Status of Foreign Trade in Nepal

Status of Foreign Trade in Nepal

• Nepal’s foreign trade has increased over the years in terms of both the total trade-to-GDP ratio and in absolute value. For example, total foreign trade was around 32% of GDP in 2072/73, which has increased to 42.5% of GDP in 2078/79. Due to some restrictions on imports in 2079/80 and the slowdown of imports in recent years, the total trade is expected to remain 34% of the GDP in 2081/82, according to the economic survey. This implies that Nepal’s dependency on foreign trade is increasing over the period.
• The export sector is weak and stagnated for years. For example, export was 2.7%  of GDP in 2072/73, which remained almost the same for years, and as of the economic survey 2081/82, export is expected to increase to 4.1% of GDP. This indicates that Nepal’s efforts in export promotion have mostly failed, as indicated by below 5% of GDP despite the various policies and institutional reforms.
• The import is significantly higher and growing over the years. For example, import was 29.6% of GDP in 2072/73 which has increased to 38.6% in 2078/79 and due to import restriction for some products (luxurious products) in 2079/80, import to GDP declined to 30% and in 2081/82 import is expected to be 29.9% of GDP as per the economic survey. This shows higher dependency on import implying that lower supply capacity of the economy.
• Trade deficit has been a serious threat for the economy which is large and growing over the period. For example, trade deficit was 26.9% of GDP is 2072/73 which increased to 34.6% in 2078/79 but in declined in recent years due to slow economic activities but expected to increase once the economy revives.
• The export to import ratio has remained below 10% during this decade and in FY 2081/82 such ratio is expected to be 13.7% as of the economic survey. This implies unfair gain from foreign trade to Nepal.
• Nepal trades around 60% with India, around 15% with China, which indicates Nepal’s Trade Concentration and inability to diversify the market despite bilateral, multilateral and regional effort.
• There is limited export basket and where the major exports are agricultural based products, other primary products and low value added products for decades. This implies poor innovation and diversification of Nepal’s exports. In some year, there was unexpectedly high export of products such as palm oil, soyabean oil, sunflower oil etc. but the raw material of them is imported and only a small value is added on them. In recent years, hydroelectricity and IT products have shown some potential of exports.
• Import is much and Nepal imports almost all product ranging from regular food items to luxurious vehicle and costly technology.
• Due to free and open market with India, there is significant informal trade is being carried out. Various studies have reported that such informal trade carries around 30%-40% of the formal trade between India and Nepal. This has caused a serious implication in revenue mobilization and Indian currency management. 

Causes of Trade Deficit

Trade deficit has been a serious challenge to the Nepali economy which was around 25% of GDP in 2081/82 and this may further increase when the economy starts expanding. The economy is facing some sluggish progress in the recent years.

The trade deficit was more than one third of the GDP in 2077/78 which was reduced to around 25% of GDP due to the restriction in some of the import as well as slow growth of the economy. This shows that the trade deficit as a major threat to the macroeconomic stability of the country. The following are the major reasons for such increase in trade deficit.

1. Limited supply capacity of the economy.
2. unable to compete by the domestic products in terms of both price and quality.
3. Poor marketing. branding, and standardization of the local products.
4. Poor trade diplomacy in realizing benefits given by bilateral, multilateral and regional trade agreements.
5. Relatively higher inflation rate and erosion in the competitiveness of the economy.
6. Increasing remittance income and growth of disposable personal income of household.
7. Appreciation of real exchange rate of the Nepalese currency due to fixed exchange rate with India for long and increasing inflow of foreign currency.
8. Growing consumerism culture and demonstration effect.
9. Erosion in the preference of domestic product, technology and resources.
10. Pre-mature deindustrialization and conversion into trade based business or entrepreneurship.
11. Import based revenue policy, businesses and economic activities.
12. High infrastructural cost, bureaucratic hassle to the export and poor capitalization.
13. Lack of internationally certified or accepted labs and issue of certification of quality assurance.
14. Lack of marketing, branding and standardization capacity of SMEs.

Role of Monetary Policy | Central Bank to reduce trade deficit

Monetary policy can play an important role in correcting trade deficit. The following are the monetary measures to reduce the trade deficit.

1. Provision of subsidize in the export credit in order to export cost.
2. Restriction in the import credit by increasing interest rate ceiling on the import credit and control of LC.
3. Provide interest incentive in the productive and manufacturing sectors.
4. Strict control of informal and illegal of trade (imports) through control of Hundi, Online gambling, online transfer, crypto etc.
5. Promote public awareness on the state of economy and consumption of domestic product through regular update of the data, research and publication.
6. Promote financial literacy for the best use of money and discourage consumption.

Foreign Investment

It is the investment made by the foreign individuals, groups or companies in the form of direct and portfolio investment. The FDI refers to the investment made by the foreign by establishing new company, as a partnership to the local company and as a subsidy company of any MNCs. The FDO comes in the area of comparative and competitive advantage with the objective of long term profit. The investor of FDI is directly involved in the management of the organization as per the rules of the company.

Similarly,  there may be foreign portfolio investment (PFI) where the foreign investor invest in equity, bonds, debenture or any ither financial transaction through the capital market based on the speculation. The  motive of such type of investor is not the growth of the company and for long term profit of the organization rather to earn the profit based on the speculation. So, FPI is the speculative investment made by the foreigner in the domestic capital market.

The foreign investment and technology transfer act 2019 (2075) defines the foreign investment is the investment made by foreigners as

• The investment in the shares (equity of the company)
• Re-investment of the profit earned by the foreigners
• Laon to the domestic industries

Similarly, technology transfer is defined as the permission to use the brand name, franchising, use of specific chemical formula, patent rights and trademark, license etc.

Importance/Rationale of Foreign Investment

The development experience of the world have shown that the countries which are able to attract more foreign investment in their strategic and priority sector are able to achieve rapid transformation in their economy. The example is China has received huge foreign investment from USA and Europe and China is one of the fastest growing economy with miracle in achievement within the short period of time.

Importance of foreign investment are:

1. To bridge the gap between saving and investment in the economy.

• • Gross Domestic Saving – 10%
  • Gross investment – 40%

This gap should be minimized

2. To transfer and develop technology
3. To mobilize the resources such as natural and human resources in efficient manner.
4. To create employment opportunity and support for poverty reduction.
5. To increase Forex reserve and help to maintain favorable BoP.
6. To reduce trade deficit by increasing export and substituting imports.
7. To improve the competitiveness and productive capacity of the economy (after the arrival of Pathao, Indrive and Ncell, domestic companies should strengthen their competitiveness)
8. To increase the government revenue as economic activities increases.
9. To enhance market access and integration into the regional and global market.
10. To integrate into the global value chain and minimize the risk of internal trade.
11. To extend and develop international relation.
12. To develop large infrastructure and capital formation for growth and development.