Nepal’s economic vulnerability worsens as deficit up twofold

- POST REPORT, Kathmandu
Nepal’s economic vulnerability worsens as deficit up twofold

Oct 7, 2014-

Nepal’s economic vulnerability has worsened with the trade deficit doubling to Rs 631.42 billion over the last five years as imports massively overtake exports.

Since remittance is the biggest source of financing for the country’s surging imports, the economy has been exposed to external incidents particularly security and policy issues in the Middle East and Malaysia from where Nepali migrant workers send money home.

According to Nepal Rastra Bank (NRB), the country received remittance worth Rs 543.29 billion in the last fiscal year 2013-14 becoming its largest source of foreign exchange.

According to the Trade and Export Promotion Centre (TEPC) under the Ministry of Commerce and Supplies, the average trade deficit grew 20 percent over the last five years. The deficit amounted to Rs 314.66 billion in fiscal 2009-10.

During the period, imports jumped to Rs 722.78 billion from Rs 375.61 billion while exports inched up to Rs 91.36 billion from Rs 60.95 billion, said the TEPC. Export earnings amounted to one-eighth of the imports in the last fiscal year.

As a result, the country’s income through remittance, exports and even foreign grants and loans are not enough to pay its import bills. Nepal received Rs 686.67 billion in remittance, export revenues and foreign grants and loans in the last fiscal year.

Trade expert Posh Raj Pandey said the rising trade deficit had posed a great risk to the economy as the country was heavily dependent on remittance for even essential goods.

“If the Gulf countries where thousands of Nepalis are employed were to be caught up in a situation like in war-torn Syria and they make policy changes limiting the intake of Nepali workers, Nepal may not have enough money even to buy medicines,” he said. “It will also invite destabilization in the country with a large number of unemployed youths.”

The country has been traditionally dependent on imports for modern goods such as automobiles, machinery and electronics, but now it is becoming increasingly dependent on imports even for agricultural products.

“The increased imports of consumption goods show that the country’s productive capacity has diminished over the years, and that is not a good sign,” said Pandey.

To compound the problem, the country’s export sector has been marred by political instability, lack of proper industrial environment and policy paralysis and inconsistency and incoherence.

Although failure to gain market access is one concern, the biggest obstacle to improving the country’s disappointing export performance has been supply side constraints. “The country’s productive capacity has been badly hampered by lack of energy, road, labour problems and lack of trade facilitation measures,” said Pandey.

On the other hand, there has been policy incoherence in providing cash export subsidies.

“Although the country ships two-thirds of its exports to India, cash incentives are being provided only to exports that earn foreign exchange and not Indian currency,” said Pandey. A majority of the goods that are exported to India are farm products.

Most of the products that have been listed in the Nepal Trade Integration Strategy (NTIS) are related to agriculture. The NTIS products are those that have been identified as having huge export potential.

“The government’s failure to give cash incentives to such products has resulted in poor export potential although it has given priority to NTIS products on paper,” said Pandey. Out of the 13 products under the NTIS, eight are related to the farm sector. Exports of NTIS products amounted to Rs 27.41 billion as of the last fiscal year, according to TEPC.

As far as imports are concerned, a huge amount of money is being spent on importing petroleum products and inverters.

“The development of the hydropower sector will result in a massive slash in petroleum imports and other imports that have swollen due to load-shedding,” said Pandey. “This will also help boost domestic production as energy is vital for enhancing the country’s industrial production.”

 

Published: 08-10-2014 09:59

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