Trade facilitation and corruption at customs in Nepal

My latest op-ed is titled “Dismal progress in trade facilitation”. It is based on The Global Trade Enabling Report 2009, published by World Economic Forum. Last year, I wrote a similar piece (Leaking customs and weak trade)and argued that trade facilitation process in Nepal is one of the worst in the world. Sadly, there has not been much improvement this year as well.

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Dismal Progress In Trade Facilitation

Three weeks ago when the Commission for Investigation of Abuse of Authority (CIAA) directed employees at the Tribhuvan International Airport (TIA) to wear uniform without pockets in order to control theft and corruption, the news made quite a buzz in the media and blogosphere. This move came after numerous reports of irregularities and corruption – though not surprising – at the airport were reported in the media and to the CIAA.

Corruption and irregularities are not exclusive to TIA checkpoints; it is like a pandemic plaguing almost all the sectors in the economy. One of the places where such activities are excessively rampant is at custom departments, which are the key points for trade facilitation and revenue generation. An efficient border administration, supportive business environment and well-developed transport and telecommunication infrastructures help reduce transaction costs, ensure timely delivery of goods and services and realize the benefits of trade and aid growth.

Despite being a member of WTO in 2004 and of two other regional trading blocs, the benefits of trade Nepal has reaped so far are horribly low. The value of merchandise imports are more than three times the value of exports—in 2008, exports and imports amounted to US$ 887.7 million and US$2904.4 million respectively. More than 50 percent of trading activities take place with India alone. Exports to other countries have been decreasing, chiefly because of internal labor disputes, supply bottlenecks and inefficient ‘enablers’ of trade. Note that Nepal does not produce many goods and services that could be exported with comparative advantage. Worse, on the current ‘product space’, there are only a few goods and services that could be potentially exported with comparative advantage, provided that institutional, regulatory and financial conditions are right and relevant infrastructures adequately supplied.

Given this situation, the main task for now is to make the most out of existing goods that are traded through our customs. How successful have we been on this front? Latest evidence shows that we have not made satisfactory progress and a lot needs to be done to facilitate trade across borders. Nepal has barely improved in the trade enabling rankings complied by the World Economic Forum. The Global Trade Enabling Report 2009, which ranks countries based on their efficiency at border administrations and business environments that are conducive to trade, ranks Nepal 110 out of 121 countries considered in the report.

This means that high costs, opaque and prolix custom clearance procedures, and inefficient administrative difficulties in an overly bureaucratic environment have been serious barriers to trade. In the latest rankings, Nepal ranks 113 in border administration, 107 in transport and communication infrastructures and 117 in business environment required for promotion and facilitation of trade. Compare these dismal standing with the impressive ranking on domestic and foreign market access (29 out of 121). This implies that despite good ranking on market access, Nepal’s trade facilitating infrastructure, institutions and regulatory structure are so miserable that they overshadow potential gains from increased market access.

The Enabling Trade Index measures institutions, policies and services facilitating free flow of goods over borders and to destinations by looking at performance of individual countries in four key areas: Market access, border administration, transport and communication infrastructure, and business environment. The top 10 countries that have the necessary attributes for enabling trade are Singapore, Hong Kong, Switzerland, Denmark, Sweden, Canada, Norway, Finland, Austria and Netherlands.

Specifically, Nepal’s ranking in efficiency of customs administrations, efficiency of import-export procedures and transparency of border administrations are 119, 105 and 100 respectively. Transparency is crucial for gaining faith of traders and promoting trade across borders. Regularly publishing and distributing entry and exit rules, notifying trading community in advance about any changes to existing rules and publishing Department of Customs’ data and analysis in a timely manner would help to promote transparency and accountability. In terms of effectiveness and efficiency of clearance at customs, Nepal ranks third from the last (119).

An equally important factor in facilitating trade is the supply of infrastructure. However, Nepal’s ranking in quality and availability of transport and communication infrastructures is not that encouraging—availability and quality of transport infrastructure (101), availability and quality of transport services (88) and availability and use of ICTs (120). The availability of adequate and quality infrastructure is vital for reducing transportation costs, linking markets and production sites, increasing investment and stimulating growth. In fact, a recent study done by this author (and a separate one done by ADB) showed that bad infrastructure is the most binding constraint on economic growth in the Nepali economy.

In addition, given the level of disturbances and supply bottlenecks in the economy, it is not surprising that Nepal’s rank is 104 in regulatory environment and 121 in physical security, the worst among countries incorporated in the report. Between January and June 2009, there were 532 transport obstructions and bandas (closures) in different parts of the country. The inability of traders to supply goods, mainly because of supply bottlenecks and insecurity, in time has already cost the garment and textile industry, once the major foreign currency earning sector, dearly.

In the Doing Business Reports ranking as well, Nepal’s position is not that encouraging. There has not been any improvement in ranking under the heading ‘trade across borders’ in the past three years (157 out of 181 countries). It still takes nine documents, 41 days and US$ 1764 per container for completion of a normal export process. Meanwhile, it takes 10 documents, 35 days and US$ 1900 per container for completion of import process.

Improving trade facilitation would help reduce transaction costs, effectively monitor border controls, enhance trade competitiveness, discover new tradable goods and attract FDI, among others. At a time when the economy is losing grounds on price and quality competitiveness in the international market, promoting and reforming trade facilitation procedures would at least help to aid the struggling exports industry. Properly addressing these issues in the upcoming fiscal budget would not only foster confidence in our corrupt and inefficient customs but also realize the benefits of trade.

Source: Republica, July 14, 2009

Links to news about Nepal’s fiscal budget 2009/10

Nepal’s Finance Minister presented Surendra Pandey fiscal budget 2009/10 yesterday. The total budget is Rs 285.93 billion, which is a record-breaking amount. I will write a review of the budget tomorrow. Below are some of the links to news about the budget from the Nepalese media.

Text of budget speech

What the budget means for you

Budget 2009: Nothing but promises

Hydropower gets huge budget boost

Mixed bag in borrowed template

Govt promises ‘half-hearted’ reforms

25,000 MW hydroelectricity in 20 years

A budget with many upsides

Income tax exemption raised

FM steps on higher ground than Dr Bhattarai

The year of the roads

Ambitious budget, populist thrust

Nepalese economy in trouble-- Economic Survey 2008/09

Almost all the economic indicators registered negative growth rate in the last fiscal year, according to Economic Survey 2008/09 release by the Ministry of Finance (see the tables below). The forecast for this fiscal year does not look any better. The plunge in manufacturing and agricultural sectors is very troubling for a struggling economy. Troubles in growth rate, balance of trade deficit, inflation rate, national debt…

The economy grew at 3.8 percent against a forecast of around 7 percent (last year the growth rate was 5.3 percent). GDP growth rate is estimated to be 4.7 percent next fiscal year (2009/10). GDP per capita reached US$473 (Thank God, Nepal remittances inflow continued to increase!). Agricultural sector grew at 2.1 percent (last year it was 4.7 percent) and non-agricultural sector grew at 4.8 percent (last year it was 5.7 percent). Inflation rate hit 13.1 percent in mid-March 2009 as against 7.2 percent in mid-March 2008. GDP deflator (a measure of the level of prices of all new, domestically produced, final goods and services-- expressed as (nominal GDP/real GDP)/100) rose from 6.3 percent to 12.2 percent.

Summary of macroeconomic indicators:

Annual growth rate of GDP by economic activities:

As a percentage of GDP, domestic savings is down to 8 percent from 11.21 percent last fiscal year. Thanks to increasing remittances gross national savings has increased to 32.32 percent (% of GDP) from 31.53 percent last fiscal year. Exports have increased by around three percentage points to 15.70 percent from the first eight months of last fiscal year’s 12.08 percent. However, imports have increased to 37.42 percent from last fiscal year’s 32.66 percent, thus increasing the hole in balance of trade (BoT). Note that balance of payments (BoP) has been in positive territory. Revenue/GDP increased to 14.8% from 13.2% last fiscal year but total government expenditure/GDP increased to 22.2% from 19.7% last fiscal year. Budget deficit/GDP decreased to 3.8% from 4.1% last fiscal year.

Gross fixed capital formation as a percentage of GDP barely increased to 21.25 percent from 21.11 percent from last year. On gross fixed capital investment front, government investment/GDP was 4.1 percent (up from 3.1% last fiscal year) and private investment/GDP was 17.1 percent (down from 18% last fiscal year). Gross investment/GDP stood at 29.7 percent (down from 32.8% last fiscal year). Similarly, the gap between gross domestic savings and gross investments/GDP increased to -21.7% from -21.6% last fiscal year. The resource gap-- saving-investment gap (gross domestic savings minus gross domestic fixed capital formation)-- (% of GDP) was 2.60 percent from -0.26 percent last fiscal year (again, thanks to increasing remittances).

The ratio of investment to GDP decreased to 29.7 percent to 31.8 percent from last fiscal year. Exports/GDP increased to 21.7 percent from 20.6 percent from last year. Due to impressive revenue collection, revenue mobilization/GDP increased to 14.8 percent against 13.2 percent last fiscal year. Outstanding debt/GDP increased to 41 percent from 39.6 percent (first eight month of fiscal year), showing that expenditure continue to outweighed national income. Foreign debt/GDP also increased to 28.5 percent from last fiscal year’s 26.4 percent. Meanwhile, domestic debt/GDP actually decreased to 12.5 percent from 13.2 percent in last fiscal year.

Well, the government admits that it is doing a bad job managing the economy:

A big question mark has emerged on our skill of overall economic management in a situation where the Nepalese economy entangled in the vortex of economic sluggishness amidst the double-digit price rise thereby adversely affecting the purchasing power and living standard of the Nepalese people. Hence, there is the necessity of wider reform initiatives on development efforts, investments, and regulatory areas for expanding the economy. The nation is also being made to bear adverse supply shock due to frequent Bandhs, chakka jams, strikes etc. For this, national imperative is making sufficient legal arrangements and ensuring effective enforcement of those provisions for completely banning Bandhs, strikes especially against transportation and movements of the people for allowing the country's economy move ahead in a smooth and natural way, and also providing relief to the people's livelihood.

The impact of exports delay on trade

On average, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 85 km on average. Delays have an even greater impact on developing country exports and exports of time sensitive goods, such as perishable agricultural products. In particular, a day’s delay reduces a country’s relative exports of time-sensitive to time-insensitive agricultural goods by 7 percent.

More here. Due to road obstruction and closure (bandhs), the Nepalese export-based manufacturing firms have been unable to supply pre-ordered goods in time. It led to cancellation of contract from companies in the West. This is having a severe impact on the whole exports industry, leading to closure of several firms. Between January and June 2009 alone, there were over 500 road obstructions and closures in different parts of the country. This has been a cancer affecting the whole industrial sector in Nepal.

Links of Interest (07/10/2009)

$20 billion to boost food supplies to the hungry committed by the G8

Olivier Blanchard explains “the perfect storm”

World Economic Outlook July update (economic growth projected to be 2.5 percent in 2010)

More agricultural subsidies for poor farmers in Nepal (the more subsidies Indian farmers receive, the more Nepali farmers need to compete in the heavily integrated market)

Female time poverty reinforces the persistent female income poverty (because the gender division of labour between paid and unpaid activities, distinct from childhood, seems to have important implications to female accumulation of capital)

The reason for an ever-growing Nepal’s fiscal budget is…

… because

“there has always been a holier-than-thou attitude of the government in power and its finance minister. As one of the architects of Nepal´s fiscal budgets says, whoever is the finance minister at the helm, he does not want to be seen as chicken-hearted but rather a lion-heart, no matter what negative consequences his budget may cause to the economy.”

More here. Last year, the fiscal budget presented by the Maoist finance minister was 45% higher than the year before. But real expenditures fell short of the allocated budget. Why inflate fiscal budget when we cannot spend it?

Nepal’s central bank gets active, finally!

So, the central bank of Nepal,for the first time, is doing what it is supposed to do long ago. After liquidating Nepal Development Bank (NDB), it is now going after its promoters, who swindled almost Rs 1.08 billion while ruining the bank’s balance sheet. Some of the promoters are Madoff of Nepal!