Economy of the external sector
In many economies, trade has worked as an engine of growth but this is not the case in Nepal’s context. Nepal has been running a trade deficit since 1965 and the deficit is incurred mostly in merchandise trade and partly in income. Nepal’s trade deficit has been widening due to high growth rate of import compared to exports. The major concern for Nepal to benefit from trade has always remained the slow growth in export and robust growth in import. The export policy clearly recognizes that the unfavorable balance of payments led by trade deficit is responsible for negative effects on the economy and a slower industrialization. If this continues over time, it can have adverse effect on foreign currency reserve of Nepal and thereby invite macroeconomic instability. Identification of the issues and challenges of Nepal’s widening trade deficit is crucial in the sense that Nepal can hardly incur trade deficit of significant size forever. It is in fact the diagnosis of the problem which can suggest necessary policy prescriptions to be pursued. Considering the contribution of trade to gross domestic product (GDP), the ongoing trend of trade deficit can no longer be ignored for growth and development of Nepal. In addition, sources of financing a deficit are significant and the issue of sustainability of trade deficit hinges on the sources of financing.
A developing economy like Nepal naturally faces number of limitations to tackle the deficit such as agriculture and service dominant structure of the economy, amount of foreign exchange reserve, capacity to increase gross domestic savings, capital flow and its structure, debt servicing capacity, volatility of international labor market and hence the flow of remittances. The causes of trade deficit in Nepal begin from the existing structure of the foreign trade. It suffers from an absence of export diversification in terms of commodities in particular. The exports basket comprises mainly those commodities which are price-elastic. In contrast, the imports basket includes a full range of diversified products ranging from basic consumption goods to various high-tech commodities that are relatively price-inelastic. The export performance of manufactured goods is very dismal and depressing. Nepal’s export base is quite narrow which can be attributed to high cost of production coupled with poor access to international markets.
Despite having strong export potentials, Nepal lacks the production of commodities that can compete in the international markets. A steady decline in the overall export has portrait a dismal indication in the foreign trade sector. There is virtually no change in the types of finished products or commodities that Nepal has been exporting during the last two decades. Despite many agro based and other industries having comparative advantages, they could not come up in the absence of incentives. Collapse of a large number of agro-based cottage and small-scale industries and over-concentration in few-imported raw material based manufactured products has constrained Nepal’s industrial diversification. Massive inflow of highly subsidized agricultural products from the southern neighbor under the open border and free trade arrangements of primary products and rising asymmetry in agricultural related policies between the two countries has have had pervasive negative impacts on the Nepali agriculture worsening the terms of trade. Also, the cascading tariff structure has hampered growth in industries and exports.
Provision of fiscal incentives to exporters and importers and infrastructural facilities in setting up an industry and trade promotion will indeed impel growth. Human resource development is another factor contributing to the economy. Investments need to expand to physical, human, and technological capital together with promoted market access and exports to raise productivity and create economic opportunities and employment. Healthcare and education seems to be potential service sectors for export promotion which needs better healthcare policies in place and infrastructural bottlenecks need to be addressed. This would help spur private investment in these sectors. Similarly, IT and BPO, although having promising future, are suffering from infrastructural bottlenecks, poor business climate, rent seeking attitude, cartels’ vested interest and deficiency in policy measures. There should be provision of risk capital and accelerators and incubators should support IT firms in order to enhance high and sustainable growth.
A compulsion to shift toward industries with competitive advantages would help tap the tremendous potentials of both agro- and forestry-based industries. However, there are more challenges and risks emanating from the given adverse initial conditions in terms of productivity and competitiveness. Imports, on the other hand, are swelling up as a result of remittance prompted consumption. Despite sluggish economic growth, demand remained strong due mainly to remittance inflow. With remittance in hand, the increase in consumption is being met by excessive imports minimizing the gross domestic savings and the gross national savings. It is not wise enough for Nepal to regard remittance as a substitute for national development and poverty reduction strategy because the need of the hour is a multidimensional approach towards attaining long term sustainable development where outmigration should be considered as just one constituent element.
Usually, when an economy starts modernizing, the share of agriculture sector to the GDP shrinks while the contribution of service and industrial sector increases and widens. However, available data show that Nepal is not in foot prints that almost all the economies worldwide followed in their development history. Shrinking industrial activities is one of the disturbing features of Nepal’s economy. Nepalese industrial bases have been enfolded and squeezed over the years. Nepal’s industries failed to capitalize the opportunities unveiled by the remittance-fueled consumption in the domestic economy, compelling the domestic economy to depend on imports to meet increased internal demand, let alone producing goods for exports. Domestic industries have not been able to capitalize the opportunity unveiled by robust growth in domestic demand. In addition, lack of exportable production from volume, value and quality has contributed to a great extent in widening trade deficit. Owing to the lack of policy and strategies to explore rapidly emerging business opportunities in such a huge market, Nepal hasn’t been able to reap the benefits. Also, inadequate and poor condition of trade related and other infrastructures is limiting the prospects of industrialization in Nepal.
Nepal’s long-run political instability has produced many ills but despite the new federal structure in place, Nepal continues to struggle with poor business doing environment. Cartels and the nexus between businessmen and politicians have indeed eroded healthy competition. The pattern of fiscal policy reform and accompanying government resource allocation trends is also one of the factors that has been a hindrance in the country’s economic growth and development. Policy reforms are mainly donor driven as donor driven tactics are quite evident, manifested in more stringent conditions in areas like privatization and deregulation. Special incentives are essential for small industries and trade through legal and other means which will strengthen macro-micro linkages by enhancing backward linkages between industry and trade. Moreover, it is critical to ensure that there is a paradigm shift in terms of enforcement of participatory grass-root development approach.
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