Annual budget expected to address ballooning trade deficit

Kathmandu, July-10 The upcoming budget has raised hopes that it will address the country’s ever ballooning trade deficit. The widening gap between export earnings and import expenses has been a major concern of almost every sector presently.

As per government records, the country’s dependency on imported goods has been increasing yearly. Last year, the country earned Rs91.36 billion from exports while it spent Rs722.77 billion on imports, resulting in a trade deficit of Rs631.41 billion. The deficit in the fiscal year 2012-13 was Rs523.85 billion, as per the Trade and Export Promotion Centre’s statistics. The records of the Department of Customs show that the trade deficit reached Rs6.16 billion as of the first 11 months of this year.

The trade deficit has exploded more than seven-fold in the last decade due to political instability, low production and changing lifestyles spurred by increased inflows of remittance.

The situation worsened in the aftermath of the April 25 earthquake. Exports plunged as production units were destroyed by the tremor, mainly in the the small and cottage industry sector. A study carried out by the Confederation of Nepalese Industries (CNI) showed that almost 90 percent of the small and micro enterprises took a direct hit from the earthquake.

Experts and traders have stressed that the government should come up with a coherent plan to cut the trade deficit through the budget announcement for 2015-16. They have urged the government to promote import substitution production plants, increase cash incentives to exporters, provide easy loans to export oriented sectors, commercialise agriculture, encourage value addition to herbal products and support small and micro enterprises devastated by the earthquake.

Anup Malla, chairperson of the Export Promotion Committee in the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) said the government should increase cash incentives on exports. “The incentive should be at least double from the current 2-4 percent that the government has been providing to exporters,” he said.

According to Malla, export oriented factories were hard hit by the earthquake. “Besides suffering physical damage, the production plants have been operating at 5-10 percent of their capacity due to labour shortages and other problems,” he said.  

Meanwhile, manufacturers of readymade garments (RMG) have also been expecting the government to launch different packages to make their products competitive in the international market.

Chandi Aryal, acting president of the Garment Association of Nepal, said the government should announce relief packages through the upcoming budget. According to him, the government should provide easy and subsidized loans to RMG manufacturers. “If the government extends the repayment period, it would be a great relief for RMG manufacturers.”

Hopes are up after US Senator Dianne Feinstein tabled a bill in the US Senate following the April 25 earthquake advocating duty-free entry to Nepal’s RMG products. If the bill is approved, the largest potential market for Nepali products will be opened wider.

The government has been providing cash incentives of up to 4 percent for goods exported to third countries. However, traders have been demanding similar incentives for goods exported to India. At the same time, they have been urging the government to simplify the process of receiving the incentive in order to make domestic products competitive in the international market. The need for cash incentives has become more urgent after the earthquake that hit many production businesses, said experts.

Posh Raj Pandey, executive chairman of the South Asia Watch on Trade, Economics and Environment, stressed the need for introducing a sustainable plan to enhance the production capacity through the upcoming budget. “Unless the production capacity is improved, we cannot reduce the trade deficit ,” he said.

Pandey also stressed the need to establish accredited laboratories. “Due to the absence of such labs, we have been unable to supply quality products of comparative advantage to the international market,” said Pandey. He gave the example of herbal products being exported at low prices due to the absence of processing plants and testing labs.  

According to him, there is high demand for Nepali herbal products in foreign markets. “The government has to help increase production besides searching for products with high potential,” said Pandey. “The government should include the issue of growing trade deficit in its national agenda.”

Trade expert Purushottam Ojha said the government needed to introduce a special programme to reopen the cottage and small industries that have remained closed due to the earthquake. “To increase exports of agricultural products, the government has to launch programmes to enhance the production and productivity of products like ginger, cardamom and tea,” he said.

Ojha also urged the government to consider herbal production as a mean to improve the trade situation. “At a time when there is no export of herbs through formal channels despite the immense potential, the government should conduct a study of the herb production in the country,” he said.

An improvement in the investment environment, capacity building, policy reform and administrative reform are also among the areas that Ojha stressed to bring down the country’s growing trade deficit .

Likewise, economist Rameshwor Khanal said the government should come up with policies to promote import substitution. “As there are many constraints in increasing exports instantly, it is better to focus on lowering imports,” he said.

Khanal stressed the need to revise the tariff on cement and iron rods in particular. Similarly, encouraging multinational companies to manufacture automobile parts and mobile phones is the other priority area of Khanal. “Besides, diversification and commercialisation of agricultural products could help increase exports thereby reducing the trade deficit .”

Director General of the Customs Department Shishir Kumar Dhungana cited swelling consumption and increasing inflow of remittance for the widening trade deficit . He said the government needed to focus on increasing agricultural production to control growing food imports including rice, pulses and wheat.

“As import of these products have been increasing of late, an increase in the production of these food items could help control the growing trade deficit ,” he added. “Besides, policies to promote investment in sectors like tourism and hydropower that have higher comparative benefits should also be addressed in the budget.”

Source: The Kathmandu Post