export | foreign exchange earning | jobs | industrial diversification | special economic zones

Export or die

The country has untapped export potential (or missing exports) of about $9.2 billion, yet there is little progress and inadequate sign of interest

- By the_farsight |

Main Entrance Gate Simara Special Economic Zone (SEZ) Block A. Presently, Bhairahawa SEZ and Simara SEZ Block A are under operation, while Paanchkhaal SEZ is under construction. SEZs, a set of geographic areas allocated to industries, are built with objectives to promote and diversify export industries and improve the country’s trade balance. Photo Source: Special Economic Zone website
Main Entrance Gate Simara Special Economic Zone (SEZ) Block A. Presently, Bhairahawa SEZ and Simara SEZ Block A are under operation, while Paanchkhaal SEZ is under construction. SEZs, a set of geographic areas allocated to industries, are built with objectives to promote and diversify export industries and improve the country’s trade balance. Photo Source: Special Economic Zone website

The covid-19 pandemic brought about many economic hardships. 

Nepal's economy was hammered so hard: in FY20 it shrank by 2.4% for the first time in 30 years. Service sector output fell by 3.6%, tourism, transport activity ground to a halt (leaving 1 million people jobless) and industrial production declined by 4.2%. And 25% of economically active workers lost their jobs, dealing a heavy blow to the progress made in poverty reduction.

The pandemic struck at a time when growth was already stalling: it had started moderating in the first half of FY20, with falling tourist arrivals, reduced agricultural activity and plunging remittance inflows on the back of restrictions imposed on outmigration.

With the rollout of the vaccination campaign, the economy began to bounce back, though, and is estimated to have grown at 5.8% in FY22. Private consumption took off and favourable monsoons led to agricultural growth. Still, the pandemic is expected to have long- lasting effects.

Service-export earnings are yet to reach their pre-pandemic levels due to low tourist arrivals. Inflation, which is at its six-year high, is also reducing consumers' purchasing power and weighing on economic growth.

Addressing structural economic weaknesses has never been so important for a recovery from the ravages of covid-19. One way to do this is by exporting in order to accelerate growth and create jobs. Benefits are not only limited to that, however. 

Tapping into exports also aligns with the country's green, resilient, and inclusive development pathway. It will increase the country's ability to withstand climate-related damages, too, as the rising temperature is expected to lead to more economic pain in the second half of the century.

Strong remittances have supported the economy by increasing domestic demand and government revenues. But it has come at a cost, weighing down the country's export competitiveness while fueling massive imports. The government's heavy reliance on import taxes for revenue has not helped, either.

Low export growth is also a consequence of low productivity growth. Experience suggests that exporting means having a minimum threshold of firm productivity. In the last few decades, total factor productivity contributed only 0.8 percentage points to Nepal's overall annual growth, much lower than in countries like Cambodia. But once firms begin to export, their productivity rises through more exposure to competition and knowledge transfers.

Nepal's trade deficit stood at 37% of GDP in 2018, one of the highest in the world. In the FY 2021/22, Nepal recorded a staggering trade deficit of Rs 1.72 trillion. This, in turn, has created vicious cycles: low- quality jobs have encouraged people to flee the country in droves and high imports have slashed firm productivity. Nepal's economic transformation, therefore, will require the country to rely less on imports and more on selling abroad.

Exports will break the back of those vicious cycles, which is needed for a quick, inclusive and resilient recovery. The emphasis should be on reducing trade costs that sap firm competitiveness, increasing investments in infrastructure and promoting the digital economy – rather than exporting talent. Without all this, the growth is set to stall, at least to some extent.

For instance, consider border crossings. Because of poor infrastructure, they are congested to the point they raise product losses and logistics costs, reducing export competitiveness. Consider, too, the slow implementation of an e-payments gateway, which is forcing exporters to rely on expensive payment methods, such as banks. Investments in digital payments infrastructure will facilitate the flow of payments within and out of Nepal. This, in turn, will slash transaction costs for traders.

Exports do not have to double or triple within the next few decades to boost growth. They just have to grow slowly but surely. Yet Nepal's exports have stagnated at 4% on average over the past two decades, less than the average of South Asia, and are concentrated in only a few countries. It fell from $2.66 billion in FY 2018/19 to $1.89 billion in FY 2020/21.

Worse still, the country has untapped export potential (or missing exports) of about $9.2 billion–12 times more than it is exporting now–by some estimates, ranking the country first out of 104 countries in terms of the index of missing exports.

Exploiting that potential is within reach, however; and with that comes lots of benefits. For example, it will create over 200,000 new good-quality jobs over the medium term, says the World Bank. It will help retain about two-thirds of the workers who migrate in a given year. The productivity those potential workers could have contributed to the domestic economy is an additional missed opportunity. Exports also bring foreign currency into the economy, which can be used to pay for well-needed imports.

Closing the gap between actual and potential exports will raise the export-to-GDP ratio from the current 5.2% to 46%, lifting Nepal from being the sixth least-export-oriented economy globally to 64th out of 188 countries. Moreover, low-income folk tend to toil in subsistence agriculture and the informal sector. Raising exports in those sectors will pull workers out of that (leading to aggregate productivity growth), increase wages and help tackle poverty because firms that export pay higher wages than non-exporting ones, which workers find attractive.

In the long term, in order to set the stage for Nepali exporters to do well, doing trade with destination countries with a growing appetite for imports is another important factor. The good news, though, is that countries that are geographically close to Nepal, such as China, Bangladesh, the Philippines and Vietnam, have substantial missing exports for Nepal and whose imports have been skyrocketing rapidly of late. They are growing fast in GDP terms, too.

Even as the pandemic recedes, there remain many people who are still unable to get back on track. This means: a full-fledged recovery should still be a priority.

the_farsight :)

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