Trade deficit

The bloated trade deficit, which is the crux of the country’s alarming balance of payments woe, continues to be the major challenge in managing the flagging economy. According to the latest economic report released by Nepal Rastra Bank, total trade deficit leapt by over 10 percent to Rs 2.61 billion, which was more than what the country witnessed during the whole of last fiscal year. So, the million dollar question now is what is the treatment for the widening trade deficit? Classroom theories say that boosting exports and curbing imports is the most effective cure for this ill. Checking imports is relatively easier than boosting exports. The government can raise custom duties, choke import credit and bring in polices to substitute for imports through domestic production. But Nepal’s experience has been that translating the idea of increasing exports into practice is a daunting task.



No need to repeat that a protracted and toxic combination of poor industrial infrastructure and militant labor unions has turned Nepal into an unsavory place to do business. In addition, messy politics, policy inconsistencies and a fragile law and order situation are vitiating the industrial environment so much that it has wiped away a large chunk of investor confidence. The state has failed to create a conducive environment for doing business or to take measures to boost investor confidence. Despite this gloomy scenario, the latest export data does show an encouraging increase in exports of Nepal’s traditional products like woolen carpets and readymade garments. But unfortunately, the increment comes against a backdrop of the huge gap between export and import volumes.



Not that there were no attempts by the government to revive exports. Export duties were lowered and low-interest financing was arranged for the sector but the outcome continued to remain pessimistic because most of these efforts were launched without diagnosing the crux of the problem. The continuously declining contribution of manufacturing to the country´s total output is itself testimony to a failed industrial policy.



We have said many times that the government should pay urgent attention to ensuring a secure environment for doing business, a most crucial condition for reviving investor confidence. It is encouraging that there has been astonishing growth in the amount of foreign direct investment (FDI). According to the central bank report, Nepal received FDI worth Rs 5.7 billion within the first ten months of the current fiscal year, particularly in tourism-related service industry. We urge the government to provide necessary security to such FDI because it is precious not just for the employment it generates but also because it helps boost exports and substitute for imports, thereby helping to lower the trade deficit also.

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