Kathmandu, May 22

Visit supermarkets in Kathmandu and you’ll find apples from Thailand, beer from Ireland and clothes manufactured across the globe. Foreign goods have become so ubiquitous, you can find almost everything in Nepal these days. These choices have pampered consumers, enhancing their happiness level to some extent.

Consumers’ indulgence in foreign goods is not bad, as long as they can afford it. Thus says one school of thought. Another school of thought, however, says preference for foreign goods is increasing Nepal’s dependence on imports, reducing job creation and triggering capital flight.

Trade imbalance

Nepal today imports Rs 14.7 worth of goods for every rupee of goods that it exports. This export-import mismatch widened the country’s trade deficit by 21.7 per cent to Rs 816.5 billion in the first nine months of the current fiscal year, says the latest report of Nepal Rastra Bank. This capital flight of Rs 816.5 billion, which is equivalent to 27 per cent of GDP, is exerting pressure on country’s foreign exchange reserves, which must be kept robust to import raw materials and capital goods, enable foreign investors to send profit back home, and provide foreign exchange facility to Nepalis travelling or studying abroad.

“Soaring imports, often of subsidised or dumped consumable goods, are becoming a cause of concern,” said Swarnim Wagle, former vice chairman of the National Planning Commission. “With a temporary exercise of tariff-related policy instruments, we can trigger opportunities to promote domestic production of goods that can compete with imports. This is the right time to pursue this strategy because the country now has a strong government and it can take certain risks to end the inertia in the manufacturing sector.”

Many countries provide subsidies, reduce import taxes on raw materials and intermediate goods, and raise import duties on finished goods to stimulate domestic production and bolster competitiveness of domestic industries.

“But these measures should be accompanied by sunset clauses, meaning incentives, such as subsidies or higher taxes, should be phased out after certain years. Otherwise, domestic producers that are not productive may lobby to keep subsidies and elevated duties intact for a long period, deferring competition and eroding purchasing power of consumers,” Wagle said.

Weakening production

Some of the goods that Nepal produces are: food and beverage; tobacco products; non-metallic mineral products, such as cement and limestone; fabricated metal products, such as shutters and window frames; chemicals and chemical-based products; rubber and plastic products; basic metals; textiles; and wood products (excluding furniture), according to a report prepared by the Central Bureau of Statistics (CBS).

Among these, goods produced by low-technology manufacturing enterprises make a big contribution to domestic production. But even in the low-tech manufacturing, production of very basic goods, like food and beverage, has surged over the years, which signals that the manufacturing sector is stuck in reverse gear.

The share of food and beverage in manufacturing, for example, used to hover around 22.8 per cent in 1996 and 27 per cent in 2006. That share jumped to 34 per cent in 2011, the most recent CBS report shows. On the other hand, contribution of textiles in manufacturing plunged from 25.9 per cent in 1996 to 3.8 per cent in 2011 and that of apparel and fur items dropped from 6.3 per cent in 1996 to 0.5 per cent in 2011.

This indicates Nepal’s industrial fabric is becoming very weak and needs a shot in the arm.

The way forward

One way to foster domestic production is through adjustments in import tariffs, according to Ashok Kumar Todi, chairperson of Tax and Revenue Committee of the Federation of Nepalese Chambers of Commerce and Industry, the largest private sector umbrella body.

Import duties on raw materials, for example, should be at least five percentage points lower than on intermediate goods, Todi said. Intermediate goods are commodities like sugar and salt which can either be consumed directly or used as raw materials in production of goods like biscuits.

“Also, import duties on intermediate goods should be at least five percentage points lower than on finished goods,” said Todi, adding, “Currently, import tariffs on raw materials used in production of many goods, such as diapers, are higher than finished goods, which is a disincentive for domestic producers.”

This is one of the reasons why manufacturing sector’s contribution to GDP has shrunk to 5.4 per cent from about 10 per cent

in 1996-97. The government, however, always baulks at the idea of reducing import duties, because they are its biggest source of income. If the government eliminates import tariffs on all raw materials, intermediate goods and capital goods, its import tax revenue could shrink by up to 18.7 per cent, as per a World Bank report published last year. But those losses could be partially offset by rise in income tax and value-added tax collection.

“The government should take some risk because a robust manufacturing sector creates jobs and curbs labour flight [of over 1,000 persons per day],” said Paras Kharel, research director of the South Asia Watch on Trade, Economics and Environment.