Print Edition - 2014-07-21 | MONEY
All quiet on trade front
- The budget doesn't say much about boosting trade and the huge deficit is likely to persist
Jul 20, 2014-The finance minister has revealed the daunting challenges the country faces in all the key sectors of the economy from agriculture to industry and trade while presenting the budget estimates for the fiscal year 2014-15. He has expressed concern over the inability to modernize and commercialize the farm sector which is the mainstay of the economy. The dwindling industrial sector was equally a matter of worry as it has shrunk from a peak of a 9 percent share of the GDP in the post-reform period to 6 percent currently. In the same way, he was dissatisfied with languishing exports and galloping imports that led to an unbearable trade imbalance with the deficit approaching a whopping Rs 600 billion mark.
In a bid to correct these anomalies in the economy, the finance minister has announced a number of steps in the budget intended to spur investment and production that is necessary for sustained economic growth. Although not bold enough, production-oriented incentives have been announced in different forms, particularly in the agriculture sector that has been stagnating for years. Similar benefits have been announced to revive the manufacturing sector. However, the finance minister has not announced any clear-cut measure to improve the country’s external trade. In this sense, the budgetary plans and programmes appear to be less meaningful, if not counterproductive, to the trade sector.
First, adequate budgetary allocations have not been made for external trade, particularly to boost exporter capacity. Except for giving continuity to the existing programmes, which are either lingering or have already been proved ineffective, no concrete measures have been revealed to uplift the trade sector. As in the past, the budget speech reiterated plans for construction of special economic zones (SEZs) and inland container depots (ICDs) while acts governing their operation still do not exist. No efforts have been made to bring the under-utilized and relatively sophisticated ICD in Birgunj into full swing.
Likewise, there is never sufficient budgetary provisions for the establishment of long sought trade support entities like quarantine and laboratory facilities. These support services should have got utmost priority at any cost as our exporters have been hindered by non-tariff barriers simply because of lack of such facilities in the country. Inadequacies like these in the budget can affect the development of infrastructure which is vital to consolidate output and enhance delivery efficiency in our trade.
The budget has given continuity to cash subsidies for third country exports. Though this policy looks good, the faults in the subsidy programme have been grossly ignored. From the beginning, this programme has been criticised for the improper criteria for distribution of the subsidy which has led to a dispute between the government and exporters. Moreover, the programme has not been able to give a boost to exports to cut the trade imbalance which was its intended goal.
There are two major reasons for this fruitless outcome. One, it was a blunder to exclude exports to India from the subsidy scheme when this was actually where the government should have focused to correct the trade imbalance. India is the single largest contributor to our total trade deficit, so without addressing the India factor, it is almost impossible to overcome the problem of trade imbalance. Two, the amount of the subsidy was so small to the point of being almost irrelevant, and exporters didn’t even bother to claim it as it wasn’t worth the paperwork. The subsidy was neither adequate to cut production costs nor to induce investment to boost productivity.
The budget, therefore, should have revised the subsidy programme by considering these defects. It should have changed the system from directly distributing cash to exporters to indirectly supporting them through subsidization of bank loans, freight charges and taxes. These measures can attract new entrants to export trade and enhance production and productivity as they are directly linked to the export transactions without discrimination. More importantly, it can sort out the controversial subsidy distribution criteria based on the value addition of export products. However, the budget has overlooked these amendments and kept the disputed issues unresolved. That means the subsidy scheme is likely to remain ineffective and less meaningful in the coming days too.
By all accounts, the budget has ignored the trade sector. One of the chief reasons for this is the government’s lack of farsightedness. The private sector, however, cannot escape blame for this negligence on the government’s part. They lacked the advocacy to build an export strategy. Against this backdrop, one can hardly expect Nepal’s trade sector to make any remarkable progress in the near future. This means that the country’s steep imbalance in its foreign trade is likely to persist.
(Shakya specializes in economics and trade interests of Nepal and the LDCs.)
Published: 21-07-2014 09:17