Nepal’s BoT with India, the US, Germany & Japan

Nepal's trade deficit with major trading partners (US$ million)
Year	Balance of Trade (BoT)	India		United States		Germany		Japan
		Total	% of BoT	Total	% of BoT	Total	% of BoT	Total	% of BoT
1990	-375	-44	12	36	-9	54	-14	-108	29
1991	-243	-68	28	54	-22	103	-43	-106	44
1992	-124	-59	48	75	-61	131	-105	-63	51
1993	-175	-66	38	94	-54	166	-95	-71	41
1994	-283	-80	28	109	-39	132	-47	-70	25
1995	-444	-93	21	88	-20	107	-24	-65	15
1996	-988	-375	38	89	-9	78	-8	-81	8
1997	-1244	-344	28	89	-7	114	-9	-68	5
1998	-990	-294	30	93	-9	86	-9	-42	4
1999	-624	3	-1	151	-24	75	-12	-24	4
2000	-850	-267	31	173	-20	87	-10	-32	4
2001	-813	-260	32	185	-23	61	-7	-27	3
2002	-785	-210	27	89	-11	31	-4	-22	3
2003	-954	-572	60	141	-15	16	-2	-18	2
2004	-1113	-650	58	112	-10	22	-2	-16	1
2005	-1257	-691	55	81	-6	22	-2	-28	2
2006	-1568	-919	59	74	-5	1	0	-19	1
2007	-1967	-1000	51	57	-3	-3	0	-41	2
2008	-2206	-1222	55	52	-2	7	0	-46	2
2009	-2121	-1079	51	21	-1	6	0	-40	2

Note: Numbers are rounded to the nearest whole number; For % of balance of trade (BoT), negative value means trade surplus as a percent of total trade balance, and vice versa. Source: Key Indicators for Asia and the Pacific 2010 (xls).

Total trade deficit as of 2009 was US$ 1079 million (US$ 1.079 billion). Trade deficit with India accounted for 51 percent of the total trade deficit; with the US 1 percent surplus of total trade deficit; and with Japan two percent of total trade deficit. Surprisingly, there was trade surplus of around US$ 3 million with India in 1999. With the US, there generally is trade surplus, which is decreasing continuously since 2003. The high trade deficit with India is partly because of a result of high petroleum and fuel imports. These figures slightly vary depending on which database (WB’s WDI, IMF’s DOTS, ADB’s Key indicators, and the GoN’s data) you use. But, the trend is pretty much the same. It looks like trade deficit is a permanent feature of Nepal’s performance in external trade.

In 2009, after two successive years of negative growth, exports increased by 13.5 percent. Meanwhile, imports have been increasing at a rapid pace, reaching 28.2 percent in 2009. Over the period 2005-2009, average exports, on an annual basis, increased by 4.7 percent, but imports surged by 16 percent. Total exports and total imports in 2009 amounted to US$ 698 million and US$ 2820 million, which means that total exports represented 25 percent of total imports.

India is by far the most important export and import destination, accounting for 60 percent of total exports and 53 percent of total imports. Trade deficit with India was around US$ 1079 million with the world (excluding India) was US$ 1042 million.

The other significant export destinations are the US, Germany, Bangladesh, the UK, France, Canada, Italy, Japan, and Turkey. Meanwhile, the other significant imports destinations are China, Singapore, Thailand, Japan, Saudi Arabia, Indonesia, Germany, Australia, and the US.

Costs of international trade in services

Fig: World aggregate trade costs indices for goods and services, 1995-2007 (1995=100).

Trade costs in construction services have increased markedly over the last decade, by nearly 20%. Construction is also the most insulated sector, with ad valorem equivalent trade costs of around 200%. Trade costs in transport services have remained approximately constant over the last decade. By contrast, trade costs in financial and computer services have fallen by more than 10%. This finding is perfectly consistent with the rise of outsourcing in those sectors over roughly the same time period: as trade costs fall, probably due to improved information and communications technologies, it becomes feasible for firms to have more of these kinds of tasks performed overseas. Sectors such as transport and construction, on the other hand, are largely immune to such developments because of the need for physical proximity between producer and consumer.

More here. Miroudot, Sauvage and Shepherd (2010) find that trade costs in services are much higher than in goods, perhaps a multiple of two or even three times. This makes a strong case for more liberalization in services trade. However, Hoekman and Matto argue that explicitly recognizing that services liberalization cannot – and should not be – divorced from services regulation will do much to help harness the potential that trade agreements have to expand services trade and investment.

Nepali middle class and their expenditure

Middle Class and Expenditure in Nepal
HH Survey 2004/05 (means, 2005 PPP$) – per day	% of population	Total population (million)	Annual expenditure (billion)
$2-$4	16.74	4.45	4.32
$4-$10	5.3	1.41	2.91
$10-$20	0.85	0.23	1.09
Total	22.89	6.09	8.32
$20 plus	0.38	0.1	2.4
Middle class is defined as those earning between $2 and $20 (2005 PPP$)
Source: ADB 2010, p.46

The latest ADB’s report (Key Indicators for Asia and the Pacific 2010) states that total annual expenditure of middle class (defined as having income between $2 and $20 per day at 2005 PPP$-- whose number is 6.09 million) is around US$8.32 billion. This is approximately 27 percent of total value of goods and services produced in the country (i.e. gross domestic product -- GDP). In Nepal, total consumption level is above 90% of GDP. Private consumption is close to 80% of GDP. The data are derived from household survey done in 2004/05. The figures should have increased substantially as remittances has increased drastically since five years back. I wonder how someone earning $2 a day falls under middle class. These people are hardly above the global poverty line. The authors of the report might have taken the lower bound of middle class projections/definitions in literature. But, this does not give the true economic strength and potential of the middle class. Anyway, the above figures give an indication of a rough estimate of the market strength of Nepali middle class.

China in 2011

Gordon Orr, a director in McKinsey’s Shanghai office, predicts what might happen in Chinese economy this year:

• Inflation in food prices will take longer than expected to control.
• Middle-class bankruptcies will expand dramatically.
• Minimum wages will rise, but productivity gains will outstrip labor costs.
• China’s economic growth will be lower than expected.
• China will step up its “invest out” program in the new five-year plan.
• The state will again try to reduce its ownership role in business.

Global trade so far (2008-2010)

After the sudden drop in global trade in 2009, here are the major developments in global trade:

• World export volumes have regained pre-crisis levels (August 2008). As of October 2010 export volumes was 0.8 percent higher than their August 2008 levels. Although pre-crisis levels have been surpassed they remain below their pre-crisis peaks and about 13.6 percent lower than what might have been expected had the crisis not occurred.
• The recovery in trade is more advanced among developing countries than in high-income countries. By September 2010, high-income countries export volumes were still some 2 percent below their pre-crisis levels, whereas developing countries were 16 percent above their pre-crisis level by November 2010.
• Developing countries imports drove the rebound.Three quarters of the increase in high-income country exports during the first half of 2010 was sold to developing country importers, and overall developing country imports accounted for 58 percent of the increase in global exports during that period.
• Much of that import demand was in the form of capital goods, a sector of global activity still dominated by high-income countries. Exports of consumer non-durables fell 20 percent during the crisis, durables and machinery, transportation as well as minerals fell 30 percent. As a result, much of the recovery in trade was in these same categories.
• Low-income countries benefitted from the rebound in commodity prices.The increase in the demand for capital goods and durable consumer goods has also led to the recovery in demand for inputs that feed these markets including industrial metals. Partly as a result, industrial metal dependent economies  experienced a surge in export revenues.
• Global trade in services, which proved more resilient to the crisis than merchandise trade, is also on the recovery path. After services exports declined by 6 percent in 2009, it increased by 8.4 percent in the first ten months of 2010, with passenger fares and other travel services leading the way.
• Tourism services, which remains critical for many developing countries also rebounded in 2010.The World Tourism Organization estimates tourist arrivals to have grown by 4 percent in 2010.
• Global imbalances have declined substantially and are expected to continue falling. The increase in public sector and consumer spending in China as well as the increase in household savings rate in the United States in 2010 supported this reduction in global imbalances.
• The bounce-back phase of the trade recovery has ended. Many of the factors that helped drive the trade rebound were temporary in nature (e.g. inventory re-stocking, restarting of trade-finance, declines in crisis-induced precautionary savings, and the growth impact of government stimuli packages). As these factors faded, global trade decelerated. Thus after growing at a 21.1 percent annualized rate in the first half, global exports decelerated sharply, declining at an annualized pace of 1.65% in the third quarter of 2010.
• Global trade growth still remains below its pre-crisis trend. The long-term average annual growth in global trade volumes during the pre-crisis period (1991-2008) was 7.0 percent. Thus the sharp downward adjustment in global trade growth that occurred in the third quarter points to the fact that global trade growth, post-the bounce back phase, is well below the long-term trend and had not yet stabilized at a new equilibrium by September.
• Several factors suggest the pace of recovery will pick-up. The most recent trade data for instance points to a slowdown in the pace of deceleration. In October, the pace of deceleration in global trade volumes had moderated to -2.8 percent from the -4.8 percent that occurred in September. Indeed, industrial production after registering a similarly sharp deceleration is now accelerating once again in the fourth quarter. Moreover, demand-side indicators show continued positive growth, and in high-income countries there is reason to believe that the recovery is becoming more broadly based—involving more countries and more segments of aggregate expenditure.
• As a consequence of the increasing importance of developing countries in global trade, significant changes to trading partners could occur over the forecast horizon.
• South-South trade is also growing. Just as developing countries are becoming increasingly important markets for high-income exporters, so to are other developing countries becoming more important destinations for the exports of developing countries. China, in particular has become an increasingly important export market for all developing regions.
• The growing importance of developing countries in global trade has implications for the structure of global trade. Because demand patterns in developing countries are different than in high-income countries, their growing share in global imports is shaping the product structure of global trade. Rapidly industrializing developing countries demand proportionately more industrial raw materials, energy and food products, as opposed to manufactured consumer goods and non-tradable services. Hence with the growing importance of developing countries as an engine of growth, this is likely to sustain the high increases in commodity prices that occurred in 2010 over the forecast horizon.
• Although progress has been limited, concluding the Doha process remains critical to maximizing the potential benefit to developing countries from trade openness.The continued proliferation of bilateral and regional trade agreements only partly compensates for the lack of multilateral progress and has eroded the preferential margins of many low-income countries. A multilateral deal that takes into account the supply-side constraints in low-income economies, and therefore allows for greater transition periods and better market access opportunities for agricultural goods as well as processed commodities would be more development friendly than the current system. Nevertheless, some of the largest barriers to trading developing country goods and services are imposed by other developing countries. Removal of these barriers could reap significant benefits, spurring an even faster expansion of South-South trade.

Foreign Aid in Nepal–Donors & Amount

Foreign Aid in Nepal (total, million, current US$)
BA, OA, and ODA	1960-2008	1992-1999	2000-2008
Net bilateral flows	7582	2002	3116
Net ODA and Official Aid received	11732	3205	4289
Net ODA per capita (current US$)	561	147	160
GDP	159823	34859	70847
Net bilateral flows (% of GDP)	4.74	5.74	4.40
Net ODA (% of GDP)	7.34	9.19	6.05

Top bilateral donors (1960-2008):

• Japan has been the largest bilateral donor so far (1960-2008): US$ 2059 million
• Followed by the UK (1960-2008): US$ 1033 million
• Followed by Germany and the US (1960-2008): US$ 974 million and US$ 940 million
• Other top donors are European nations; the Scandinavian countries are very generous
• In this decade (2000-2008), top donors have jacked up bilateral assistance.

Average annual bilateral flows have been increasing. On average (annual), it was US$ 346 million between 2000 and 2008. The average annual net ODA flows during the same period was US$ 477 million.

Net ODA per capita (current US$) has been US$ 561 between 1960 and 2008, and US$ 147 over 1992-1999, and US$ 160 over 2000-2008.

• Net bilateral flows between 1990 and 2008 have been 4.74 % of GDP.
• Net bilateral flows between 2000 and 2008 have been 4.40 % of GDP.
• Net ODA between 2000 and 2008 have been 6.05 % of GDP.

Question: What has been the impact of this much of assistance so far on economic growth, enhancement of livelihoods, industrial development, poverty reduction, health, education, migration, conflict, governance, inclusion, and the slew sectors with development interventions? My earlier views on donors’ development strategy paper here, and a critical look at the aid industry in Nepal here. Fyi, the data is sourced from WDI website.