Something’s wrong with it

  • The export subsidy plan has been stumbling along with nothing to show for it
- Bijendra Man Shakya

Jun 19, 2014-

Something wrong with the government’s export cash subsidy programme launched four years ago. Arguments had arisen right at the very beginning between the government and exporters over the subsidy distribution criteria. Now it seems it has become engulfed in another controversy. Besides value addition, the government is considering stipulating the contribution of export products to poverty reduction as one of the requirements to be eligible to receive the subsidy. Recently, the joint secretary-led sub-committee on export subsidy at the Ministry of Commerce has made a proposal to tie the incentive with export promotion, employment generation and poverty reduction.

Although the proposal looks reasonable on the surface, it obscures the core objective of the subsidy programme. The government has announced the incentive with the key objective of boosting exports to reduce the unprecedented rise in the country’s trade imbalance. That means it is meaningless to link poverty reduction with subsidy, although the condition of value addition could be deemed necessary as a basis for distributing the subsidy. Thus the task is to assess whether or not the subsidy has improved exports and the trade balance rather than vaguely linking it other secondary issues and preventing it from progressing towards attaining the ultimate goal.

At this stage, the most important thing is to study why the subsidy programme has not produced any tangible results even after four years of operation. If we examine the correlation between the subsidy and the export performance, it is not encouraging. Although exports have grown in absolute terms after the introduction of the subsidy, the figures look erratic and trivial. From a negative export growth in the initial year, it indicates a positive but irregular growth afterwards: from 5.8 percent in 2010-11 to 15.4 and 3.6 percent in the succeeding years. For these growth rates, the impact of a depreciation of the Nepali rupee vis-à-vis the US dollar as a result of the foreign exchange disorder in India during that period cannot be underestimated.

Moreover, the ineffectiveness of the subsidy has been shown by the stagnant export ratio in the country’s GDP during the review period. The ratio has remained marginal and indicates no improvement even though the government has blown tens of millions of rupees in subsidies in the past four years. The export ratio could not cross even 5 percent of the GDP throughout the review period. Nor could it give any indication of a recovery in the trade imbalance, which was the ultimate goal of the subsidy. The deficit did not shrink from the equivalent of one-fourth of the GDP in these years. Instead it has surged from Rs 320 billion in 2010-11 to a whopping Rs 460 billion after three years, which is very upsetting.

And instead of taking care of these unwanted results and devising better proposals, the government seems to be tinkering with the subsidy programme by focusing more on the means than the ends. The primary purpose of an export subsidy is obviously increasing exports. In principle, exports can be increased by reducing the prices that foreign buyers have to pay for the subsidized products or by using the subsidy in enhancing an individual exporter’s supply capacity to cut costs and ultimately prices of exports.

Although both are aimed at price competitiveness, they were not exactly appropriate to Nepal’s case. Nepal being a small player in international markets, demand for the existing export products cannot be increased simply by cutting their prices. This is because demand for our exports is neither price sensitive nor are the products a dynamic sector in international markets. For example, lentil exporters have claimed and received almost 50 percent of the total subsidy funds so far, but there has been no tangible outcome. Ironically, lentil exports shrank from Rs 4 billion in 2009-10 to Rs 3.5 billion in 2010-11 and further to Rs 2.5 billion in the following year. The performance of most of the existing export products is the same.

These developments suggest two things. One, the direct cash subsidy is so small and cumbersome that exporters, who are mostly small scale traders, have not bothered to apply for it. It has not attracted new entrepreneurs into the export business either. Two, it is narrowly focused instead of being broadly envisioned by sidelining the total productivity and product line development. The government should, therefore, think about these things seriously instead of messing around with petty aspects as it is currently doing.

(Shakya specializes in economics and the trade interests of Nepal and the LDCs.)

Published: 20-06-2014 09:16

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