Nepal’s Trade Deficit

Nepal’s Trade Deficit

Siddhi B Ranjitkar

From the folks on the streets to the prime minister, finance minister, other ministers and politicians have been concerned very much with the skyrocketing trade deficit. Every folk have been worried about the increasing imports of everything including the flowers, rice, vehicles, fossil fuels, and certainly the power to mitigate the power outage. However, folks blamed the imports of fine rice, flowers, firecrackers, fruits, vegetables and other items of the daily need for the trade deficit. Remittances have been one of the main pillars of supporting the imports. In fact, remittances and the foreign assistance have been poisoning the fast economic development, the experts say, however, the trade deficit has been fueling the economy.

Imports of rice, flowers, apples, dry fruits and other luxurious goods during the Tihar and the Chhatha festivals have been the signs of the improvement of the lives of the Nepalis whose forefathers had lived in poverty and disease for 240 years of the Shah-Rana rule, and then the 30 years of the Panchayat, which effectively had been the autocratic rule of the last Shahs. After the reinstatement of democracy in 1990, and the onset of the federal democratic republic in 2008, the folks have felt the significant improvement on their lives. The fast improvement on the lives of common folks could be attributed to the first democratically elected government of the Nepali Congress opening up the door to the foreign employments for the Nepalis.

The sky has been only the limit for the Nepalis to go and work in the foreign countries. Nepalis have been omnipresent in near and faraway countries. Qatar alone has hosted 400,000 Nepalis to build their country, the foreign minister recently told the State-run Radio Nepal. Nepalis are in Saudi, Bahrain, you name the country, and Nepalis are there. They sent and have been sending home billions of rupees in foreign currencies. The country has been flooded with hard currencies, which have been the spine for imports fueling the ever-increasing trade deficit, no matter how hard, folks complained about it. Nobody has stopped neither could stop it.

Outflow of Nepalis has caused the tremendous shortfall of labors in the rural areas and even the urban areas the news media report. Rural folks have grumbled that the rural youths have left the villages for the foreign employments, and those who could not go for the foreign jobs went to the urban areas for work leaving the villages high and dry. Consequently, the agricultural land has remained fallow, the food production decreased, villages previously used to be self-sufficient in foods have been the food deficit areas causing the import of foods.

The fertile land has remained fallow; some agricultural experts have said that not only because of the short supply of labor but also because of the lack of irrigation and fertilizer during the agricultural season. When the folks had no other opportunities and entirely depended on the agriculture for their survival then they had remained plowing land no matter what the return on their labor had been. The rural folks became the prisoners of their villages. That had been the time when the autocrats ruled the country, when the entire State administration served those despots keeping the common folks in the dire needy. Now, the common folks have turned the tables on those despotic rulers, and the folks have become free to move from their villages to anywhere to better their lives. So, the land where the absolute rulers had forcibly kept their ancestors has been left unplowed, now.

Grandmothers and grandchildren have remained in some villages until they could move in some better places. So, polarization of rural folks into different urban areas and the foreign employments has been happening fast. Time might soon come when villages would be left to be large agricultural farms. The State must be ready for such happenings in the not far distant future.

Some rural areas have been apple farms, ginger farms, and black cardamom farms, others have been the tea gardens, and so on. The current tiny family farms might undergo a radical transformation, and the subsistence farmers might transform themselves into large commercial farms. That is what the country needs to get back the Nepalis migrated to different countries for jobs.

Rural folks have been far better off than used to be when the autocrats had been in power. Now, children of rural folks have the opportunity of going to schools. The current communist government has been for making the school education free. Future youths would have an equal opportunity of jobs when the education becomes free. However, the quality of education needed to be the same to all the citizens no matter who they are whether they are the sons and daughters of millenaries or of the common folks. That might be how an egalitarian society could be built in the future, and that might be how the wealth distribution could be done. However, the current status of education is the well-to-do children going to the schools with the English medium teaching system whereas the children of the common folks going to the State schools, whose educational standard has been much to be desired. The irony is that even the teachers in the State schools send their kids to the private schools.

Urban areas have been flooded with the motor vehicles particularly the motorbikes. One of the main items of the imports has been the motorbike for causing the trade deficit. Some economists blame the import of these vehicles for the trade deficit because these vehicles in turn demand the fossil fuels causing additional imports of fuel adding to the trade deficit. Even the current finance minister believed probably still believes that the vehicles are non-productive. However, modern economists believe that the economy grows fast with these vehicles coming to ply on the streets because these vehicles make the folks productive, and the productivity increases; so, the economists believe that the finance minister needed to update his economic knowledge.

Really, Finance Minister Dr Yuva Raj Khatiwada needed to update his knowledge of the fast-changing economic theory and practice because he believes that the investment in the shares of companies is unproductive. How the billions of rupees required for building hydropower plants could be mobilized without selling the shares of the companies to the common folks.

Surely, the finance minister would not believe that the hydropower plants are unproductive, too because they produce power. Means which help to produce anything fast must be regarded as the productive, which the finance minister often disagrees, and labels it as unproductive. If anybody believes in the modern economic theory there is nothing like unproductive in the economics. Even the foods humans consume are productive because good foods make the humans healthy and productive.

Common folks have been concerned with the imports of flowers, dry fruits, fruits and firecrackers for the Tihar and Chhatha festivals. They believe that the import of these items has contributed to the trade deficit. Firecrackers have caused the sleepless nights some folks complained; flowers have caused the problems of trash management. The hard earned remittances have been flowing down to the south and to the north because of the imports of these items.

Similarly, folks have been worrying about the import of fine rice, onions, potatoes, and other vegetables that could be easily produced in the country. However, those youths who are supposed to cultivate such crops have left the countryside and gone abroad for earning foreign currencies. Economically, those youths have been more productive there than if they have remained in the country and engaged in the most unproductive agriculture. Even if they could work productively in the agriculture in the country they had the problems of selling their products profitably. So, they have only an alternative to migrate to the urban areas or abroad for foreign jobs.

Imports of agricultural products and other luxury goods are only the small portion of the total imports. The major imports are of the hydrocarbons in other words the petroleum products including the cooking gas, and of course also the power from India to mitigate the power shortage in Nepal. What the State could do now is nothing but to wait until several hydropower plants come to operation. Until then, the imports of fuels would continue to rise and contribute to the tremendous trade deficit.

However, these fuel imports including the power from India have been the major push to the Nepalese economy. The transport and other service industries have flourished thanks to the imports of motor vehicles and the fuels required for them. The import of power has been contributing to the uninterrupted operations of industries, and other businesses, which have contributed to the economic development. Therefore, the trade deficit is only the dark side of the economy most folks watch but its bright side is surely the economic growth.

The exports have been negligible in comparison to the huge imports in the overall trade. The major trade partner has been India, would be so for many years to come, and the trade deficit with India would rise once India started off producing other sophisticated equipment and instruments. India is the sole seller of hydrocarbons, and power to Nepal. Increased import of these items would increase the trade deficit with India. India has monopolized the sale of motorbikes, cars, and pickup trucks in other words almost all the vehicles except for a few Korean cars. Nepal finds these vehicles are the cheapest ones and the spare parts for them are also cheap. So, Nepal has almost stopped importing vehicles from Japan rather Nepal could not afford to buy the highly expensive Japanese cars. China has not been able to compete with India in selling vehicles in Nepal. Imports of fossil fuels from China have been cost prohibitive.

Nepal trades with India in the Indian currency but directly or indirectly buys everything from India in foreign currencies. Nepal has not sufficient earnings of Indian currency no matter how large numbers of Nepalis are working in India from the gatekeepers to the Gurkha soldiers, singers, IT specialists and so on. However, Nepal needs a large amount of Indian currency to buy the fuels and power, and motor vehicles not to mention the onions, apples, oranges, bananas, and even sometimes tomatoes. To meet the huge demand for the Indian currency, the Central Bank of Nepal called Nepal Rastra Bank buys Indian currency from the Central Bank of India paying in dollars. So, the imports from India have been practically in dollars.

How to lessen the trade deficit with India? Nepal could not reduce the import of fossil fuels rather it goes on increasing every month. There is no alternative to it. The trade deficit due to the import of fossil fuels remains high. Import of power from India would be done away when a few hydropower plants currently under construction go on production. Then, Nepal could save some amount of Indian currency used for importing the power from India. I have said that there is no alternative to the trade deficit with India caused by the ever-increasing import of fossil fuels; however, there is an alternative, if Nepal could replace the use of fossil fuels with the use of hydropower.

Nepal has an unlimited hydropower potential, tens of small hydropower projects are under construction; however, the power these hydropower plants produce would not be sufficient to replace even small part of hydrocarbon fuels. The alternative to it is to have the massive investment in the hydropower not only in small projects but also in large projects so that the cost-benefit of these projects would be reasonably good enough for making the replacement of fossil fuels with the hydropower economically viable. Thus, the trade deficit with India could be eased. Forget about the import of rice, onions and apples.

Nepal has been exporting the labor since the Sugali Treaty Nepal had with the British India government in 1816 after the two-year war from 1814 to 1816 with the British Army that had invaded Nepal in its campaign to occupy one country after another in the South Asia. Many nations fell to the British Army but not Nepal. The British Army learnt a good lesson from the Nepalis, and the British included in the treaty the provision for recruiting Nepalis to the British Army. This was called the British Gurkha Army. The British also recruited Nepalis for the Hong Kong police, Singapore and Malaysia police.

After India became independent from the British in 1947, the British Gurkha Army was split into the Indian Gurkha and the British Gurkha. Both India and Britain used the Gurkha army aggressively. India put the Gurkha soldiers in the front during the Sino-Indian war in 1962, and other India-Pakistan wars including the war of 1971/1972 that created Bangladesh. Britain also put Gurkha soldiers in the front to fight the Falkland war, then in Iraq, Afghanistan and so on. Thus, Nepalis shed their blood for defending the British and the Indian territories.

Most of the revenue generated from the Gurkha soldiers serving the British went to the pockets of the then Shah-Rana rulers. Even the checks the British queen turned over to the then King Mahendra for the welfare of the Gurkha soldiers deposited in the account of one of the royalties probably of the queen, as the saying goes among the common folks. However, Gurkha soldiers flourished and their lives after retirement became marvelous. So, some Nepalis made efforts to death on getting the job of the British Gurkha soldiers.

Then, millions of Nepalis serving in India sent remittances in millions of rupees perhaps even in billions: only the guesstimate in absence of the official records of the amount of the money flowed to Nepal, as most of the remittances came personally or unofficially through friends and relatives. The trade deficit had not happened, yet.

Then, came the reinstatement of democracy in 1990. General elections were held in 1991 and the democratically elected government came to power. Unlike the previous regime oriented to the palace the democratic government was to the people. So, it did certain things that became beneficial to the common folks. One of them is opening up the door to the foreign jobs for the Nepalis. Hundreds of thousands of Nepalis opted to work in foreign countries. They went to the Middle East, Southeast Asian countries, Japan, Korea, Hong Kong, and many other countries. A few of them died in accidents at work or on the streets or some other places.

The democratically elected government permitted to open up a number of medical colleges, nursing schools, and technical colleges in the private sector. Some foreign students particularly the Indian and Bhutanese students came to study medicine in Nepal. Nepal produced a large number of medical doctors, nursing graduates, accountants, and technical graduates, who went to work in foreign countries.

So, all those Nepalis whether they are doctors, engineers, IT specialists or nurses, accountants or the professionals of different disciplines or ordinary labor or Gurkha soldiers send home foreign currencies worth billions of rupees that have been the main means for importing the fuels, power, and other daily requirements. That money sent home is called remittances.

Some economists including the current finance minister blame the remittances for causing the trade deficit. That is one hundred percent correct. They also blame that money for fueling the high prices of the real estate, and its fast development. That is also true. Blaming is easier than seeing the main culprit that might be the State itself, which could not properly use the remittances for the development of infrastructures such as fast track highways, railroads, airports, large hydropower plants, and IT networks.

Individuals buy a piece of land or a house from their hard-earned foreign employment incomes in absence of any reliable investment opportunity including the share market. Finance Minister Khatiwada publicly stated that the investment in the stock is unproductive causing a free fall of the share values in the stock market, which has not been able to recoup since Khatiwada told such things publicly about nine months ago after taking office.

Foreign and national investors have been deadly scared of the Nepalese bureaucracy, and the constant change in the government. Our State officials could prolong the official work without giving any reasons whatsoever indefinitely because they are not held accountable to the work. No time limit is set for any State officials to complete the work. So, they could hold on the documents indefinitely. Same thing is true with the law court. For example, the corruption cases against some previous ministers have remained pending at the Supreme Court for several years.

Land is necessary for any industries or for building any infrastructure. Acquiring land has been the most time consuming process, as the State wants to acquire the land at the most cheap prices whereas the landowners want the prevailing market prices for their land. Some foreign contractors have left the huge construction projects half done because of not having the land within the time frame they could profitably work in Nepal. Most of the hydropower projects, and even the largest drinking water project called Melamchi Drinking Water Project had suffered from the stoppage due to not acquiring land on time.

The people’s government held accountable to the welfare of the common folks needed to pay the landowners for the land at prevailing market prices rather than trying to trick the landowners or house owners to low land prices. Bulldozing the centuries old cultural heritage and private houses has been the regular practice of even the communist government for widening the roads provoking the widespread protests. Rather than widening the old roads, new roads might be the alternative if the ministers and the sycophants could logically and reasonably well think about it.

Any construction companies might face the unprecedented challenge from the ministry of forest for cutting a few hundred trees for building factories or airports or roads or any other construction projects. Those ministers were not held accountable to the delay in construction or in returning back the investors. They have the law in their hands they use them as the trump cards for holding the progress of any construction projects that require cutting trees.

Anybody or any ministry could grow trees within a few years, as Nepal is within the tropical climate. The Ministry of Forest could well manage the forestland for timber supply and even fuel wood and at the same time preserve the environment letting the construction companies work without any delay thus not holding up the development activities. The State particularly during the Panchayat regime had been responsible for the huge deforestation, and held up the economic growth to suit their authoritarian rule.

The Labor Act has been heavily biased toward the laborers, and against the employers. The Labor Act has the provision for anybody easily hiring any labor but not for firing. The result has been many employers try to avoid the Labor Act hiring the labor often unofficially or through the third party. This is not the healthy practice for the growth of the industry and for the welfare of laborers, too.

Currently, the environment issue has been another blocking means to delay the implementation of development projects. Every ministry if it were to work sincerely, the problem of preserving or maintaining an environment might not be a big deal. More often than not the ministries had been responsible for deteriorating the urban and rural environment. However, the environmental issue has become the concern of the Ministry of Environment only.

All these factors delimit the potential investments in development activities in Nepal. Then, the question might be how and where the remittances could be invested. Obviously, they could not safely invest in the development projects. The options they might have for investing their hard earned foreign money probably would be the real estate, golden jewelry, for using some for the education of their kids, and for enjoying the dish of fine rice, and meat fueling the import of rice, meat, fruits and even flowers.

The authors writing in the publication called “FINANCE & DEVELOPMENT, SEPTEMBER 2018, VOL. 55, NO. 3” of the International Monetary Fund (IMF) have questioned whether any country has fallen in the remittance trap. They wrote that countries such as Honduras, Jamaica, the Kyrgyz Republic, Nepal, and Tonga had been facing the slow economic growth as the result of the remittances amplifying some of other problems that restricted the economic growth and development. They also wrote, “Part of the remittance trap thus appears to be the use of this source of income to prepare young people to emigrate rather than to invest in businesses at home.” *

The authors have been concerned with the remittances spent mostly on the household consumption, and the demand for all products (non-traded and traded); the flood of foreign exchange made exports less competitive causing the decline of the national production; the resources then flowed away from the industries hurting the economic growth; remittances are often invested in the real estate, causing home prices to rise and in some cases stoking property bubbles.

The authors believe that the concerned governments could mitigate the adverse impact of remittances on the domestic industries making them competitive; to this end, the governments need to improve the education system and physical infrastructure; however, both are expensive and take years to implement; they require strong political will to succeed.

The authors revealed that remittances have important political economy side effects, too, as the large inflows of remittances allow governments to be less responsive to the needs of society; families are better insulated from economic shocks because of the remittances they receive, consequently, they are less motivated to demand change from their governments; then the governments are held less accountable to their citizens; so, many governments actively encourage their citizens to emigrate and send money home, even establishing offices or agencies to promote emigration in some cases. *

Another factor that inhibited the economic growth had been the foreign assistance, experts opined. Foreign assistance has poisoned the economic growth, they said giving the example of South Korea that weaned itself off the foreign assistance in 1960s and then South Korea had really taken off for the fast economic development when Nepal and South Korea had the same income per capita; however, currently South Korea has almost 40,000 dollars income per capita whereas Nepal has less than 1,000 dollars. South Korea exports cars, washing machines, refrigerators and other industrial products whereas Nepal exports the most valuable human labor to the countries including South Korea.

Anybody working at the foreign agencies in Nepal or anybody involved in dealing with the donor agencies could feel the terms and conditions sometimes too humiliating imposed on the recipient country such as Nepal. The donors supported the status quo; they had the vested interest in maintaining the status quo. When Nepal was about to end the monarchy, a group of western diplomats went to the Nepalese political leaders to convince them of not ending the monarchy. So, they did the same thing to the economy.

Finance Minister Khatiwada had an opportunity to graduate Nepal to the developing country from the least developed status because Nepal had already met the conditions required for it in 2018. However, the finance minister postponed it until 2022 probably for receiving a few hundred million dollars of loans or grants at the discounted rates provided to the least developed countries. How could Nepal take off when the finance minister with such a retarded mindset was guiding the prime minister that fitted to be a comedian than to sit on a musical chair of the prime minister?

It is amazing that the finance minister and the industry minister not to mention the prime minister could not see the need for immediately reviving the State-owned enterprises (SMEs) such as Gorkhali Rubber Factory, Bhrikuti Paper Factory, Hetauda Textile Mill, Birangunj Agricultural Tools Factory whose products Nepal could directly substitute for the imported tires and tubes for vehicles, papers, textiles, agricultural tools and so on, which might be in billions of rupees. These national products would lessen the imports and assist in reducing the trade deficit in billions.

These SMEs would generate billions of rupees worth of revenue to the State, and produce thousands of jobs for the common folks who would not need to go to foreign countries for jobs and be separated from the loved ones, and would not need to work under the sizzling sun in the Middle East countries.

Surely, to re-run these SMEs, the State needs to invest some billions of rupees in them. However, such investments would be worth to make in view of the economic and social benefits they would produce for the State and for the common folks. So, the State needs to keep these SMEs, and also as the common folks had paid in terms of land they had owned when the previous regime arbitrarily and forcibly grabbed the people’s land for these SMEs.

Some negative aspects of the SMEs have been that the folks in power indiscriminately used such SMEs for appointing the party cadres and political leaders to the major positions in such SMEs. They used every possible means to extract every single paisa for their own benefits and probably for their political parties, too. Current Minister for Industry Matrika Yadav has said that the employees have extracted everything possible from the SMEs, and none of them has been for making the SMEs flourish.

This has been so because every government has appointed its own persons rather than best persons to run the SMEs. Naturally, none of them appointed in such a way has been efficient and sincere enough to run SMEs. However, all these folks have been for extracting everything possible from SMEs as the Industry Minister has stated.

CEO of Nepal Electricity Authority Kulman Ghising has amply demonstrated that how a sincere CEO could run such a SME that has been running the power outage for more than 12 hours a day, so efficiently that within a few months the power outage has disappeared. Sincerity of CEOs is the main factor that plays a significant role in efficiently running SMEs. To appoint a sincere CEO to any SMEs, the concerned ministers needed to be sincere, too.

The next most important factor is the system, the country needed. Nobody in the State bureaucratic machine has been accountable to what s/he does. Similarly, none of the State agencies also has demonstrated any accountability to what it does or does not.

The glaring example is of the potholes on the streets of Kathmandu. Every State agency digs any portion of recently asphalted road without any problem. Any agency leaves the potholes unattended practically making those potholes life threatening to the late night motorbike riders. Some unfortunate motorcyclists have lost their lives falling into the ditches unattended. Recently, a well-known man had lost his life falling into a ditch while going for an early morning cycle riding. The concerned administrative chief of the Kathmandu city brushed off his responsibility for the loss of a life, and other chiefs did not take any responsibility, too.

Omnipotent former Prime Minister Sher Bahadur Deuba immediately after taking office ordered to fill up the potholes with gravels within 15 days; months passed nothing had happened. Such a powerful prime minister could not probably find a responsible agency or a person to fill up the potholes with anything; so, nothing happened to this end. Prime Minister Deuba who offered one or two lessons of the Constitution to his opponent KP Oli did not find it necessary to set up a system so that none of the folks would need to lose a life falling into the potholes not to mention the dirt and dust those potholes produced, and caused traffic inconvenience to the daily commuters.

Then KP Oli took over from Deuba. He also promised to fill up the potholes with gravels and put asphalt on them but it has been already nine months since Oli took office nothing has happened probably because he could not find anybody to do the job of filing up the potholes.

The concerned ward chairman of the Kathmandu Metropolitan city issues a permit to dig a hole of one square meter with a deposit of about NPR 3,000 after a person secures a permit from other concerned agencies. Then, a person digs the road and repairs his or her water line. The pothole remains indefinitely, as neither the ward chairperson is accountable nor the roads department or any other department to repair the portion of the road recently so nicely done. The monsoon rains help to widen and deepen the potholes and then those potholes go on extending until the entire stretch of the road became not less than a rough road.

Most of the Nepalis have visited foreign countries for jobs or for education, and the State employees for training on administration at the cost of donors, prime ministers, and ministers for the State visit. None of them have probably seen any potholes in any city of any countries they have visited because they have the system: if any State agency or individuals dug the road, then the agency or a person needed to repair the section of the road immediately after the completion of the work the road had been dug for; nobody could leave potholes overnight not to mention a week or a month. So, nobody could leave the potholes unattended and not filled up. That is the system the present government needed it to develop immediately if the potholes in Kathmandu and elsewhere in Nepal have to be out of the scene not the order of the prime minister would do so.

Don’t the economic advisors to the prime minister, finance minister and the industry minister know these simple things? Prime Minister KP Oli has been either for sailing the boats in the waters of the Nepalese rivers and bringing the cooking gas to the kitchen of every householder. Probably, he did not care about the potholes and alleviating the trade deficit. So, what’s the use of speaking out about the potholes and the trade deficit doing nothing for reducing it? Build up a system to make anybody doing anything accountable to what s/he does.

* The government of Nepal has recently signed off any agreement with Malaysia to make pay the Malaysian companies hiring Nepalis for everything going to Malaysia and work there, and even picking up the Nepalis from the Malaysian airport within six hours of their arrival, and making them to pay for healthcare, for fifteen days for going back and forth between Malaysia and Nepal when some close relatives such as parents and their children die. That is how the current communist government encourages the Nepalis to emigrate to work in Malaysia

November 12, 2018