Making Nepali Export Competitive

Exports refer to the act of selling goods and services abroad. Exports are very important economic activities for the prosperity of a country, which enhance the aggregate demand of the domestic economy and can be a major source of foreign currencies. Through exports, countries can increase employment in the domestic economy and the per capita income of their people. Many East Asian countries and China have adopted the policy of export-led growth, focusing on increasing exports, which has made them successful in transforming their economies. Despite the importance of exports in the economy, the performance of exports has been sluggish in Nepal.

Nepal's exports of goods have remained weak despite the adoption of the economic liberalisation policy and the opening of the current account as early as in 1993. If we look at the last decade, exports increased from Rs. 92 billion in 2013/14 to Rs. 200 billion in 2021/22, before declining to Rs. 157 billion in 2022/23. The average growth of exports in the last decade (2013/14 to 2022/23) remained at 9.5 per cent, with negative growth of 7.3 per cent in 2014/15, 17.8 per cent in 2015/16, and 21.4 per cent in 2022/23.

Weak export

Despite a moderate average growth rate of 9.5 per cent, the relative situation of exports has remained very weak. As a percentage of GDP, exports accounted for 4.1 per cent in 2013/14. This ratio declined to the lowest point of 2.4 per cent of GDP in both 2016/17 and 2017/18. Only in 2021/22, when exports crossed Rs. 200 billion for the first time, did the exports-GDP ratio again reached 4.1 per cent. Relative to imports, the performance of exports has been slow as well. The exports-imports ratio was 12.9 per cent in 2013/14, but declined thereafter to as low as 6.5 per cent in 2017/18. It gradually improved to 10.4 per cent in 2021/22, still lower than that of 2013/14. If we look further into the past, the exports-to-imports ratio had reached its highest at 48.1 per cent in 2000/01 in the post-liberalisation era. 

Due to weak exports of goods, their contribution to foreign currency reserves has also been declining. Merchandise exports contributed only 5 per cent of total convertible foreign currency in 2022/23. As a consequence of the weak performance of exports, there has been limited domestic employment, forcing young people to seek foreign employment, thereby creating a circular trap. Due to out-migration, the productive capacity of the Nepali economy has been low on one hand, while increasing remittance inflows help finance the growing imports on the other hand. 

India has remained the major trading partner for Nepal's exports. On average, over the last ten years, approximately 66 per cent of Nepal's exports have been with India. During the same period, exports to China accounted for only 1.9 per cent of Nepal's total exports. Exports to China was about 3 per cent of total exports in 2013/14, gradually declining thereafter, reaching almost negligible levels during the Covid-19 period in 2020/21 and 2021/22. However, it has started improving after 2022/23. 

Nepal has been exporting low-tech manufacturing and primary goods primarily, contributing low value addition to the economy. The share of manufacturing goods declined from more than 60 per cent until 2017/18 to about one-third in 2021/22, before improving to 51 per cent in 2022/23. Nepal has been exporting to more than 100 countries worldwide. However, with most countries, Nepal has been facing a trade deficit. There are several reasons for the weak export performance in the Nepali economy despite the implementation of a liberalisation policy. First, Nepal is a landlocked country heavily dependent on India for foreign trade, with exports primarily concentrated towards India. The ability to access markets in third countries has not been competitive, particularly when exporting primary goods. 

Even when exporting to India, Nepali exports face numerous non-tariff barriers, limiting their growth despite potential in certain commodities. Additionally, competing with India in agriculture and industrial products is challenging due to the scale of production in manufacturing and the heavy subsidies provided to agricultural products there. Second, due to various factors such as the availability of physical infrastructure, financial resources, land costs, electricity expenses, and bureaucratic hurdles, Nepal has a high-cost economy, making it challenging to compete with its giant neighbors, India and China. 

Third, Nepal lags behind technologically, resulting in the export of primarily low-value goods and the importation of high-value goods, as a reflection of falling behind in invention and innovation to create high-value goods for export. Fourth, the country lacks the capacity to explore foreign markets for goods it can produce and produce goods that can be sold internationally. This may be attributed to insufficient research and development focused on exports. Fifth, the long-term adoption of a fixed exchange rate with the Indian currency has diminished the competitiveness of Nepali products compared to Indian products, as a result of high productivity and relatively low inflation in India.

Ways forward 

Nepal need to adopt effective strategies to enhance exports in years to come. First, it is crucial to lower production costs by leveraging technology and efficiently managing available resources. Developing adequate physical infrastructure and providing low-cost electricity and land for production can significantly contribute to reducing production costs. Second, Nepal should actively explore foreign markets for our goods through effective economic diplomacy and the development of trade linkages. Collaborating with foreign investors in joint ventures can be a valuable approach, as they can help us penetrate markets in their home countries and other nations. 

Third, there is a need to develop the capacity to produce goods based on the demand in international markets. This involves understanding the nature of demand abroad and building domestic production capabilities to meet that demand. Fourth, given Nepal's landlocked nature, a focus on exporting IT-based software products, which are easier to export, could be advantageous. Fifth, developing innovation and entrepreneurship skills is essential for producing goods competitively. Taking advantage of changes in the global production system's value chain, starting with low-tech goods and gradually transitioning to high-tech goods, can be a necessary strategic approach.

 Sixth, the government and the concerned agencies should effectively implement the fourth Nepal Trade Integrated Strategy, which has incorporated several strategies for export promotion. Hence, to enhance exports, Nepal needs to develop its capacity, adopt technology, leverage economic diplomacy, and foster partnerships with foreign investors. These measures will enable Nepal to overcome constraints and increase exports by tapping into markets abroad. 

(Dr. Shrestha is an executive director at Economic Research Department of the Nepal Rastra Bank. (praks.shrestha@gmail.com)