit (25 per cent of GDP). The rapidly increasing imports are primarily financed by remittances. Exports started declining rapidly after 2000-01, the same year the Maoist insurgency intensified, as a result of disruption in production and deteriorating investment climate. Driven by lack of employment opportunities, the same year also marked the beginning of the exodus of a large number of youths for overseas employment. It resulted in high remittance inflows (around 20 per cent of GDP). In 1997-98, income from exports constituted the largest share (37 per cent) of total foreign exchange earnings. Currently, while its share is less than nine per cent, remittances contribute a whopping 62 per cent to total forex reserve.

The high dependence on remittance financed imports as a result of low domestic output and uncompetitive exports is widening the trade deficit. To decrease the gap, there is no other option but to increase production and exports. What is barring us from doing so? Inadequate supply of infrastructure and poor investment climate are the two key factors.
First, firms are operating below potential due to insufficient supply of electricity and lack of workforce. Second, cost of production is rising due to the compulsion to run diesel guzzling generators and multiple hurdles along the poorly maintained trade routes. Third, poor investment climate arising from labour militancy, extortion, frequent strikes, disruption of supply chain, and high cost imposed by syndicates along with rising cost of doing business in general are eroding industrial strength.

These are making production uncompetitive and exacerbating our ability to utilise readily available market potential abroad. Solving these should be the first priority of our leaders instead of begging for market concessions during each bilateral trade talk. It is the responsibility of not only the Ministry of Commerce and Supplies, but all line ministries, political parties and the private sector.

www.chandansapkota.wordpress.com
www.sapkotac.blogspot.com



1. S J Thapa
Excellent piece as usual from one of Nepal's most incisive commentators on finance and economics.  It is disheartening to know that we go around begging for trade concessions (which we should not have to in the first place given that free trade is such a powerful mantra) instead of solving basic problems such as lack of electricity, constant labor problems, and poor infrastructure in the country.

2. NepaliEconomy.com

Great points.

 

Essentially, if Nepal can export duty-free to China or India, from economic standpoint, Nepal is just like any other province of those countries, say Bihar or Tibet. The only way Nepal can be competitive vis-�-vis other provinces of India or China is if Nepal has lower labor and non-labor cost.

 

You highlighted high non-labor cost in Nepal. Labor cost is equally important. I think labor cost in Nepal is very high relative to productivity, or in econ-speak, unit labor cost in Nepal is very high. That's the result of Nepal's labor market joined at the hip with higher paying labor markets of Gulf and SE Asia.

 

My hunch is that lowering non-labor cost (infrastructure, militant labor, rule of law, regulation etc) helps but without lower labor cost, Nepal won't be able to compete regionally or globally.

 

The bottom line is that Nepal shares the plight of other remittance-dependent economies like Philippines and Bangladesh in that the most vibrant non-agricultural sector is services not manufacturing because services benefit from the money flowing into the economy from remittances while manufacturing struggles owing to very high unit labor cost.

 

Just my 2 paisa (visit NepaliEconomy.blogspot.com or MacroStrategy.blogspot.com)



3. Nirmal
Yes, these are the primary things on which any Nepali govt should work on IF it aspires to be the guardian of a country with functioning democracy. Because in absence of these basic facilities Nepal is, beyond the doubt, in the stone age. I'd rather be envied than pitied and this is how the country's economy must go on.
   It makes me laugh when a politician -baburam Bhattarai- whose "optimistic political theory" led to the massacre of 17K people claim to lead the growth to the double digit. I'm not sure of Babauram Bhattarai has any solid idea of diversified economy, his claims sound hollow promises.


4. HareyRam
Informative article. Did not know that our negotiations focussed only on concessions.


5. Hira Thpa
If we talk less and work more in Nepal, it could get better. If we learn to work harder than just begging, it may be better, of course I am talking about our smart high ranking govt. officers and politcians.  When everything is consumed by nepotism and politics its hard to make gains. The answer to our problems - just look at our leaders and what they have done for us. 

6. Raghubir Pandey
Some famous once said, Its the economy stupid and became the President of America.  How can it anything else.  I am surprised that old men from the political parties dominate and dictate to the younger and smarter generation of future leaders. Only in Nepal !  Poudel, Koirala and Deuba, all 3 incompetent fools driven by personal and petty politics want to be the next PM of Nepal. These 3 immoral men are holding the future of Nepal hostage to their big fat egos. UML and Maoist, these commies know only how to loot the treasury and have no intention or ideas to develop Nepal. The Indians control the leaders of the Terai. So who can or who will rescue Nepal from the daily destruction and collapse. All Nepalis cannot be corrupted or immoral, so where are the honest men hiding. Why do they not come forward. All Nepalis cannot be cowards, so where are the brave sons of Nepal.  We must sacrifice a handful of traitors and pave the way for the future of 28 million Nepalis to shine. The time for comments, opinions or speeches and talks is over. The simmering of volcano of injustice and corruption is ready to erupt and wash away all the evil people of Nepal in the stream of its lava. There is no other option on the table for Nepalis.  


7. shyam
#6.  "The simmering of volcano of injustice and corruption is ready to erupt and wash away all the evil people of Nepal in the stream of its lava."  I like this statement. Maybe, the big slaps to Mr. Jhallu was an example of the stream of lava you imagined, but still he is indifferent in his political attitude. A hammer by chair to Prachanda and a punch to PM BRB are not still enough to melt over the evil leaders of us - donkey people. People are proudly organizing strikes in favour of Corrupt leader Khum Bahadur and smashing vehicle's windshield for the benefit of crook and filthy person Mahesh Basnet.           

8. Deeps
informative article. If Nepal has  more focus priority to strength domestic industry and creating favorable investment climate will definitely helps to reduce trade deficit gap and make us less dependent. Sadness part is that we didn't capitalized  being member of SAFTA, WTO ...where least developed country has given much space and priority to encourage them to participate in regional and global trade....just we do only negotiations, concession, bargaining ...

LATEST ISSUE
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(11 JAN 2013 - 17 JAN 2013)


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