‘Low production base is the major constraint to boost exports’

The country’s trade imbalance has grown exponentially owing to weak production base and increasing dependence on imports. As of the first 11 months of fiscal 2016-17, the ratio of Nepal’s imports to its exports stood at 1:13.3 against a ratio of 1:11 in the corresponding period in fiscal 2015-16. Despite various commitments from the government at different levels to boost exports and gradually substitute imports, Nepal has not been able to make any substantial progress in narrowing down the import-export gap. In this context, Sujan Dhungana of The Himalayan Times spoke to Naindra Prasad Upadhaya, secretary at Ministry of Commerce, to discuss causes of the ever-widening trade deficit in the country, government’s plan to increase exports and overall trade scenario. Excerpts:

How do you evaluate the current trade scenario in the country?

Taking the trade data of the first 11 months of fiscal 2016-17 as a base, the trade deficit of the country is widening. Though exports from Nepal surged by almost Rs four billion in the review period compared to the previous fiscal, imports also escalated in the review period thereby widening the trade gap further. The volume in which imports surged was a lot higher than the volume of exports. Our exports have only seven per cent share in the total trade while import constitutes 93 per cent of the overall trade. This shows that we should immediately start import management of certain products. Our trade statistics show that a majority of imports are in the unproductive sector like housing, iron and steel, and petroleum products, which do not contribute much to the national economy. Similarly, the import of cement clinker, which Nepal can produce itself, surged to almost Rs 20 billion within the first 11 months in 2016-17 though only Rs eight billion worth of cement clinker was imported during the same period in the previous year. Thus, it is clear that the ballooning trade deficit of Nepal is not going to narrow down unless we enhance our production and supply capacity. Nepal’s production base is very low. In a bid to encourage large scale production, we should focus on large scale investment and infrastructure development. We should discourage non-productive imports as much as possible by increasing domestic production. Similarly, assurance of access to market and connectivity — both digital and physical — should go side by side. The production base of large industries in Nepal has not been so good while small scale and medium scale industries are being established on a regular basis. So, we should now look for ways to promote high-value agricultural and manufacturing goods produced by SMEs to boost our production base further. The bottlenecks to export including technical barriers to trade (TBT) should be unlocked through a collaborative and bilateral effort. Meanwhile, other ministries of the government should contribute to boost the production base. In a bid to promote export-led economy, MoC has been reforming existing policies and introducing new policies. Similarly, MoC is facilitating the export sector by reducing tariffs on goods. However, to bring in larger investment in the country we need a collaborative effort of all the concerned ministries to make sure that we have the required infrastructure. A majority of Nepali products already enjoy duty-free access to foreign markets including India. However, we have not been able to capitalise on this facility due to lack of an integrated approach to export and trade. Thus, the only way to substitute imports is to increase our production base and access to foreign market.

Nepali traders have been facing problems repeatedly while exporting products like jute and ginger to India. Why is it so?

Though it is true that some Nepali products have witnessed hassles while being exported to India in the past, MoC has been active in solving such obstacles promptly. It is due to policy ambiguity, quality issues and lack of coordination between authorities of both nations that such problems have occurred in the past. Problems related to market access arise basically due to food safety provisions, sanitary and phytosanitary measures and technical barriers in trade, which are often witnessed in international trade. The crucial part is how promptly such barriers are resolved and MoC is committed to resolve such barriers as and when they occur and permanently too in the long term.

As one of its biggest tax reforms, the Indian government has implemented goods and services tax from July 1. What impact will it have on Nepal’s trade?

Though MoC was analysing the implication of the goods and services tax (GST) on Nepal’s trade much earlier, its actual impact can be analysed after we have thoroughly studied the tax slab imposed by Indian government on different goods after introduction of GST. As the Indian government has already implemented GST, its implication on Nepal’s trade should be analysed from three aspects — its impact on Indian exports to Nepal, Nepali exports to India and the imports and exports that take place between Nepal and third countries via India. The GST will not affect goods that come to Nepal from India as the tax slab rate on such goods is at zero level. However, there are chances that tax rate on Nepali exports to India might be affected with the implementation of GST if the integrated GST being levied is more than the fragmented taxes like countervailing tax and state tax that India had been imposing on Nepali goods earlier. GST can also affect Nepal’s third-country trade if India imposes service tax on transit services that India offers to Nepal on third-country trade. Meanwhile, MoC team recently visited India to know more about the implication of GST and urged Indian authorities not to enforce service taxes on transit services. We have requested the Indian authority to impose tax slabs that will not affect import and export of goods from, to and via India. Moreover, the GST council has also assured us about addressing our concerns. India is Nepal’s preferential market as a number of Nepali products are enjoying duty-free access in the Indian market. Our concern is that the implementation of GST should not add burden on our products that have free access to the Indian market. On top of that, I believe that the GST will not have that big an impact on Nepal’s trade. GST will help formalise trade and increase trade transparency.

With an objective to ensure transparent and formal trade, the government had implemented export-import code for Nepali traders from the last week of January. How effective has this provision been?

The government had implemented the export-import (ExIm) code for traders to reform the documentation issues during

customs transit declaration (CTD) and assure transparency. It was a reformative measure taken by MoC with ample analysis that it will not put additional burden on traders. It is certain that traders will have some reservations while implementing new measures. However, in the long run such reform measures will play a crucial role to ensure good trading environment for traders. As the ExIm code does not seek any further document while trading goods, it also assures hassle-free trade. MoC has been focusing on formalising Nepal’s trade with India and other nations and implementation of ExIm code is a part of it. Similarly, we are in the last stage of operating Integrated Check Post (ICP) in Birgunj while construction of ICPs in Biratnagar, Bhairahawa and Nepalgunj is underway. Operation of ICP will also be crucial to encourage formal trade of Nepal with India.

MoC recently completed the feasibility study of free trade agreement with China. What were the conclusions of the study?

We are yet to prepare the final draft of the feasibility study of free trade agreement (FTA) with China. Once we complete the data analysis, we will finalise the products from Nepal that can get duty-free access to China and Chinese goods that can have duty-free access to Nepali market on a ‘request-offer’ basis with China. After this, the two sides will negotiate on the feasibility draft opening doors for both countries to enter into a Free Trade Agreement.