Thursday, February 3, 2011

Exports prospect of Nepal

My latest piece is about exports prospects of Nepal in the fiscal year 2010/2011. I did a simple annual estimation from five months data of this fiscal year. The main point is that exports this fiscal year might not increase while imports will increase relative to previous two years. Nothing has fundamentally changed with regards to productive capacity and efficiency in the economy. So, the underlying problems that have been plaguing our export and industrial sectors still persist. Unless we solve these exogenous and endogenous problems, export prospects will remain gloomy.

Nepal's exports prospect

The latest macroeconomic update released by the central bank shows a favorable growth in exports, and decline in both trade deficit (the difference between monetary value of exports and imports) and balance of payments (BoP), which basically is an accounting record of all the monetary transactions between Nepal and the rest of the world, deficit. While many marveled at the decline in trade and BoP deficits, a bitter truth about the state of our export and industrial sectors was pretty much ignored: We are still stuck in the same mess we have been for a couple of years now and growth prospect of exports and industrial sectors look as gloomy as it was last year.

During the first five months of this fiscal year, merchandise exports increased by 8.5 percent to Rs 27.3 billion, which is an improvement by Rs 2.1 billion over the same period last fiscal year. Meanwhile, imports increased by 0.6 percent to Rs 154.3 billion, which is an increase by Rs 0.9 billion over the same period. Hence, trade deficit amounted to Rs 127 billion, a decrease of Rs 1.4 billion. The decline in imports and an increase in remittances helped overall BoP deficit to shrink to Rs 3.4 billion from Rs 14.6 billion over the same period. In short, this is the story about the status of our external sector in the past five months of fiscal year 2010/11.

Now, an intriguing exercise would be to project the likely performance of exports and imports for the full year, which the central bank should have done but is not doing so far. Based on the trend in the last two fiscal years, the annualized figures for exports and imports for this fiscal year are expected to be Rs 63.3 billion and Rs 379.6 billion, respectively. Based on this calculation, the trade deficit will be between Rs 316.3 billion and Rs 318.4 billion. Simply, it means that Nepal will be importing six times as much as it exports by the end of fiscal year.

Rather than comparing five months figures as the central bank did, let us compare the annualized numbers with previous years’ data, which gives a better picture of the performance of exports sector. In a nutshell, the core message is that exports performance during this fiscal year will not be different from what it was in the last two years. The deepening of the global economic crisis severely affected exports last fiscal year, when it stood at Rs 61.1 billion as compared to Rs 67.7 billion in FY 2008/09. On an average, exports during the last two years was around Rs 64.4 billion, which is still higher than what is expected by the end of this fiscal year. Following the same methodology, imports this fiscal year will be higher than the average of last two fiscal years. It means that trade deficit will also be higher. Overall, the exports sector’s performance this fiscal year does not seem encouraging and there is little reason to bask on improved yet incomplete data for the first five months of this fiscal year.

Before going into the potential reasons for dismal performance of exports sector, let me first discuss a little bit more about how our exports are expected to perform until 2012. According to Global Economic Prospects (GEP) 2011, exports, as a share of GDP, are expected to continuously decline, reaching 9.9 percent in 2012 from 11 percent, 12.9 percent and 15.7 percent in 2011, 2010, and 2009, respectively. Meanwhile, imports are expected to continue increasing in pretty much the pattern it is doing so far. This means trade deficit is expected to further widen in 2012. Worse, due to weak foreign currencies, thanks to lose monetary policy in the West, our exchange rate is expected to appreciate, making our exports costlier abroad, which will put further strain in the performance of this sector. Add to this the impact of rising inflation rate in Nepal, our exports will be even more uncompetitive in 2012, if the underlying constraints that plague this sector are left unaddressed.

Now, you might be wondering what’s up with all these numbers and performance of exports sector? Well, the reality is that its performance largely determines the strength of our industrial sector, our external/macroeconomic balance, and to some extent our economic growth rate. With the existing state of exports and other economic fundamentals, Nepal’s real GDP growth is expected to be 3.7 percent and 4 percent in 2011 and 2012, respectively. It means that Nepal’s real GDP growth rate will be second lowest in South Asia in the next two years.

The main point is that despite a marginal increase in exports, slow growth rate of imports, and declining balance of payments deficit in the first five months of this fiscal year, we still are in a deep trench. Our economic fundamentals have not changed. The same problems that have been plaguing our exports sector are obstinately persistent. Supply-side constraints such as intermittent blockades, labor disputes, and lack of adequate infrastructures (primarily road transport and electricity) are further eroding our competitiveness. These constraints are mostly exogenous in nature. They are making our exports uncompetitive and are also preventing diversification of exports basket.

That said, some endogenous factors such as the lack of entrepreneurship and innovation in exports sector, the ignorance about the rapidly changing and globalizing market, and the inability to embrace a change in restructuring production, marketing and distribution structures of firms are some of the other factors ailing the growth of industrial and export sectors. This is corroborated by the World Bank’s projections in GEP 2010 and GEP 2011. The GEP 2010 projections showed higher growth rate in exports and in exports as a share of GDP, but they were revised down due to persistent negative impact of the above-mentioned constraints.

Most of these are non-economic constraints. So, the set of solutions are political consensus on national agenda regarding export and industrial promotion, amicable settlement of labor disputes, and simplification of rules and procedures regarding construction of infrastructures directly related to these sectors. It should be aided by promotion of entrepreneurship in and restructuring of exports sector. Else, our exports and industrial competitiveness will continue to decline, resulting in a widening trade deficit, prolonging of BoP crisis, further slowing down of growth rate, and stagnating employment opportunities.

[Published in Republica, February 3, 2011, p7]