higher than that of exports; as a result Nepal's trade deficit has continuously increased (see figure 1). Figure (1): Trade Balance of Nepal 200000
Nepal's Trade Dependency Problem Nepal traded with more than 100 countries (imports from 101 and exports to 85 countries) in thousands of products in 2004-05 (TEPC, Overseas Trade Statistics, 2005/06). But a few countries and products constitute a large share in Nepal's export (see Tables 1, 2 and 3).
150000
50000
2004/ 05
2001/ 02
1998/99
1995/96
1992/ 93
1989/ 90
1986/87
1983/84
1980/ 81
1977/ 78
1974/75
1971/72
1968/ 69
1965/ 66
1962/63
1959/60
-50000
Table (1): Nepal’s Major Trading Partners 1956/ 57
Million Ru p ees
100000
0
-100000
-150000
Exports
Import
Trade balance
Continuingly rising trade deficit has been one of the frequently discussed topics among Nepal's policymakers and trade analysts and export diversification/promotion and import substitution are the policy prescriptions provided by most of them to narrow down trade deficit. Following their prescriptions, the government of Nepal adopted various measures to promote and diversify exports (Poudyal 1988, SAWTEE 2006). As a result, Nepal's trade with overseas countries started to expand, especially after the mid 1960s. However, progress in export diversification has been very low and Nepal's trade dependence, in terms of both products and countries, is still very high. India still occupies a two-third share in Nepal's exports and three countries (USA, Germany and UK) occupy two-third shares in its overseas exports. Similarly, a few primary commodities still occupy large shares in Nepal's exports basket (Table 2 and 3). Economic and political risks associated with heavy dependence on a few commodities and countries are hotly debated issues among policymakers, academics and trade analysts in Nepal. It was felt that heavy dependence on a narrow base of export products to an equally narrow set of market destinations potentially makes the economy vulnerable to external shocks (SAWTEE 2006). Therefore, diversification of export portfolio has been considered a primary goal of national development strategies and trade policies in Nepal. Despite weaknesses related to infrastructure and productivity, various studies show Nepal as a potentially competitive country across a range of labour intensive manufacturing and agricultural goods and services sectors (MOICS 2004, SAWTEE 2006). On the other hand, despite Nepal's continuous efforts (of more than four decades) to diversify export basket, the situation largely remained unchanged.
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Therefore, it is now necessary to initiate an integrated approach based on three basic components, viz. identification of products with comparative advantage; formulation and implementation of sector development strategies and, development of a negotiation strategy in bilateral and multilateral forums (SAWTEE 2006).
Export (as % of total export) S. N. 1. 2. 3. 4. 5. 6.
Countries India U.S.A Germany U.K Italy France Sub Total
2001/02
2002/03
(2003/04)
59.00 19.79 8.53 1.71 1.20 1.00
52.85 25.37 7.11 2.14 1.06 0.91
57.05 17.97 6.61 3.11 1.08 1.09
2004/05 66.89 12.84 5.29 1.78 1.04 0.99 88.83
2005/06 68.30 11.60 4.70 2.00 1.20 2.20 90.0
91.23 89.44 86.91 11.17 10.00 8.77 10.56 13.09 Note: NR=Not in the rank in that particular year Source: Compiled from Overseas Trade Statistics(various issues), Trade and Export Promotion Centre, Nepal. Other Countries
Table 1 reveals that Nepal's export is heavily concentrated with India and a few other countries (US, Germany and the UK). The top six countries constitute 90 percent of Nepal's exports in 2005/06. A declining share (though marginal, from 91.23 percent in 2001-2002 to 86.91 percent in 2003-2004) of export trade with major trading partners indicates the possibility of further diversification of trade in the future. However, in recent years, re-concentration of Nepal's export in India has largely eroded such possibilities (see figure 2). In FY 2005/06, 68.3 percent of Nepal's goods were exported to India, while India's products occupied 67.1 percent of Nepal's total imports. These figures would be even more staggering if informal trade across the porous India-Nepal border were documented.8 For example, Nepal's total export to India is around US$ 321 million in 2000/2001, among which US$ 141 million (43.9 percent) is informal (Taneja 2007). Similarly, informal imports constitute 52.8 percent in Nepal's total import from India (ibid.). Product-wise too Nepal's export is heavily concentrated in a few items, most of which do not have comparative and competitive advantages. Nepal's main exports to India are vegetable ghee, polyester yarn, jute goods, zinc sheets, textiles and threads (Table 2). Nepal's top ten export commodities to India constitute more than 50 percent of Nepal's total export to India in recent years.
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