What should Nepal do to develop foreign trade and to minimize trade deficit?

There are several problems with Nepal’s foreign trade: It is a land-locked country competes with India in high imports and low exports, it produces low quality goods with a high cost of production, capital formation is inefficient and government policy is antiquated.

Land-locked

Geography is not in favor of Nepal. As a land-locked country it has to import/export through India which by itself raises the cost of commercial transactions not only in transportation costs, but on merchandise shifting from one mode of transportation to another, also, border crossing fees and transit time among other issues.

Open Border:

Nepal is bordered by India from three different sides that include an open border policy. As a result, there is a large flow of Indian goods at low prices. At borders, Indian goods are smuggled in and imported foreign goods trafficked into India through unofficial routes. Smugglers are the only beneficiaries of the illegal practices while the country has little to gain from these activities.

Balance of trade in Nepal is negative as it imports more than it exports both in terms of volume and value. Most exports are agricultural products, handcrafts and raw materials, which are all of low commercial value resources which bring little foreign currency to its treasury.

Nepal does not have a well-developed industrial base, therefore, production is of low quality and it cost more to produce which makes its products non-competitive for the international market place.

Low capital formation is another major problem for Nepal’s foreign trade by depriving the country with limited economic activity. It also lacks modern infrastructure for developing an industrial base while it lacks a favorable environment for private and foreign investment. This leaves the country dependent on domestic finances with little capital formation to grow and expand its productive base.

As more countries enter global trade Nepal is being left behind as it is becoming less and less competitive. Many countries are now exporting good quality manufactures at a lower price that Nepal can produce. Additionally, Nepal does not have the skill resources, educational base and modern production technologies to compete with international trade markets.

Modern trade policy is a major standing problem for Nepal’s efficiency in foreign trade. Since the 1990’s Nepal adopted a liberal trade policy of open borders. This permits the flow of foreign goods into Nepal unrestricted and with no effective policy to police its borders by poorly trained human resources. The combination of issues is causing large trade deficits with no trade policy in place because of either political will, corruption, or a combination of both.

What are the solutions?

• Enhance industrial bases
• Promote export-oriented goods
• Give appropriate incentives to exports
• Improve quality of goods
• Adopt proper trade policies
• Enhance training and skills

After 15 years of trying and hard work, Nepal became a member of WTO, the global trade body in 2004. Access to the WTO group of nation was supposed to aid in expanding Nepal’s international trade and its competitiveness abroad. However, after 14 years, Nepal’s exports have undergone a sharp decline, while imports are quickly rising and increasing the trade deficit. In joining WTO, Nepal was expected to diversify its exports and develop new trading partners. However, this hasn’t happened.

The main causes of widening trade deficit with India, China, and other countries are as follows:

• Nepal’s supply side constraints include political instability, low connectivity, a power generation crisis and difficult labor relation. In addition, geographic constraints such as high transit costs, delays at border crossing by red tape, waiting for transportation and lack of temporary storage at crossings has in total a negative effect on trade.

It follows that the recommendation for Nepal is that it must urgently address the factors that are minimizing its opportunities participating in WTO and relieve its widening global gap.

• The country should focus on promoting products and services where it has competitive advantage.
• It needs to expand its human resources base with better training and education for its entire work force.
• The government should facilitate the financial means and encourage entrepreneurs to engage in trade activities.
• Nepal should simplify transportation modalities that have high transit costs, improve its border crossing time, facilitate temporary storage and remove administrative hassles.
• Overall improvements should also be made to the exports of agricultural products that could mean accesses to 400 million consumers in bordering India.
• The government needs to implement policies that can attract foreign investment to develop or enhance basic industries that can promote capital growth and economic diversification.
• The country must invest in primary infrastructure like roads, railways electricity generation and storage depots to improve border crossing time and transport mode switching to minimize delays at the borders. Nepalese industries need to supply a sizable part of domestic demand of household goods in the wake of strong internal demand and the rapid price rise of Chinese goods.

In general, there is a great need for creating a favorable business environment in Nepal. Industrial unrest and rigid labor laws are some of the biggest obstacles to the industrialization of Nepal and its future participation in a fast globalizing economy.