Being sandwiched in between two rising economic powers, China and India, Nepal has established reliance on its neighbors for trade. In 2004, Nepal attained membership in the World Trade Organisation (WTO); at its core the institution works towards non-discriminatory, reciprocal, binding, enforceable, transparent and safe trade. Being part of the WTO, whose members work and negotiate to liberalise trade, has introduced potential trading partners globally. However, since 2004 the dependence of trade with India has persisted.
Historically, Nepal’s trade balance has been in deficit. Although the export market was not greatly damaged by the global economic crisis, the deficit in recent years has deepened following a substantial increase in imports. As production within Nepal is limited to certain industries, as development is progressing and the population is growing the demand for imported goods is pulling the balance of payments further into deficit.
The balance of payments is a broad measure not only including the difference between exports and imports of goods, but of services, unilateral transfers and capital investments. The consequences of a balance of payments deficit can be unemployment, failing foreign currency reserves and a weakening exchange rate.
Nepal’s balance of payments as of September 2018 sat at 25.85 billion NPR in deficit. Considering the trade account, year-on-year both import and exports are growing. Other sources question the legitimacy of figures reported by the Ministry of Finance, claiming that Nepal sits in a greater level of deficit than reported.
Indeed, there is scope for a level of trade to go unrecorded. The most likely source would be the Indo-Nepal border. This border is governed by Indo-Nepal Treaty of Peace and Friendship (1950), which allows for free movement of both goods and people. As 70.1% of imports come from India and 56.6% of exports go to India, this unregistered trade could significantly affect the current account balance. Although, it is also possible that the understatement of the balance of payments is due to erroneous measurement, which the government of Nepal have previously admitted to having affected other statistics.
Nevertheless, this is a substantial deficit. Currently, Nepal’s top exports are tea and coffee, carpets, stable fibres such as jute and clothing and accessories. The major imports include fuel, iron and steel, cars, gold, electrical goods and medicine. At the core, Nepal is importing so many goods because it doesn’t have the productive capacity or the technology to produce such goods themselves. This in conjunction with low domestic productivity and failure to modernize the state meaning that Nepal losses out on comparative advantage.
Once Nepal makes the step to move away from primary industry towards secondary industry, some of the presently imported goods will be able to be produced within Nepal. Improving productive capacity can be enabled by a better educated population, application of technology and infrastructure improvements; and facilitated by the adoption of more neoliberalist ideologies. Furthermore, Efficiency gains in Nepalese bureaucracy is needed, as it has been branded one of the weakest non-performing systems in the world. The prolonged decision-making processes, slow implementation and inefficient service delivery systems subsequently deter trade.