Sunday, June 10, 2012

Changing composition of and destination for exports and imports of Nepal

The composition of Nepal’s export basket is changing. Some of the traditional export items like honey and garments have lost market share. Meanwhile, exports of iron and steel products as well as textiles have increased rapidly along with that of tea, ginger, essential oils n.e.s., instant noodles, medicinal herbs, large cardamom, and wool products. Overall, the share of merchandise exports in GDP declined from 10 percent in fiscal year 2003/04 to 5 percent in fiscal year 2009/10.

The composition of merchandise imports is also changing. The share of agricultural goods and textiles and clothing imports fell. The share of transport equipment, electrical and non-electrical machinery, and iron and steel increased. Notably, the share of imports of gold rose from 0.1 percent in 2003 to 11.1 percent of total imports in 2010. Gold imports began to rise after India raised its import tariff. The tariff increase may have encouraged Nepal to import gold from third countries and trade with India. In value terms, petroleum products, vehicles, machines, and iron and steel were Nepal's main imports.

Along with the changes in the export and import baskets, there have also been changes in direction of trade. On top of the flow of exports and imports over the past few years to the top destinations, it is also revealing to look at the direction of trade in 2003 and 2010 (before WTO accession and the latest year of comparable data available after 2004). While India's share in exports is increasing, the US's is decreasing, perhaps reflecting the sharp decline of Nepali garment exports following the phase out of the Agreement on Textiles and Clothing. On the other hand, Nepal's exports to some SAARC members such as Bangladesh and Bhutan have increased rapidly, but the volume of exports in absolute terms is insignificant.

With regards to imports, the share of Nepal's traditional trade partner – the EU – as an import source has declined, while the shares of the Middle East countries, in particular the UAE, have increased rapidly. India still commands the lion’s share of Nepal’s import.

Apart from India, other major sources of Nepal’s imports are China, UAE, Indonesia, Thailand, the UK, Japan, South Korea, the US, Argentina and Singapore. Imports of goods have exploded unsustainably. Between 2000/01 and 2009/10, while imports from India increased by 374 percent, imports from China, UAE, Indonesia, Thailand and the US increased by 239 percent, 1052 percent, 256 percent, 127 percent, and 318 percent, respectively. 

[The figures are based on data from UNSD, Comtrade database (SITC Rev.3); sourced from Nepal’s TPR 2012

Few observations:

  • Sophistication of Nepali export basket is very low. The export items are still low-valued goods with high price elasticity of import demand. Nepal is losing competitiveness in its major export, i.e. garments. The government cannot promote all export items at the same time. It should focus on promoting the 19 goods and services identified in NTIS 2010.
  • Trade concentration is with India is very high. The share of trade deficit with India in fiscal year 1974/75 was 78.81 percent. It decreased to 26.55 percent in fiscal year 1988/89 and then started increasing rapidly in the last two decades, reaching 65.87 percent in fiscal year 2010/11. The total trade deficit in 2010/11 was NRs 331.84 billion. Nepal is selling high amount of dollars to purchase Indian rupee, which in turn is used to purchase goods from India.
  • Competitiveness of Nepali export items is going down. The main reasons are: lack of adequate supply of infrastructure, political instability/strikes, labor problems, lack of innovation by private sector, and government’s inability to implement key reforms enshrined in major policy documents. The state of trade facilitation in Nepal is pathetic, ranking 124 out of 132 countries. Nepal has the fifth worst logistics efficiency in the world. Supply-side constrains have eroded competitiveness to a great extent. The situation has reached to such an extent that some businessmen design garment items here, manufacture in Bangladesh and then import them for consumers in the Nepali market.
  • Due to huge remittance inflows, Nepalis are consuming at an alarming rate. There are symptoms of Dutch Disease. Some of the imports like petroleum fuel cannot be curbed in the absence of alternative sources of energy. Simply, a Dutch disease occurs when an economy depends on one sector so much that it leads to decline in manufacturing sector. In Nepal, increasing remittances at the household level have led to high consumption demand, high imports, and appreciation of real exchange rate, resulting in the erosion of manufacturing sector and its competitiveness.
  • At the same time, the subsidy given by government in diesel and LPG is destroying NOC’s balance sheet and putting strain on fiscal balance. The increase in load-shedding hours has led to substantial rise in demand for diesel, which has further widened trade deficit.
  • Reviving exports with SEZs has remained a distant dream. The cash incentives for exports scheme, though a bit misplaced, should be broadened in terms of value addition and employment generation.
  • Apart from addressing the supply-side constraints, the government needs to devise smart strategies to foster R&D investment, innovation, production of high-value goods and services based on our comparative advantage and endowment, and promote Nepali items in the international market (this would also require active involvement of Nepali embassies and consulates aboard). Rather than relying more on tariff and quota concessions (we need them!), Nepali exports sector need to shore up its competitiveness; both the government and the private sector need to be pro-active role on this front.

(Relevant tweet for the figure above here)

Exports are declining, especially after 1996 (so is the contribution of industrial sector and manufacturing sector to GDP). Export of goods and services was 26% of GDP in 1997. It was 9.75% of GDP in 2010. It is expected to be 9.78% of GDP in 2011/12. Imports are ever-increasing, reaching 37% of GDP in 2010. It is expected to be 32.57% of GDP In 2011/12.
Trade deficit is ever-widening, reaching around 23% of GDP.