Nepal doesn't produce its 2 biggest export items

Question: What are Nepal’s first and second biggest items of export?

Answer: Soyabean Oil and Palm Oil.

How is that possible when the country does not even produce these commodities? The reason is that Nepal’s private traders import soyabean and palm oil in bulk and re-export them to India exploiting tariff differentials.

However, experts say this undermines Nepal’s own manufacturing potential and harms the country’s credibility in international trade fora.

After being introduced to Southeast Asia from Africa by European colonials, palm trees now produce oil that makes up one-third of all vegetable oil consumed in the world today – and 85% of it is produced in Indonesia and Malaysia.

Nepal exported Rs41.03 billion worth of palm oil last fiscal year to India – making up more than 20% of total exports to all countries. And the volume of both imported and exported palm oil has grown exponentially in the past three years, rising from just Rs10.3 billion in export in 2018.

It is the same story with soyabean oil. Nepal cannot even produce enough soya oil for its own needs, but exported nearly Rs50 billion worth of the cooking oil last year. In fact, soya oil is Nepal’s biggest export item, making up one-fourth of total exports.

Sunflower oil is also not produced in Nepal, but the country exported Rs4.5 billion worth of the product. All three types of vegetable oils went to India.

Added up, half of Nepal’s total exports are made up of these three types of vegetable oils that are re-exported to India with very little value-added in the country itself.

In fact, Nepal spent Rs46.2 billion importing palm oil and Rs53.2 billion buying soya oil from abroad, and showed it as ‘artificial’ exports.

The main reason for the growth in trade of these commodities is the differential in import tax on them in Nepal and India. Nepali traders are using South Asian Free Trade Area (SAFTA) provisions for tariff-free or low tariff exports of certain items to India.

India, however, has high tariffs on agriculture imports to protect its domestic industry, which means direct exports of palm, soy and sunflower oil to India is not competitive for producers.

“While this is a windfall for traders, Nepal just gets to raise some taxes and does not benefit from it all,” explains Posh Raj Pandey of the South Asia Watch on Trade Economics and Environment (SAWTEE). This is why the Nepal government is not stopping the trade even though it actually harms the country's economy in the long-term.

India has demanded that items that it imports tariff-free from neighbouring countries should have been levied at least 30% SCT there. However, although India stopped importing soy and palm oil from Nepal in 2020, the trade did not just pick up but doubled in 2021 after imports resumed.

Nepal’s exporters of the oils say it is not true that there is no benefit for Nepal, since the imported items are repackaged using electricity, cartons, metal containers and labour.

“Nepal needs Indian rupees to pay for its imports, and we import these items in dollars and export in Indian rupees, which benefits the country,” explains Pradeep Murarka of Sriram Refinery.

The tariff-free re-export from Nepal of cooking oil has often been an irritant in secretary-level negotiations between Nepal and India. New Delhi has stopped imports periodically to protect its domestic manufacturers, but opened it depending on local demand for the commodities so as to address shortages.

It is not just vegetable oils in which Nepali traders have been benefiting from SAFTA tariff concessions. They have also ex-exported or smuggled pepper, cloves, cardamom, dal, supari, etc.

“The Indian side raised the issue of supari re-export and smuggling numerous times, including pointedly in my meetings with then Commerce Minister Nirmala Sitharaman,” recalls the former joint secretary Rabi Shankar Sainju at the Ministry of Commerce and Supplies. Sitharaman is now India's Finance Minister.

In 1996, India allowed zero tariff import of vegetable ghee from Nepal, resulting in a sudden spurt in factories in Nepal reprocessing imported raw material. But in 2002, India imposed a cap on vegetable ghee imports from Nepal, which put many of these manufacturers out of business. Nepali re-exporters of acrylic yarn, copper wire and zinc oxide also shut down after similar Indian restrictions.

Not only has this underhand trade discouraged Nepali manufacturers and set back the country’s industrial development, but it also comes at a cost to the country credibility in the international arena.

Says SAWTEE’s Pandey: “Traders only want to profit from such illicit trade, and the government is allowing this at the cost of domestic productivity. The politics of patronage means that the businesses are capable of influencing Nepal’s trade and tax policies.”

In fact at a time when Nepal’ foreign exchange reserves have fallen to only six months worth of imports, the government earlier this year opened the import of supari – not for domestic consumption but for re-export to India.

Posh Raj Pandey sums up the malaise: “Businessmen are colluding with politicians to award themselves tariff rebates paid for by tax payers. This is slowly killing Nepal’s industrial and manufacturing potential.”

Read more: Nepal less and less able to feed itself, Ramesh Kumar