The current economic and financial crisis poses an unprecedented challenge for policymakers of the developing world as they don’t have adequate expertise in addressing such a situation. The severity and speed of the economic downturn was largely unpredicted and has triggered populist pressure on governments to protect the national market and jobs. The question is whether the governments should return to protectionism for economic recovery or continue pursuing open and liberal policies started two decades back in most of the South Asian countries, including Nepal.
It is high time for Nepal to to establish Export-Import (EXIM) Bank to ease the life of producers and exporters and protect them from all odds.
Nepal opened its economy to the outside world effectively in the 1990s and a number of measures were taken up by bringing out new policies on trade, industry, tourism and privatization. The trade treaty with India in 1996 provided duty free market access to all kinds of Nepali products in the Indian market. Inland Clearance Depots (ICDs) were developed and customs modernization program were launched in order to facilitate trade and investment. Nepal also joined two regional trading arrangements and a multilateral trading system in a bid to integrate trade and economy with the outside world. The membership of regional and international trading systems has, on the one hand, opened up opportunities for market access while, on the other hand, threatening marginalization in the wake of competition in the destination markets. The latter is becoming more serious in the context of global economic downturn as the declining trend of export will, in all likelihood, magnify in the days ahead. Hence, a carefully crafted policy response is a sine qua non to stop and reverse the declining trend of export and investment.
The Government of Nepal has recently announced the new Trade Policy-2065, which focuses on the requirement of identification, development and promotion of new products and services that bestow comparative and competitive advantage to the country. These would be products in agriculture and forest sector and the products of small and medium enterprises. The potential service sectors would be tourism, education, health and IT. Nepal could harness the potential of hydropower for power trading, which can possibly trigger industrial growth. In addition, the trade policy has emphasized mobilization of physical, social and human capital, structural changes and development of technology and promotion of development-friendly culture as prerequisites for making Nepali trade more competitive in the international markets.
Achieving trade-led growth in the context of global economic crisis would require intervention through a number of measures. First, there is a need for establishing policy coherence among various sectors of the economy such as trade, investment, fiscal, exchange rate and labor policies. The formation of an inter-ministerial body with high-level representatives of the relevant line ministries and other stakeholders from the private sectors could be considered to deal with all aspects of the declining economy and focus on macro-economic management, exchange rate and money supply, trade and investment and to prepare the stimulus package for revival of various sectors of economy. Such a high-level committee could be entrusted with developing a plan of action for short- to medium-term recovery.
Secondly, there should be renewed commitment for advancing the trade liberalization process undertaken in the bilateral, regional and multilateral trading systems. Nepal should advocate in favor of successfully completing the Doha Round of negotiations of World Trade Organization, which advocates for duty free, quota free access of goods manufactured in the least developed countries’ (LDCs) in the markets of developed countries, and aid for trade for capacity building of the LDCs in trade related matters. Developed countries are reverting back to protectionist approach due to economic meltdown. Barriers are being raised against imports from developing countries in the pretext of environment and labor standards and ‘buy local’ stimulus. These kinds of postures are harmful for a LDC like Nepal. It is pertinent to work together with groups that advocate for dismantling the barriers of trade.
The ongoing global financial crisis has significantly increased the risk associated with trade, in particular, commercial risks such as buyer insolvency, bankruptcy and protracted defaults. The situation could be corrected by providing or enhancing government-backed export credit insurance and guarantees. Some of the countries in Asia and Pacific like Thailand, Indonesia, South Korea and India have already enhanced measures to strengthen trade finances to cover risks in export. They have been providing increased financial assistance to small and medium enterprises through export-import banks and export credit guarantee agencies. It is high time for Nepal to establish Export-Import (EXIM) Bank to ease the life of producers and exporters and protect them from all odds. Efforts should be made to utilize the resources available through International Monetary Fund (IMF) in trade finances. It is relevant to mention that the G20 meeting held in London in February 2009 has increased the level of funding substantially (US$ 250 billion) in trade finance to be channelized through IMF. LDCs could amply benefit from this.
Diversification of market and products is another important step that can be taken up in sustaining the export of LDCs. Identification of niche products and markets are appropriate strategies that need to be pursued vigorously by Nepal. Increasing south-south trade and economic cooperation has been an appropriate alternative to contain decreasing export in developed countries. This, on the one side, has given rise to the need for further increasing trade and investment complementarities among the developing world countries under the aegis of regional trade agreements while, on the other hand, necessitating promotion of domestic demand to enable efficient production and specialization.
(Writer is secretary, Ministry of Commerce and Supplies.)
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