Major points

• Higher tariffs on imports of intermediates reduce export competitiveness
• Only few applicants have been receiving export incentive
• Study has highlighted the need for government to review its policy of levying tariff on import of industrial raw materials on basis of domestic sales or export

Kathmandu, October 26

Reduction in tariff of the industrial raw materials of export-oriented industries will have much greater impact than cash incentives on exports, and could also be instrumental in boosting productivity in the country.

A study commissioned by the Ministry of Commerce and Supplies (MoCS) in cooperation with Trade and Competitiveness Initiative of the World Bank Group has said that cash incentive to exporters introduced in 2010-11 with the objective of increasing exports, reducing the trade deficit and diversifying exports, has proven to be less effective.

Enhancement of production side is the fundamental aspect for countries like Nepal. However, higher tariffs on imports  particularly of intermediates  decrease export competitiveness, which in turn further creates an anti-export bias, as per the study.

Weighted average tariff in import is relatively high in Nepal. On the other hand, obstacles like finance, power supply, transportation and labour problems are hindering country’s competitiveness in the production side.

The revenue that the government collects from the import of raw materials can be compensated with reduction of costs in managing export incentive, as well as from the increased economic activity in the medium-term.

Originally when introduced in 2010-11, the government had extended one, two and four per cent incentives to firms exporting to third countries depending on their value added levels, and it was modified in 2013 to the flat rate of two per cent.

The government has fixed the benchmark of more than 30 per cent value addition as a requirement for firms to be eligible for the incentive.

However, only a limited number of applicants have been receiving export incentive. In the last fiscal year, more than 700 firms had applied for cash incentive, but only 107 got it.

As a majority of the firms failed to get cash incentive, they have been discouraged, said the study. “The incentive got less generous along with the elimination of the four per cent tier in 2013.”

On other hand, there are about 700 exporting firms that export eligible products, while the number of those that manufacture non-eligible products stand at more than 1,000. Despite the incentive, neither has the number of eligible firms increased substantially nor the export income gone up significantly.

The study has also highlighted the need for the government to review its policy of levying tariff on import of industrial raw materials on basis of domestic sales or export. For example, pashmina producers pay five per cent tariff on yarn if they sell the product in domestic market, and only one per cent if they export.

“But distinction between selling locally and exporting is fictional,” as per the study, “Sixty per cent of domestic sales of pashminas go to tourists  effectively being exported.”

The study has said that export-oriented industries are more productive and creating better jobs, paying higher wages than non-exporters.

Export-oriented industries are five to 25 per cent more productive than non-exporters.