Trade deficit as a share of gross domestic product has substantially increased over the years


Nepal's merchandise trade deficit as a share of the gross domestic product (GDP) has substantially increased over the years owing to poor export competitiveness and lack of product diversification, according to the Macroeconomic Update unveiled by Asian Development Bank.

The report shows that Nepal's export-to-import ratio has tumbled to 9.2 per cent in fiscal year 2020-21 from 48 per cent in fiscal 2000-01.

Trade Policy 2015 was reformulated with an overarching objective of reducing its rising trade deficit. As the policy was adopted right before the promulgation of Nepal's new Constitution on September 20, 2015, the ADB report says it needs restructuring to reflect mechanisms/channels of translating national level export promotion plan into actions at sub-national levels.

While ascertaining internationally recognized certification is crucial for export promotion, Nepal is unable to meet international quality standards because of lack of standard labs and research centres. The current policy discusses about strengthening existing laboratories and establishing multifunctional and reference labs. Thus, the ADB report has suggested strategic action plans with specific timeline be formulated for establishment of standard labs, research centres and advanced technologies for testing and certification, along with simultaneously addressing the deficiency of skilled labour force in such facilities.

Moreover, lack of effective value chain development and associated rules and regulations have hindered Nepal's export promotion drive.

"Therefore, processing, packaging, and branding of niche products crucial in driving exports should be executed through technical assistance from donor communities in conjunction with private sector in a time-bound frame."

Effective implementation of trade policy 2015 largely rests on a good coordination within and among various government and non-government actors. Hence, implementation of different provisions that complement overall trade and export promotion will have to be effectively monitored by respective line agencies, the ADB report says.

Plans and provisions set forth in trade policy should be well aligned with other relevant policies. Trade policy talks about incentivising export-oriented industries and provisioning of such other facilities.

Therefore, this policy will have to be very much integrated with industrial policy.

The country's GDP is estimated to have modestly expanded by 2.3 per cent in fiscal year 2020-21 after contracting by 2.1 per cent in fiscal2019-20, as per the macroeconomic report.

The ADB has said the growth is largely supported by a low base effect, lifting of nationwide restrictions as COV- ID-19 ebbed earlier in fiscal 2020-21 and a global economic recovery.

Fiscal deficit marginally widened to 5.5 per cent of GDP in fiscal 2020-21 from 5.3 per cent a year earlier owing to a substantial increase in capital expenditure. The spending soared by 47.6 per cent in fiscal 2020-21 with the lifting of nationwide lockdown in early 2021 and facilitation of civil works with COVID-19 safely protocols. Recurrent expenditures also increased by about 12 per cent in fiscal 2020-21 owing to higher health and social protection spending to mitigate adverse effects of this pandemic.

Revenue collection increased by 11.5 per cent in fiscal 2020-21 supported by higher import-based revenues.

Non-taxes revenues however decreased by 51.7 per cent as dividends from financial, commercial, and service-oriented institutions dipped in fiscal year 2020-21.

The current account deficit substantially widened to eight per cent of GDP from 0.9 per cent in 2019-20 on the back of increased trade deficit amid a massive cut in services income such as from inbound tourism.

Import growth, particularly of transport equipment and manufacturing raw materials rapidly surged in the latter half of 2020-21, mainly reflecting pent-up demand following the ease of restrictions. Merchandise exports as well sharply rose by 30 per cent after declining by 6.9 per cent in fiscal 2019-20. But with low export base, merchandise trade deficit widened by 25.3 per cent in 2020-21, reversing a contraction of 19.3 per cent a year earlier.

Workers' remittances increased by 8.2 per cent in fiscal 2020-21 after contracting by 3.3 per cent in fiscal 2019-20, but fell far short of trade deficit expansion, widening current account deficit.

GDP growth is anticipated to expand to 4.1 per cent in the current fiscal year 2021-22 largely underpinned by ongoing vaccination campaign against COVID-19. Local level elections tentatively slated around April/May 2022 will stimulate spending, supporting GDP growth. Agriculture is expected to grow as paddy plantation has been promising owing to abundant rainfall this monsoon.

Inflation in this fiscal is forecast to average 5.2 per cent, up from 3.6 per cent a year earlier, on increased global oil prices and a gradual recovery in domestic demand.

However, there are downside risks to the forecast, as per the ADB, owing to uncertain trajectory of COVID-19. A possible resurgence of COVID-19 infection and subsequent strict containment measures could reverse the gradual economic recovery since fiscal 2020-21. Heavy rainfall since mid-June has triggered landslides and floods, damaging infrastructure, and loss of lives and livelihoods in some mountain districts. Persistent capacity deficiencies regarding investment planning, financial management, project readiness, procurement, and contract management at provincial and local levels may further weaken sub-national level spending.

A version of this article appears in the print on October 1, 2021, of The Himalayan Times.