Nefnote 2 - Recalibrating the Nepal Trade Integration Strategy (NTIS)

Page 1


C ING THE NEPAL TRADE INTEGRATION

STRATEGY (NTIS)

© 2024 Nepal Economic Forum

Nepal Economic Forum

P.O. Box 7025, Krishna Galli, Lalitpur-3, Nepal

Nepal Economic Forum (NEF) is a not-for-profit organization aiming to be Nepal’s premier private sector-led economic policy and research institution. We are an impact-driven economic and development think tank that seeks to redefine Nepal’s development discourse by analyzing, facilitating, and disseminating contemporary issues in society and economy.

Please write to info@nepaleconomicforum.org if you have questions, comments, or suggestions.

What is a NEFNote?

NEFNote is Nepal Economic Forum’s policy brief paper which provides a succinct yet comprehensive analysis on various topical issues. Crafted with precision and insight, they seek to fuel informed discussions and shape public discourse. NEFNote is an addition to NEF’s line of publications, which has gained a reputation for being high-quality and evidence-based resources, providing valuable Nepali insights.

Title – Recalibrating the Nepal Trade Integration Strategy (NTIS)

Authors – Aadit Subedi, Sagar Jung Karki, Sushant Dhakal

Aadit Subedi is a current intern at NEF and a rising sophomore at Rice University pursuing a dual degree in Economics and Mathematics. He is deeply passionate about Development Economics and Public Policy, particularly in leveraging data-driven approaches to address socioeconomic challenges.

Sagar Jung Karki works as beed at beed management where he is engaged in assignments including management consulting, development consultations, and sectoral studies for the private sector and development partners. He has a Master’s in International Business Management from the University of the West of England.

Sushant Dhakal is a current intern at NEF and an MBA candidate at Kathmandu University School of Management. He is driven by a deep interest in development economics, trade, and financial modeling.

Recalibrating the Nepal Trade Integration Strategy (NTIS)

Looking Back at NTIS

Trade is one of the crucial drivers of the economy in today’s world, occupying 63% of the global GDP.1 To promote trade, nations come up with trade strategies that help create favorable market access, negotiate with trading partners, reduce trade barriers, and encourage foreign investments.2 Likewise, countries try to identify domestically produced products and services that have a comparative advantage in the destination markets.3

In this regard, Nepal has been using trade strategies to enhance its export competitiveness and diversify its market. The country has had three Nepal Trade Integration Strategy (NTIS), along with one national trade policy, that have been formulated to date, which have been listed below:

1. Diagnostic Trade Integration Studies (DTIS), also known as the Nepal Trade and Competitiveness Study (NTCS) 2004

1. NTIS 2010

2. Trade Policy 2015

3. NTIS 2016

4. NTIS 2023

The first trade strategy of Nepal the Nepal Trade and Competitiveness Study (NTCS) was carried out in 2004 under Diagnostic Trade Integration Strategies(DTIS).Subsequently,theGovernment

of Nepal introduced NTIS 2010 as a revised version of the Nepal Trade and Competitiveness Study 2004. NTIS 2010 identified 12 goods and 7 services as having export potential and focused on promoting them. NTIS 2010 has outlined four indices for each product i.e., export performances, world market condition, domestic supply condition and socio-economic impact. However, it only mentioned the potentiality of each product in these aspects and lacked any strategic implementation plans for improvement. Thence, NTIS 2010 failed to achieve its overall target, after which the government reintroduced NTIS 2016, identifying 12 goods and services for strengthening trade and export, developing the supply chain of identified goods and services, enhancing trade infrastructure, and institutionalizing capacity for trade negotiations. NTIS 2016 had outlined term wise action plans to implement after conducting a strength, weakness, opportunities, and threats (SWOT) analysis of each product which NTIS 2010 had failed to identify.

Source:TheWorldBank

Even though, a detailed action matrix was outlined in NTIS 2016, the execution of actions fell short of expectations. It also did not provide any necessary funding requirements for the implementation of strategy. Therefore, it was onlysuccessfulinachievingfewgoalswhilemost of the targets were not achieved.

The Ministry of Industry, Commerce, and Supplies (MoICS) has launched the ongoing NTIS 2023, which is set to be active from 2023 to 2028.Thisstrategytargetsachievingatrade-toGDP ratio of 55% and an export-to-GDP ratio of 20% in five years, up from 48.1% and 6.3% in 2022, respectively.4 It has also identified 32 goods and services with export potential, including agricultural goods, industrial goods, and services like electricity, business process outsourcing (BPO), and tourism. The strategy aims to support Nepal's graduation from least-

developed country (LDC) status in 2026 and the subsequent removal of preferential tariffs. NTIS 2023 has also outlined comprehensive assessment and implementation measures for the policy to become effective. While NPR 463 billion is estimated to be required for the implementation of NTIS 2023, the government allocated NPR 40 million for it in FY 2023/24.5

Hindrances in NTIS Implementation

Although these strategies were meant to enhance trade balance, the actual scenario is different. During the decade of 2010-20, even though Nepal witnessed a 220% growth in exports, imports increased by a whopping 400%.6 Figure 1 depicts the trend in Nepal’s trade from 2004 to 2022. It is apparent that the imports have been escalating at a significantly faster rate than exports, leading to a widening trade deficit. It is noticeable there were only two

Imports Exports Trade Balance (Deficits)
Figure 1: Trend of total imports, exports and trade balance of Nepal (in USD billion)

major disruptions in the trend caused by the 2015 mega earthquake and 2020 coronavirus pandemic.

Historically, Nepal has had issues with the implementation of policy and vision documents. The major reasons for this have been identified as political instability, a lack of fact-driven policy and policy implementation capabilities.7 NTIS, like other policy documents, has largely met with the same fate of being unattainable. Previous trade strategies have not been able to fulfill all the Key Performance Indicators (KPI), with subsequent action points that were to be achieved within five years.8 Moreover, over the years, NTIS has prioritized quantity over quality of exports. This is evident by the number of promising export items, which rose from 12 in NTIS 2016 to 32 in NTIS 2023.

Nepal introduced federalism as a new form of governance after 2015 constitution. Since then, coordination among various levels of government has been a new obstacle in implementation of NTIS especially on the roles and responsibilities of the federal and provincial government with regard to export promotion.9

We look back at the previous NTIS 2016 to point out the failure in the target and KPIs in the trade strategy. NTIS 2016 had set a target of 4% for these items' exports as a portion of GDP.10 However, in the fiscal year 2021/22, the export revenue from the goods included in NTIS 2016 was NPR 38.41 billion, or roughly 0.89% of the

nominal GDP during that time.11 This shows how NTIS despite its ambitious targets, failed to achieve them mainly due to lack of execution of action plans outlined by the strategy and fiscal support.

Tourism was selected as one of the export priority sectors in NTIS 2016. To evaluate the effectivenessofNTIS2016,welookedbackatthe outcomes NTIS 2016 had targeted. 12 short-term and 5 medium-term actions were recommended to enhance the performance of the tourism sector. The ultimate target of NTIS 2016 was to increase tourist numbers to 1,344,000 tourists in a year, USD 136.6 per tourist spending per day, 15 days of the average stay in Nepal by 2017, and 2 million tourists by 2020.12 However, the target was not achieved. The number of tourist arrivals in 2017 was 940,218; it even decreased to 230,085 in 2020.13 Although thisdrasticdecreaseinarrivalscanbeattributed to the worldwide lockdown and closure of borders due to the COVID-19 pandemic, the number was 1,197,191 in 2019, which is far below the targets set by NTIS 2016. The average length of stay was 12.7 days and the average spending per visitor per day was USD 48.14 Similarly, in the agricultural sector, ginger was identified as an export potential product in NTIS 2016. It had aimed to achieve the production of 300,000 metric tons of ginger by 2020 and export 70% of it. In the fiscal year 2019/20, Nepal produced 298,945 metric tons of ginger while exported only about 20% of it.15

Netherlands’ Successful Export Strategy

Despite being 3.5 times smaller than Nepal in terms of land area, the Netherlands is the world’s seventh-largest exporter. The Dutch Agriculture Export Strategy, supported by government initiatives and favorable arable land, has propelled the Netherlands to becomea leading exporter of agricultural products, second only to the United States. Key aspects of the Dutch strategy include a focusonhigh-valueandqualityagriculturalproductsforinternationalmarkets,suchasdairy(milk, cheese), flowers (notably tulips), meat, fruits, and vegetables. It prioritizes the useof innovative and efficient technologies that enhance productivity. Moreover, Dutch agriculture exporters receive assistance from the government, not limited to financial, research, and favorable trade policies with theirinternationalpartners.16 Likewise,withtheinvestmentininfrastructuretoimprovetheseaports, the government better positions domestic exporters to meet large volumes of product demand. The value of Dutch agriculture exports was estimated to be nearly EUR 124 billion in 2023.17 Collaborating with Wageningen University & Research, the government has invested heavily in research and development for agricultural products. It also imposes a strict quality standard to remain competitive and maintain the image of premium Dutch products in the global market. 18 However, along with agro products, the Netherlands also exported EUR 226.5 billion in services in 2020.19

Policy Recommendations

• According to the Department of Customs (DoC), in the first ten months of FY 2023/24 out of 168 trading partners, Nepal had a trade surplus with only 34 countries and trade deficits with the remaining 134 countries.20 In thiscontext,itisevident thatimportshaveto be made harder to foster exports and domestic production.21

• Given the increasing role of services, particularly ITC exports, IT firms need to be more engaged in the drafting and implementation of the NTIS. Additionally, to institutionalize service exports, it might be beneficial to establish organizations like serviceexportpromotioncouncil,technology institutes, and functional IT parks. Furthermore, trade, being a cross-cutting

issue, needs the involvement of multiple stakeholders. An interagency trade promotion and facilitation committee might be helpful for communication among ministries, private sector and development partners. Likewise, future strategies have to be aligned with the five-year national plans and other strategic documents.

• Rather than making a comprehensive strategy for many products and services, NTIS can specialize in few goods or services with highest competitive quality in foreign market and focus resources on them to realize their potential by utilizing available resources.

• Nepal is exporting agricultural products like tea, cardamom, and ginger in their raw form which gets low price from the buyers. The strategy can focus on transitioning from low

value raw product exports to high value processed goods. Moreover, marketing and promoting unique Nepali agricultural products is essential to generate demand in international markets.

• Sanitary and Phytosanitary (SPS) tests mandated by the WTO has also been a major non-tariff barrier for Nepal. Nepali exports are sent to India, which has increased the cost and time for exporters. To meet the SPS measures for agricultural exports, modern testing labs must be established in Nepal.

• Another suggestion for the effective implementation of NTIS would involve the decentralization of NTIS in coordination to provinces and local-level governments. As mentioned in NTIS 2023, this would ensure that both federal and local resources are channeled toward implementing the policy. For instance, local products manufactured in Madhesh province can be directly exported to bordering states in India.

• A country-specific export plan can be included within future NTIS targeting reduction of trade deficit with a particular country. For instance, a customized export approachcanbedevelopedformajortrading partners like the US, India, EU, Australia, etc.

2023#:~:text=In%202022%2C%20almost%20all%20agricultural,natural%20gas%2C%20packaging% 20and%20transportation

18 “How the Netherlands Feeds the World”, National Geographic, September 2017, https://www.nationalgeographic.com/magazine/article/holland-agriculture-sustainable-farming

19 “International trade; import and export of services 2014-2020”, 125 Years Statistics Netherlands

20 “Foreign Trade Statistics 2023/24”, Department of Customs, April 2024, https://customs.gov.np/page/fts-fy-208081s

21 “Outline of Nepal’s International Trade”, JICA, https://openjicareport.jica.go.jp/pdf/12112280_02.pdf

Turn static files into dynamic content formats.

Create a flipbook
Issuu converts static files into: digital portfolios, online yearbooks, online catalogs, digital photo albums and more. Sign up and create your flipbook.