Graduate School of Development Studies

The Causes of Trade Defcit of Nepal

A Research Paper
presented by:
Rajan
Silwal
(Nepa
l)
in partial fulflment of the requirements for
obtaining the degree of
MAS!RS "# ARS $N %!&!'"PM!N
S(%$!S
Speciali)at
ion:
Economics of
Development
(ECD
)
Members of the e*amining
committee: %r 'oren)o
Pellegrini
%r +o,ard
Nicholas
he +ague- he
Netherlands
No.ember-
/001
2
Disclaimer:
his document represents part of the author2s study
programme ,hile at the $nstitute of Social Studies3 he
.ie,s stated therein are those of the author and not
necessarily those of the $nstitute3
Research papers are not made a.ailable for circulation outside of
the $nstitute3
n!uiries:
Postal address: $nstitute of Social Studies
P3"3 4o*
/5667
/80/ ' he
+ague
he
Netherlands
'ocation: 9ortenaer:ade ;/
/8;1 A< he
+ague
he
Netherlands
elephone: =>; 60 ?/7 0?70
#a*: =>; 60 ?/7 0655
"c#nowled$e
ments
#irst and foremost- $ ,ould li:e to e*tend my cordial than:s
to my super.isor %r 'oren)o Pellegrini for his :ind
guidance3 +e has been a continuous source of inspiration
and encouragement and under his ad.ice@ this Aourney of
my research has been incredibly e*citing and smooth3
he BseedB of this research paper ,as an outcome of the
discussion ,ith my second reader- %r +o,ard Nicholas3
+e has al,ays boosted my morale by pro.iding me ,ith
detailed comments and suggestions to ensure that $ learn
the basics of research3 $ am glad to be able to e*tend my
special than:s to him3
$ am indebted to the Co.ernment of Nepal for nominating
me to pursue this degree and to the Netherlands
#ello,ship Programme for pro.iding me ,ith this
,onderful opportunity3
"ther important names that $ ,ish to ac:no,ledge for
their inspiration and assistance along the ,ay are 'iDMie
Eu- Almas Mahmud- Shi.a RaA 4hatt- AAaya 9rishna
Shrestha- Fonchesta 9abete- Sintayehu +ailu Alemu-
$fte:har Ahmed Robin- Ma:hahliso No:ana and Goy Misa3
Similarly- $ ,ould li:e to e*tend my sincere than:s to all
staff members of !F% programme in $SS3
'ast but not least- $ e*press my gratitude to my parents- my
,ife Nita- my sons Abhina. and Anurag- and my nephe,
Sharad for their continuous support and for the sacrifces
they ha.e made during my stay and study abroad3
$ am fully responsible for all the errors and omissions- if
any- in this research paper3
RaAan
Sil,al
he
+ague
;/
th
No.ember-
/001
Ta%le of Contents
Ac:no,ledgements >
'ist of ables 7
'ist of #igures 7
'ist of Acronyms 1
Abstract ;
0
Rele.ance to %e.elopment Studies ;
0
9ey,ords ;
0
Chapter & ntroduction &
&
;3; he 4ac:ground ;
;
;3/ Policy Rele.ance and Gustification ;
/
;3> Research "bAecti.es and Huestions ;
>
;3? Research +ypothesis ;
>
;38 %ata and Methodology ;
>
;37 Scope and 'imitations ;
>
;36 "rgani)ation of the Study ;
?
Chapter ' Review of (iterature and Theoretical
)ramewor#
&
*
/3; 'iterature Re.ie, ;
8
/3/ Re.ie, of !mpirical Studies on Fauses of rade
%eficit
;
6
/3> Nepalese Studies ;
1
/3? heories on Fauses of rade %efcit ;
5
/3?3; !*ternal Shoc:s and rade %eficit ;
5
/3?3/ #iscal %eficit and rade %eficit /
0
/3?3> Monetary Policy and rade %efcit /
;
/3?3? rade 'iberalisation and rade %efcit /
/
/3?38 !conomic Cro,th and rade %efcit /
>
/3?37 'ac: of Fompetiti.eness and rade %eficit /
>
/3?36 'andloc:edness and rade %efcit /
>
/3?31 Political $nstability- Fonflict and rade
%eficit
/
?
Chapter + Structure and Direction of )orei$n
Trade of Nepal
'
*
>3; rade Structure
/8
>3;3; ".erseas rade Fomposition of Nepal /6
>3;3/ Number of Products !*ported and
$mported
/1
>3/ %irection of #oreign rade of Nepal /1
>3/3; Mo.ement of rade ,ith $ndia and "ther
Fountries
>;
>3/3/ %irection of %efcit Fompared to rading
Partners
>/
>3/3> rade %efcit in Coods: $ndia and "ther
Fountries
>/
>3/3? Cro,th Rate of !*ports and $mports >>
>3/38 Furrent Account 4alance >?
>3/37 NepalBs rade Policy >8
Chapter , "nal-sis of Causes of Trade Defcit of Nepal
+.
?3; !*ternal shoc:s and rade %efcit >7
?3/ 4udget %efcit and rade %eficit ?0
?3> !*cess Money Supply and rade %eficit ?;
?3? Real !*change Rate and rade %eficit ?/
?38 rade 'iberalisation and rade %efcit ??
?37 !conomic Cro,th and rade %efcit ?7
?36 'ac: of Fompetiti.eness and rade %efcit ?1
?31 'andloc:ed Ceography and rade %efcit 80
?35 FonIict and rade %eficit 8;
Chapter * Conclusion and /olic- Recommendations
*+
83; Fonclusion 8>
83/ Recommendations 88
References 87
Notes 7/
Appendices 7?
(ist of Ta%les
able >3; !*ports of Some MaAor Fommodities to $ndia
($n Million Rupees)
/8
able >3/ !*ports of MaAor Fommodities to "ther Fountries
($n Million Rupees) /
7
able >3> Fomposition of ".erseas rade of Nepal (J) /
6
able >3? Periodic rade 4alance (;567D08) >
;
able >38 rade 4alance (Coods and Ser.ices) in
%iKerent Fountries
(J of C%P)
>
/
able ?3; rade 4alance 4efore and After 'iberalisation ?
8
able ?3/ rade 4alance in Neighbouring Fountries:
4efore and After
'iberalisation
?
7
able ?3> Annual Percentage Fhange of 'abour Fosts and 'abour
Producti.ity of !ight Asian Fountries
?1
able ?3? $nde* of Fost Fompetiti.eness $ndicators of Nine Asian
Fountries- ;555 ?
5
able ?38 Fomparati.e Fost of !lectricity and Eater
(se
?
5
able ?37 'ogistic Performance $nde*: Neighbouring
Fountries and
rading Partners
8
0
able ?31 rade 4alance in Coods and Ser.ices (J of C%P) in
FonIict
Period
8/
(ist of )i$ures
#igure ;3; rade 4alance of Nepal since ;578 (in Coods
L Ser.ices)
;
;
#igure >3; Number of Products: !*ports and $mports /
1
#igure >3> rade 4alance in Coods and Ser.ices /
5
#igure >3? rade 4alance in Coods and Ser.ices
(combined) and $ncome
>
0
#igure >38 rade 4alance in Coods- Ser.ices and $ncome
(Fombined)
>
;
#igure >37 rade 4alance ,ith $ndia and "ther Fountries >
>
#igure >36 !*port and $mport (Coods only) Nepal >
?
#igure >31 Furrent Account 4alance >
?
#igure ?3; !*ternal %emand Shoc:s (9ey Fommodities) >
7
#igure ?3/ !*ternal %emand Shoc:s: $ndia and ".erseas Fountries
(All Fommodities)
>6
#igure ?3> "il Price Shoc:s- $nflation and %irection of NepalBs
#oreign
rade
>1
#igure ?3? $nternational Price of Petroleum and rade Performance of
Nepal >
5
#igure ?38 he ,in (4udget and rade) %eficits ?
0
#igure ?37 Sa.ingD$n.estment Cap and rade 4alance ?
;
#igure ?36 !*cess Money Supply and rade 4alance ?
/
#igure ?31 Mo.ement of R!R and rade 4alance ,ith
$ndia
?
>
#igure ?35 Mo.ement of R!R and rade 4alance ,ith
"ther Fountries
?
?
#igure ?3;0 !conomic Cro,th and rade 4alance ?
7
#igure ?3;; !conomic Cro,th in MaAor rading Partners
and 4 in Nepal
?
6
(ist of "cron-ms
AAN Action Aid Nepal
A%4 Asian %e.elopment 4an:
AR$F Asia Regional $ntegration Fenter
4% 4udget %efcit
4oP 4alance of Payments
F# Fapital and
#inancial Account ch3
Fhapter
FA Furrent Account
F4S Fentral 4ureau of Statistics
FP$ Fonsumer Price $nde*
!C !conomic Cro,th
!R !*change Rate
!( !uropean (nion
#%$ #oreign %irect $n.estment
#M #iscal Mear
CF$ Clobal Fompetiti.eness $nde*
C%P Cross %omestic
Product C%S Cross
%omestic Sa.ing CNP
Cross National Product C L S
Coods and Ser.ices
CoN Co.ernment of Nepal
$#EC $ntegrated #rame,or: Eor:ing Croup
$'" $nternational 'abour "rgani)ation
$M# $nternational Monetary #und
$Re $ndian Rupee
''%Fs 'andDloc:ed %e.eloping Fountries
'P$ 'ogistics Performance $nde*
M $mport
M; Narro, Money
M/ 4road Money
M#A Multi #ibre Agreement
Mo# Ministry of #inance
MS
Money Supply n3a3
not a.ailable n3d3
no date
N!SP!F Nepal Social %e.elopment and PeopleBs
!mpo,erment
Fentr
e
NR4 Nepal Rashtra 4an:
NRe Nepalese Rupee
"'S "rdinary 'east Squares
P$ Political $nstability
R!!R Real !ffecti.e !*change Rate
R!R Real
!*change Rate RMC
ReadyDmade Carment Rs
Rupees
SAARF South Asian Association of Regional
Fooperation
SAE!! South Asia Eatch on rade- !conomics and
!n.ironme
nt
SD$ Sa.ingD$n.estment
4 rade 4alance
% rade %efcit
!PF rade and !*port Promotion Fentre
#P otal #actor Producti.ity
(N (nited Nations
(NFA% (nited Nations Fonference on rade and
%e.elopme
nt
(N$%" (nited Nations $ndustrial %e.elopment
"rgani)ation
(S (nited States
E4 Eorld 4an:
E%$ Eorld %e.elopment $ndicators
EC$ Eorld
Co.ernance $nde* E"
Eorld rade "rgani)ation <
!*port
"%stract
his research paper has discussed the principal causes of
trade deficit trade deficit of Nepal3 !Korts ha.e been made
to sort out the e*ternal as ,ell as internal sources of trade
defcit3 4ased on e*ploratory data analysis and using the
data during ;567D/00?- this paper has found that both
e*ternal shoc:s and internal factors are responsible for the
ongoing trade deficit3 Specifcally- demand and price shoc:s
in the big economies of the ,orld ha.e sho,n ine.itable
impacts on NepalBs trade balance3 Among others- internal
bottlenec:s such as lac: of competiti.eness- geopolitical
aspects- economic policies- bilateral agreement ,ith
trading partner are also found responsible in determining
the direction of trade balance3 Fontrary to some
con.entional theories and e*periences- this paper does not
fnd strong and con.incing relationships of budget deficit-
e*cess money supply- real e*change rate- and economic
gro,th ,ith trade defcit in the conte*t of Nepal3
Relevance to Development Studies
#oreign trade is not only the barter of goods and ser.ices
across borders but also an eKicient channel of e*changing
labour- capital- technologies- opportunities and cultures3 $n
many economies- trade has ,or:ed as an engine of gro,th3
$n a broader sense- trade and de.elopment are
interdependent3 And- trade has prospects and problems3
%iagnosis of problems leads to,ards
.arious alternati.es to cure them3 $ndeed- de.elopment does start
from
identification of needs or problems at frst3 "n this ground-
this paper pro.es its rele.ance to %e.elopment Studies3
0e-words
!*port- $mport- rade 4alance- rade %efcit- rade- Nepal- C%P
Chapter &
ntroduction
&1& The 2ac#$round
rade is one of the means to achie.e gro,th- employment-
and ,elfare3 $n many countries- trade has a signifcant share
in the Cross %omestic Product (C%P)3 $nternational trade is
pi.otal ,hen countries are not selfDreliant in factors of
production- consumer goods and capital goods3 $n the ;5
th
and /0
th
centuries trade had played a maAor role to
accomplish global economic gro,th3 $n se.eral de.eloped
countries- international trade and longDterm capital flo,s
acted as Bengine of gro,thB in bringing rapid economic
gro,th and de.elopment (":e /006)3 Rodri: (/00;: />)
rightly argues that no country has gro,n ,ithout
international trade3 !*ternal trade is one of the main
sources of foreign e*change earning ,hich is necessary to
import capital goods plus other consumer goods and
ser.ices that are not produced domestically3 $n business and
!conomics- foreign trade has al,ays been emphasi)ed for
comparati.e ad.antage and one of the maAor components
contributing to C%P3 A
persistent and high defcit in international trade is less
li:ely to resemble the good health of an economy- lea.ing
the question of its sustainability3
Nepal- a small economy ha.ing ?5J of contribution by
trade in its C%P (/00?) has been running a trade defcit
(%) since ;578 (#igure ;3;)
;
3
Figure 1.1
Trade Balance of Nepal since 1965 (in Goods & Services)
Data Source: World Bank(WB), 'World Development Indicators (WDI)-!!", '
he deficit is incurred mostly in merchandise trade and
partly in income3 he current account ,hich includes trade-
ser.ices and transfer income has also been negati.e since
;566@ ho,e.er- it has sho,n a positi.e sign after /00/
(#igure >31) contributed by signifcant increase in
remittances (see Appendi*D
%)3 Nepal has a high (??J of total deficit- on a.erage) %
,ith $ndia
/
N a main trading partner and bordering country3
Moreo.er- the % ,ith rest of the
,orld is also signifcant3 According to 4aAracharya and Sharma (as
cited in
%e.:ota n3d3)- Bthe trade deficit continued to gro, unbridled- and is
increasingly posing a serious challenge to the .arious
economic structure of the nationB3 #igure ;3; has e*plicitly
sho,n t,o trends3 #irst- after ;576 the deficit has ,orsened
in e.ery successi.e decade3 Second- there are sudden and
sharp upturns and do,nturns3
4esides- the deficit ,as relati.ely lo, until ;560s but it :ept
,orsening
after ;510 e*cept for some e*ceptional upturns in ;518-
early ;550s and ;5553 Moreo.er- the oscillations are .ery
frequent and the magnitudes of them are equally
interesting for a study3
&1' /olic- Relevance and 3ustifcation
#oreign trade helps consumption of those goods and
ser.ices ,hich are either unprofitable to produce
domestically or not feasible due to .arious reasons3
'i:e,ise- the need of capital- capital goods and technology
are also met by means of trade3 A fa.ourable balance of
trade is e*pected to generate foreign currencies necessary
for the imports of capital as ,ell as consumption goods and
ser.ices3 Moreo.er- it is one of the means of bridging the
sa.ing gaps in an economy3 he balance of trade- being a
:ey component of the current account- can ha.e farD
reaching impact on economic gro,th- de.elopment and
balance
of payments3 he go.ernment of Nepal has reali)ed the
e*port sector as an engine of gro,th ,hen this sector
,as blooming in ;550s3
BNepal2s e*ports ha.e played a positi.e role since the ;517D50
periods3 %uring this period- their contribution to economic
gro,th increased to ;0 percent- from / percent for the pre.ious
period (;567D18)3 !*ports ,ere an engine of economic gro,th
during the ;550s- particularly during the period after economic
reforms- ;55;D
58B (Mo$FS
>
- as cited in Prasad /006: ;5)3
he e*port policy of the eighth fi.eDMear Plan (;568D10)
of Nepal clearly recogni)es that the unfa.ourable balance of
payments led by a % of the country is responsible for
negati.e eKects on the economy and a slo,er
industrialisation3 Sharma and 4handari (/008: >0) see that
BNepalBs foreign trade has tremendously been suKering from
successi.e deficit ,hich can ha.e negati.e eKect on foreign
currency reser.e of the country and thereby in.ite macro
economic instability3B
$dentifcation of the causes of % is crucial in the sense
that a country can hardly incur % of signifcant si)e fore.er3
his identifcation- in fact- is the diagnosis of the problem
,hich can suggest necessary policy prescriptions to
be pursued3 Ci.en the higher contribution (almost 80J) of
trade to C%P- the ongoing trend of % ,ould no longer be
ignored for gro,th and de.elopment of the country3 More
importantly- sources of fnancing a defcit are .ery important
and the issue of sustainability of % hinges on the sources of
fnancing3 %espite .arious sources to finance a %- an
underde.eloped economy li:e Nepal naturally faces number
of limitations to tac:le the defcit3 hese limitations are the
agriculture and ser.iceDdominant structure of the
economy- amount of foreign e*change reser.e- capacity to
increase gross domestic sa.ings- capital Io, and its
structure- debt ser.icing capacity- .olatility of international
labour mar:et and hence the Io, of remittances and so on3
$n its study report- (NFA%
?
(;555: 1?) has sho,n that B333
,ith some notable e*ceptions- the relationship bet,een
trade balances and economic gro,th in de.eloping
countries has ta:en an unfa.ourable turn during the past
decadeB3 +ence- % is a problem to accelerate economic
gro,th3 A % of
BNepalese si)eB (;>35J of C%P in /00?) requires an
intensi.e in.estigation of principal causes as the frst step
to address the problem3
&1+ Research 4%jectives and 5uestions
he main obAecti.e of this research paper is to identify the
principal causes of trade deficit in the country3 he
research paper hence aimed at ans,ering the follo,ing
research question D
Ehat are the principal causes of trade defcit of NepalO
&1, Research 6-pothesis
he follo,ing t,o hypotheses ha.e been made in this research:
a) !*ternal shoc:s (demand and price) are the main
causes of NepalBs %3 b) $nternal bottlenec:s (trade and
economic structure- competiti.eness-
geography- conIict) and policy en.ironment (trade- fiscal and
monetary)
factors are secondary
causes3
hese hypotheses ha.e been tested on the basis of
theoretical and empirical foundation but no statistical tests
are pursued due to the limitations mentioned hereafter3
&1* Data and 7ethodolo$-
All the data are from secondary sources in this paper3 $n
most of the analytical part- the study period is ;567D/00?
(see section ;37)3 he maAor sources of data are the Eorld
4an:- Nepal Rashtra 4an: (NR4)- $nternational Monetary
#und ($M#)- Ministry of #inance (Nepal)- Fentral 4ureau of
Statistics and $ntegrated #rame,or: Eor:ing Croup
($#EC)3 Regarding the methodology- this study relies on
e*ploratory data analysis3 Rele.ant crossDcountry
comparisons ha.e been done among the South Asian
neighbouring countries as ,ell as maAor trading partners3
&1. Scope and (imitations
his study captures only the principal causes of Nepalese
%3 here can be a number of micro and macro factors
,hich ha.e in one ,ay or another causal relationship ,ith
the %3 Ci.en the constraint of time- academic purpose of
the study and other resources- those subsidiary issues ha.e not been
considered
in the analysis3 All the inconsistencies and insufficiencies
seen in the data gathered from .arious sources can ha.e
bias in inferences3 %ata from Nepalese
sources are based on fiscal year ,hereas the data from
Eorld 4an: and other international organi)ations are
produced in calendar year3 hus- it might ha.e erroneous
interpretation3 he analysis mostly depends on e*ploratory
data analysis ,hich has its o,n limitations compared to
other sophisticated data analysis methods- especially in the
attribution of causal relationship bet,een dependent and
e*planatory .ariables3 Since timeDseries data analysis
requires relati.ely a longer data series of all dependent
and independent .ariables- $ ha.e not chosen the method
due to the defciency of data corresponding to some :ey
.ariables3 Most of the data series are a.ailable from ;567
till /00?3 +ence- $ ha.e chosen the time frame3
o the e*tent- crossDcountry comparison has been made
to .alidate some indicators or findings@ they should be
carefully understood since these countries possess .aried
economic- political- and geographic characteristics3 he
special NepalD$ndia trade relation N ,here the border is
open and an unauthori)ed trade bet,een them is claimed to
be signifcant in si)e (aneAa et al3 /00?: ?>) N may also
delimit the identifcation of real problem3
'astly- % has multiple implications on the .arious
macroeconomic concerns3 he question of significance of
% on economic gro,th- employment- and its
sustainability issue is defnitely important3 +o,e.er- $
ha.e not discussed these issues gi.en the limitation of
data- lac: of time- appropriate methodology and intensity
of the question at large3 Similarly- despite the presence of
high % ,ith $ndia in formal and informal trade- ,here a
single research can be made- $ ha.e pursued my analysis
in an aggregate pac:age ,ith other countries3
Ne.ertheless- to the e*tent that data ,as a.ailable and a
special Austification needed- $ ha.e incorporated them3
&18 4r$ani9ation of the Stud-
his paper has been organi)ed into f.e chapters3 he
second chapter is de.oted to re.ie, of literature and
theoretical frame,or:3 hus it comprises rele.ant literature-
theories and empirical fndings@ and related Nepalese
studies in foreign trade3
he third chapter discusses the structure and direction
of NepalBs foreign trade o.er the decades3 $t describes the
general story of % in Nepal3 $n addition- a brief summary
NepalB trade policies are gi.en3
Fhapter four- the main part of analysis deals ,ith the
causes of %3 he last chapter summari)es the conclusions
dra,n from the analysis and presents some policy
recommendations3
Chapter '
Review of (iterature and Theoretical
)ramewor#
his chapter has frst o.er.ie,ed the main debates made
by diKerent scholars regarding the causes and implications
of % in general3 $t goes further by summari)ing empirical
studies about the causes of % in diKerent countries3
#inally- based on the empirical studies- the theoretical (also
analytical) frame,or: has been designed3
'1& (iterature Review
here are considerable numbers of literature regarding the
%3 #or some- it resembles a problem@ for others it does not3
An o.er.ie, of trade account of diKerent countries suggests
that many countries are passing through a % and this issue
has been discussed in national- international- economic and
political arena3
he debate on % is most li:ely to re.ol.e around its
impact on the
economy- ,ay to fnance it and its nature (causes- si)e
and persistence) in question3 here are ,riters and
institutions focused on analy)ing the issue
from the .ie,point of de.eloped and de.eloping countries3 $n the
former case-
.oices are raised to say that it is not a problem per se ,hile
in the later there are studies ,hich ha.e sho,n that %
retards gro,th and de.elopment thereby in.iting fnancial
crises- deindustriali)ation- unemployment- and so on3 +ere
are some arguments on the issue3
Analy)ing the (S conte*t Mueller (/007) contends that
the problem is not the defcit itself but the ,ay to get rid of
it ,hen foreign fnancing stops3 $n support of the Bno
problemB side- the author argues that capital inIo, is the
sign of an attracti.e and gro,ing economy3 Cris,old (;551)
for e*ample- considers the % not as bad ne,s- not resulting
from unfair trading practices of other countries and nor due
to lac: of competiti.eness but due to
emergence of other factors in the macro economy not
directly related to trade3 he author claims that % simply
resembles the mirror image of a surplus in the capital
account and the gro,ing economy of a country propelled by
high in.estment3 $n contrast- in line ,ith the B,orry
positionB- the arguments are that % leads to a higher
e*ternal debt ,hich can crash do,n any time in the
future alongside stopping of foreign financing3 Some other (S
scholars .ie,
the % as BPnot all good- not all bad- and certainly not
irrele.antB (4yrne and %erbin /00>)3 heir Austifcation is
that it can create unemployment or high e*ternal debt or
fnancial and political problems (not all good)3 $t also helps
fll lo, domestic sa.ing and social ,elfare due to higher
consumption (not all bad)@ and not irrele.ant in the sense
that it has association ,ith
macroeconomic .ariables3
$n a research for $nternational Monetary #und
($M#)- Chosh and
Rama:rishnan (/007) percei.e the FA defcit from three
perspecti.es- as the
diKerence bet,een the .alue of e*ports and imports of goods
and ser.ices@ gap in national in.estment and sa.ing@ and
interDtemporal trade3 $f the deficit is due to high Qe*ternalR
in.estment- according to the authors- it does reIect only a
lo, le.el of sa.ings and no need to ,orry pro.ided
in.estments are channelled to output gro,th3 Similarly-
there is no harm of importing more goods- the authors
contend- thereby incurring a % today and e*porting the
same tomorro, enAoying a surplus3 $n addition- if the defcit
is easily fnanced by foreign capital as done by Australia and
Ne, Sealand- it is not bad but it can
be bad if there is problem of fnancing the defcit due to ,ithdra,al
of pri.ate
financing as in Me*ico in ;558 and hailand in ;556 (ibid)3
(d,adia and Agmon (;511) .ie, the % from economic-
political and moral standpoint and argue that it is a Tno
problemT situation3 he authors argue that any potential
crises due to a persistent % are o.erstated by political and
moralistic perspecti.es and it has little implication ,ith the
economic impacts3 #rom a political corner- the argument is
that a trade surplus is contended as Bgood for the countryB
and a must for those ,ho thin: that po,er comes from
proft3 "n moral ground the defcit is BbadB ,hen people say-
Bdo not consume more than your meansB and Bsa.e for a rainy
dayB (ibid)3 +o,e.er- the authors ha.e ac:no,ledged the
interplay of these three perspecti.es to turn the % as a
problem3
he Sunday imes (/6 Guly /001) oKers a critical ,riteD
up about % and clusters the ideas from optimistic and
pessimistic sides3 %epending upon the nature of imports
and its utili)ation- a % can be assessed ,hether or not it
helps gro, the economy3 $t is good if the imports are made
to boost the production of tradable goods andUor in.estment
goods3 $t is not bad if it does not create a problem of
4alance of Payments (4oP) or run out the foreign e*change
reser.es of the country or it is only caused by shortDterm
cyclical shoc:s3 he Paper ,rites- if the deficit is due to the
building of infrastructure of the nation or the industrial
base- or the imports of ra, materials or due to high inflo,
of foreign aid and foreign direct in.estment (#%$) into
producti.e
sector@ no need to ,orry since they ,ill reco.er the deficit in
the nearest future3 +ence the question is not the % per se
but the underlying rationale behind it3 he paper rightly
emphasi)es that irrespecti.e of the 4oP surplus- a % is
li:ely to raise a problem of higher e*ternal liabilities in the
future ,hich ,ill further deteriorate the importing capacity
of the economy and distort the much needed resources
to,ards the debt repayment and ser.icing3
Moon (/00;- /008) presents e*tensi.ely in his papers
about ho, a % hampers the economic gro,th of countries
and leads to accumulation of higher foreign liabilities-
dependence- distortion of national priorities- slo,er
gro,th and de.elopment- and potential fnancial crises as
in 'atin American and !ast Asian countries in the past3
Moon (/007: //) has carefully critici)ed
the neoliberal claims that BPthe NorthDSouth di.ide could be
narro,ed- if only the poor countries ,ould emulate the
economic policies of the richB3 he
author argues that BP it is not their e*pansion of trade
.olumes that should be copied but their prudent a.oidance
of trade deficits in the past and presentB Qemphasis addedR
(ibid)3 #rom the abo.e discussion- it is clear that (i) trade
deficit is e*istent in many countries@ (ii) economists ha.e
different perceptions to consider it as a problem@ and (iii)
regarding the sources of problem3
'1' Review of Empirical Studies on Causes of Trade
Defcit
Saruni (/006) has unco.ered three main factors responsible
for an)aniaBs persistent %3 he author has used
go.ernment e*penditure- household consumption- real
e*change rate (R!R)- #%$- income from the rest of the ,orld
and trade liberalisation in his logDlog ordinaryDleastDsquare
("'S) regression model for the data during ;560D/00/3 he
paper fnds that the go.ernment e*penditure- #%$ and
income from abroad played a positi.e role in the
determination of trade balance (4) despite the negligible
coeKicient of the #%$3 "n the other hand- household
consumption- R!R and trade liberalisation deteriorated the
43 Some of the findings in SaruniBs paper are in line ,ith
theories and some are not but his "'S approach for time
series analysis suKers some methodological limitations3
he (NFA% (;555: 58D6) presents an econometric
analysis of 4 using the panel data of ;7 countries o.er /7
years3 +ere- 4 to C%P ratio is dependent .ariable ,hereas
gro,th- purchasing po,er of e*ports- gro,th rate in
industrial countries and economic liberalisation are
e*planatory .ariables3 $t
is found that the acceleration of gro,th rates in de.eloping
countries increased the % ,hile liberalisation ,orsened it
significantly3 'i:e,ise- better terms of trade and rapid
economic gro,th in industrial countries helped lessen the
% in de.eloping countries3
A ,ider concept of 4 is represented by the FA and the
determinants of ,hich are often .ery same as the
determinants of %3 Purohit (/006: 8?) found that the
determinants of $ndiaBs FA defcit are not the ,idely
belie.ed changes in stoc: of money or fscal balance3 he
author highlights the lac: of competiti.eness (in the
manufacturing sector)- supplyDside constraints of domestic
economy and inflation through international price shoc:s
(in oil and food) as some maAor determinants of %- and FA
defcit in turn3 he analysis is based on time series data
from ;560D/008 in the regression analysis and the
.ariables are FA to C%P ratio- e*cess money supply (MS)-
gross fscal deposit- real eKecti.e e*change rate (R!!R)-
and FapitalD"utput ratio3 +o,e.er- the author has largely
pursued e*ploratory data analysis3
"nafo,ora (/007) e*amined the causal relationship
bet,een budget
deficit (4%) and % in case of Nigeria using a regression
model ,ith the data from ;560D/00;3 he study .ariables
are %- 4%- MS- domestic income- discount rate- and R!R3
he author has found a positi.e longDrun relationship
bet,een 4% and %3 4ut contrary to the con.entional
theory- the paper highlights that the causality runs from %
to 4% since Nigeria is highly dependent on the e*port of
petroleum products3 $n addition- the paper has obser.ed a
positi.e correlation of % ,ith MS and depreciation of
domestic currency3 Mean,hile- increased domestic income
and rising interest rates had ,orsened the % (in Nigeria)
in the longDrun3 $t is due to the fact that the former raises
the demand for foreign goods and ser.ices ,hile the later
encourages capital inflo, that necessitates appreciation of
home currency@ and again more imports from abroad3
Anoruo and Ramchander (;551) in.estigated
relationship bet,een Bt,in deficitsB in f.e de.eloping
countries using time series data (;586D5>)3 he authors
ha.e included both the de.eloped (for e*ample- the (S)
and
de.eloping countries in their study3 he analysis is based
on .ector autoregressi.e model and the direction of
causality bet,een the t,o defcits has been tested by the
Cranger causality test3 he study re.ealed that the %
causes 4% and not the .ice .ersa3 hat is- a ,orsening of
% forces the go.ernment to spend more to help minimi)e
the domestic hardships3 +o,e.er- in case of Malaysia- the
authors noticed a ,ea: bidirectional
relationship too3 $n the model- shortDterm go.ernment
interest rates- the tradeD ,eighted !R of the local currency-
C%P- and inIation rate ha.e ser.ed as e*planatory
.ariables3 Fontrary to the documented cases in the (S and
other de.eloped countries- the authors ha.e found a
unidirectional causality from current (trade) accounts to 4%3
#urthermore- the causality bet,een increase in C%P and %
,as significant only in the case of $ndia and Malaysia3
FalderVn et al3 (/000) in their research for the Eorld
4an: found that
Bcurrent account deficits in de.eloping countries are
moderately persistentB@ an increase in domestic output gi.es
rise to a higher FA defcit@ terms of trade loss or
appreciation of R!R@ and an increase in international
interest rates or higher gro,th rate in industrial economies
lessen the FA defcit in de.eloping countries3 he research is
based on crossDcountry panel data of ?? de.eloping
countries co.ering the period from ;577D583 he .ariables
under study for pooled timeDseries are pri.ate and public
sa.ing rates- international real interest rate- the e*tent of
4oP control- R!R- the share of e*ports in gross national
disposable income- national income (domestic and
international)- and the
terms of trade3
'1+ Nepalese Studies
o the best of my :no,ledge no pre.ious study has been
done ,hich ,as in.estigating the causes of % of Nepal3
+o,e.er- there are some ,riters and organi)ations ,ho
ha.e e*pressed their concern on ,ea: e*port performance
and %3 $n almost all cases- the authors ha.e raised their
arguments on the problems li:e inadequate di.ersifcation
(A%4
8
- /00?@ SAE!!
7
/007)- lac: of competiti.eness
(4hatt /008- $#EC
6
/00>: 5- Mo#
1
- /00?U08- Poudyal
/006- Shaa:ha /001- Sharma /00?)- o.er.alued !R due to
the f*ation of Nepalese Rupee (NRe) ,ith $ndian Rupee
(Panta /006)- and ,orsening terms of trade (Singh /001)-
e*ternal shoc:s (9oirala et al3 /008)3 Similarly- structural
bottlenec:s and landloc:edness (%e.:ota n3d3- Shaa:ha
/001)- absence of in.estmentDfriendly policy en.ironment
(Mo# /00?U08) Qpace ofR trade liberalisation (4hatt and
Sharma /007 )- changes in international demand or the
Bdemand shoc:sB (Shaa:h /001)- insurgency and stri:es in
the country (9oirala et al3 /008)- and to some e*tent
bilateral trade treaty ,ith $ndia (9oirala et al3
/008- Mo# /00>U0?) are also considered responsible for the %3
Most of these
arguments are made in institutional publications-
ne,spapers- and public forums3 Some of them are
briefly discussed here3
he A%4 (/001) and $#EC (/00>) see the reduced
competiti.eness in readymade garments (RMC)- pashmina
and ,oollen carpets as responsible for declining e*ports to
o.erseas
5
countries thus leading to %3 "n the other hand-
in its report- SAE!! (/007: 6D5) emphasi)es that NepalBs
e*port di.ersification policy is hardly eKecti.e and the trade
,ith $ndia constitutes a
big share of defcit3 he report claims that the gro,th in
imports has out,eighed the e*port gro,th ,hich has
propelled the deficit further3 Prasad (/006: //) sees both
the role of ,ea: e*port capacity and imports of lu*ury
goods in the % of Nepal among others3 he author claims
that the composition of e*port bas:et of Nepal is not
di.ersified compared to its ,idely .aried imports3
According to Sharma (/00?)- B$ndiaBs abnormal proft
moti.e reIected in trade negotiations and tariK and nonD
tariK barriers imposed infrequently upon Nepal is also
causing hea.y trade deficit and hence- damage to the
Nepalese economy3B Similar arguments are put by 9oirala et
al3 (/008)- Prasad (/006) and A%4 (/00?) that underline the
restricti.e NepalD$ndia rade reaty for damaging e*ports of
Nepal after /00/ ,hich is responsible for a t,oDdigit %3
here are opposing .ie,s about the !R regime and the % of
Nepal3 "ne
.ie, emphasi)es that the f*ed !R ,ith the $ndian currency
is detrimental to the Nepalese trade ,hereas another .ie,
percei.es it benefcial in general (he 9athmandu Post- /
Gune /00>)3 %e.:ota (n3d3)- using a regression equation-
in.estigated the causality bet,een R!R and 4 of the
country3 he author found that !R de.aluation is not helpful
to achie.e impro.ement in %@ and de.aluation alone hardly
helps minimi)e the % if it is not supported by other
economic tools3
Regarding the causal relationship bet,een budget
deficit and FA defcit- Acharya (;555: 87D5) found that
Nepalese B333budget defcit is significantly e*plaining the
current account deficitB3 And- the author sees consistency in
the neoDclassical doctrine N a higher le.el of fiscal defcit
leads to higher le.el of FA defcit3 Regarding the impact of
trade liberalisation in Nepal- Acharya and Fohen (/001)
ha.e demonstrated that both the budget and trade defcits
do ,iden under the oneDtime liberalisation of !R and trade
due to the appreciation of domestic currency3 he authors
ha.e estimated the % 038>J and ;3?>J more than the
baseline .alue under trade liberalisation- and trade and !R
liberalisation respecti.ely3
'1, Theories on Causes of Trade Defcit
#rom the re.ie, of literatures it is ob.ious that there are a
number of causes of % in different countries3 Among them-
fiscal and monetary policies- e*ternal shoc:s (particularly-
demand and price)- trade liberalisation- economic gro,th-
lac: of competiti.eness and landloc:edness are maAor ones3
$n this subDsection- efforts ha.e been made to outline the
theoretical frame,or: on the basis of these determinants3 $t
has also been considered as the analytical frame,or: for
this research3 hey are discussed one by one3
'1,1& E:ternal Shoc#s and Trade Defcit
$n an open economy- either the demand shoc:s or the price
shoc:s transmitted from global economy can produce
unfa.ourable circumstances in a countryBs 4 and
macroeconomic stability3 he Asia Regional $ntegration
Fenter (AR$F n3d3) states ho, a slo,do,n of gro,th in
maAor economies- particularly the (S and the frequent hi:es
in the oil prices are transmitted across countries .ia
trade- in.estment- fnancial Io,s and mo.ement of ,or:ers
and their remittances3 Some other e*ternal shoc:s can
emerge from global interest rate and shifts in fscal and
monetary policies of big economies (Gansen /001)3 he
transmission of shoc:s is obser.ed in the asset prices-
domestic interest rates- appreciationUdepreciation of !R-
imbalances in trade and current account and real economic
acti.ities3 Ne.ertheless- the impact of shoc:s depends on a
countryBs degree of trade openness- capital inIo,s- and si)e
of the economy3
4esides- the AR$F (n3d3) states that a supplyDside shoc:
that has risen from a sharp rise in imported input (for
e*ample- energy)- for ,hich demand and supply are
relati.ely inelastic is more li:ely to raise the output price-
slo,er gro,th but higher inIation3 he rise in output prices
,ill end up in a loss of competiti.eness thereby causing
smaller e*ports and %1 he price shoc:s directly hits the
terms of trade- for e*ample- Sch,art) (;515: ch3 ?) states
that
in the (3S3 the terms of trade and the % mo.ed together
after the Eorld Ear $$ ,here changes in the domestic
demand for imports and residual supply of e*ports ,ere t,o
dri.ing forces behind the %3 Fon.ersely- the demand side
shoc:s appear from the sudden and sharp decrease in the
demand for imports by maAor economies3 he demand
shoc:s- according to Solanes et al3 (/006)- transmit their
effects through t,o channels N the R!R and domestic
product and these eKects are stronger3 %esamanya (/007)
contends that e*cept internal imbalances- a sudden increase
in oil price ,ill ,orsen the %- create disturbances in
o.erall 4oP- losses in countryBs foreign e*change reser.es
and pressure on the !R3 Similar arguments are gi.en by
&atanse.er and 9utlay (/001)- Manrique (/00?) and A%4
(/008) in the conte*t of other countries3
'1,1' )iscal Defcit and Trade Defcit
As mentioned in the earlier section- there are t,o lines of
thin:ing and conclusions that the causality runs from 4% to
% or .ice .ersa3 Ehether ,e see at broader perspecti.e of
FA deficit or a component of that N the %- the causality is
not the same3 $n macroeconomic accounting- national
sa.ings are disaggregated into pri.ate and public sa.ings3
And- ob.iously- fscalUbudget deficit indicates go.ernment
dissa.ing3 he relation bet,een them can be sho,n as
belo, (Mueller /007):
i) <DM W (SpD$p) = (DC)
ii) N< W S N $
Ehere <- M- Sp- $p- - C- S- $ and N< stand for e*port-
import- pri.ate sa.ing- pri.ate in.estment- ta* re.enue-
go.ernment e*penditure- national sa.ing- national
in.estment and trade balance respecti.ely3
$n equation (ii) a negati.e national sa.ing due to higher
public dissa.ing or budget deficit (higher the pri.ate
in.estment and bigger the CD) ,ill lead to a negati.e 43
Symbolically-
iii) NN< W S < $
he alternati.e argument is that the % is not because
of a dissa.ing but by higher pri.ate in.estment ,hich leads
to a higher output- and hence not TbadT3 $n this connection-
equation (iii) can be interpreted in terms of FA deficit and
total of fnancial and capital account of the 4oP as belo,:
i.) 4oP W N< = F#
W 0 .) N N< W F#
Ehere- F# is total of capital and fnancial account ,hich
compensates the
current account andUor trade defcit3 +ere too- t,o :inds of
arguments are found3 #or some- a negati.e FA is fnanced
by a positi.e F#- hence the inflo, of capital is the TcauseT
for the negati.e 43 #or others- % is due to lo, public and
pri.ate sa.ing and public debt3 Fiting ruman- Purohit
(/006: ;6) contends that FA defcit and fiscal deficits are
not the t,ins on analytical and beha.ioural ground e.en
though they are the t,o main components (sa.ing and
in.estment) of national income3 Ehen gross domestic sa.ing
is smaller than the in.estment to be made then D induced by
a high interest rate D inIo, of foreign capital is possible
,hich again leads to a similarDsi)ed net inIo, of foreign
goods and ser.ices N o.ershooting the e*ports (!l,ell /001)3
he author argues that the larger the sa.ingDin.estment
gap- the larger is the inflo, of foreign capital thereby
producing a still larger %3 According to 'abonte and
Ma:inen- national sa.ing and in.estment are the cru* of %
in a country3 he greater the imbalance bet,een in.estment
and sa.ing the higher the %- ,hich ,ill further be
propelled by budget defcits3 Moreo.er- gi.en a pri.ate
in.estment boom and decline in pri.ate and household
sa.ing- % is
magnifed ('abonte and Ma:inen /008)3
"ne of the underlying contentions in e*plaining the
causality from 4% to % is that if fscal defcit is financed by
printing ne, money@ it ,ill create e*pansionary effect in
the economy and the demand for more capital and
consumption goods ,ill rise thereby promoting a higher
import3 $n contrast- 4% necessitates a higher interest rate
,hich encourages capital inIo,- appreciation of domestic
currency- loss in e*port competiti.eness and e.entually a
%3 Ne.ertheless- empirical studies ha.e sho,n mi*ed
results- that is- countries ha.e diKerent e*periences
(Purohit /006: ;6D1)3
'1,1+ 7onetar- /olic- and Trade Defcit
!*cess money supply (MS) and !R regime are other t,o
.ariables ,hich ha.e relationship ,ith %3 hey are brieIy
discussed here in the light of t,o maAor alternati.e
approaches that e*plain the %- namely- elasticity approach
and the monetary approach3 According to Ardalan (/00>)-
the elasticity approach underlines the role of !R on % and
4oP adAustments- ,hich treats e*ports and imports as
dependent on relati.e prices3 4esides- the monetary
approach discusses the mechanism on the basis of demand
for and supply of money in an economy3 he elasticity
approach suggests that the 4 is determined by the o.er or
under.aluation of a currency3 (nder 9eynesian system- the
author argues that de.aluation leads to changes in the
prices of domestic goods
against the foreign goods implying a change in terms of
trade that brings changes in the 43 Alternati.ely- an
o.er.aluation of domestic currency deteriorates the e*port
competiti.eness and induces more imports from abroad
gi.ing ,ay to % (ibid)3 Ci.en the domestic and foreign
prices- an increase (decrease) in R!R indicates the
depreciation (appreciation) of domestic currency ,hich is
e*pected to impro.e (,orsen) the %3 +o,e.er- empirical
studies ha.e suggested that o.er or under.aluation of a
currency does not necessarily produce e*pected outcome
since e*port and import of a country do depend on price
elasticities of traded goods3
he monetary approach is founded on the famous
Huantity heory of Money postulated by #riedman
;0
,hich
suggests that disequilibrium in the current account andUor
4oP is essentially- though not e*clusi.ely- a monetary
phenomenon (Ardalan /00>)3 (nder monetary approach- the
demand for money
;;
is considered as stable and any
increase in MS by the authority ,ill o.ershoot the real
demand for money3 he e*cess money in the system ,ill be
di.erted into goods and bonds (foreign and domestic) and
hence the process
of equilibrium in money mar:et ,ill dri.e to current account
andUor trade deficit (+all,ood and Mac%onald ;517 as cited
in Purohit /006: ;/)3 +ere- the inherent supposition is that
an e*cess MS ,ill gi.e rise to inIationary pressure that
ma:es a countryBs e*ports relati.ely dearer than that of
trading partners3 his ,ill result in loss of competiti.eness
and a current account or trade deficit (Purohit /006: ;>)3
he critics of the monetary approach emphasi)e that
monetaristsB assumption of constant .elocity of money
alongside f*ed real output (due to full employment
hypothesis)@ inclusion of nonDinterest bearing M; (or narro,
money) in the defnition of money stoc:@
;/
and the presumed
lin: bet,een changes in money balances and capital flo,
are neither
con.incing nor clear (Ardalan /00>- Nicholas /001b- Purohit
/006)3 !.en the argued automatic adAustment in trade and
current account by the !R under the Ioating !R regimes is
questionable (Nicholas /001a)3
'1,1, Trade (i%eralisation and Trade Defcit
$t is argued by neoclassical line of thin:ing that liberalisation
of economy is .ery li:ely to gain benefits from the free trade
that brings competition- comparati.e ad.antage- eKicient
allocation of resources- higher #%$ Io, and e*ternalities
(Fhang and Crabel /00?: ch36)3 $n its report- (NFA%
(;555: 16D
50) presents an e*planation that ho, a Bbig bangB type liberalisation
process of
de.eloping countries lead to %3 $n the absence of a
selecti.e and appropriately sequenced liberalisation
coupled ,ith eKecti.e measures to promote
competiti.eness and e*ports- the report states-
liberalisation of imports can cause a %3 $n the report-
instances of Argentina- Folombia- Me*ico- Philippines-
hailand and ur:ey ha.e been gi.en ,here a rapid
liberalisation ,as follo,ed by large inflo,s of capital-
currency appreciations
and a mounting % ending into a crisis (ibid3 p350)3 Similarly Moon-
(/00;: />)-
Fhang and Crabel (op3cit3 ch36) ha.e also supported that
the trade liberalisation policy is one of the reasons of %3
%ollar and 9ray (as cited in Moon /00;) ha.e sho,n that
the % in open economies is larger than in closed
economies by /305J of C%P3 $n their study- Pari:h and
Stirbu (/00?:
;1) obser.ed a ,orsening % after liberalisation in many
de.eloping countries of Asia- Africa and 'atin America3
'1,1* Economic ;rowth and Trade Defcit
+igh economic gro,th (!C) in the home country (trading
partner) ,orsens (impro.es) the % due to higher demand
for capital plus consumer goods and ser.ices from abroad
(home country) ,hile a ,ea: !C in trading partners dampen
the demand for domestic e*ports and leads to % (!l,ell
/001- (NFA% ;555)3 he main e*planation here is that
gro,th needs additional in.estment- ,hich necessitates
inIo, of capital in a country and ma:es the sa.ingD
in.estment (SD$) gap or the % bigger3 4ut Could and Ruffn
(;557) do not see any relationship bet,een !C and % in
the longDrun3 "n the other hand- (NFA% (;555: 65D10) and
Moon (/00;) found that % hampers the subsequent gro,th
due to the BbleedingB of in.estible surpluses from the
economy and other macroeconomic disturbances3 +ence-
the causality
bet,een these t,o .ariables is not the same for all countries3 $t
depends on
countryDspecific characteristics li:e le.el of de.elopment-
si)e and structure of the economy- integration ,ith the
global economy and other macroeconomic .ariables3
'1,1. (ac# of Competitiveness and Trade Defcit
Fompetiti.eness is a broad concept ,hich has diKerent
interpretations and methods of measurement3 According to
!)ealaD+arrison (;555: 8>)- B333 a country is competiti.e if its
industries ha.e an a.erage le.el of total factor producti.ity
(#P) greater than or equal to that of its foreign
competitorsB3 he author asserts that #P measures the
combined producti.ities of not only all factors of production
but also socioeconomic institutions and infrastructures
as ,ell in an economy3 his microDle.el parameter based on
producti.ity and cost helps assess the competiti.eness of a
country3 A country is said to be competiti.e pro.ided its
firms and industries maintain a.erage le.el of unit costs
lo,er than its competitors (ibid)3 4ut- the study underlines
that a country can be competiti.e ,ith respect to technology
and scale of production but not under the cost
considerations3 Moreo.er- the author rightly argues that
competi.eness in terms of cost is not a single indicator and
hence producti.ity should also be accounted3 he limitation
of cost competiti.eness is such that it suKers from any
changes in international currency and instabilities- if any- in
the global monetary system3 Regarding the macro
parameters of competiti.eness- the degree of economic
liberalisation and sound institutional and infrastructural
frame,or: are important to e*hibit a countryBs
competiti.eness that is considered constant in this regard
(ibid3 p388)3 here
are .arious indicators for measuring the competiti.eness of
countries3 hey are discussed in chapter ?3 Purohit (/006:
8?)- +ossain (/00?) and Mueller (/007) attribute lac: of
competiti.eness in the manufacturing sector as one of the
important determinants of % in $ndia- 4angladesh and the
(S respecti.ely3
'1,18 (andloc#edness and Trade Defcit
he (NFA% (/006: ;76) has disclosed that landloc:ed countries
incur %
in manufactured goods since they largely rely on the e*ports of
limited
numbers of goods ,hile they import far more (see #igure
>3;)3 Another argument is that the high import costs due to
e*pensi.e transportation and deli.eryDlag ,ill lead to higher
cost of production that are targeted for e*ports (ibid)3
Cusep (/008) too argues that landloc:edness causes
imports to be o.ercharged and e*ports to decline in their
.alue3 o quote him- BQiRt has been calculated that a
landloc:ed country e*periences- on a.erage- a .ery
substantial deficit in trade (around 60J) in relation to a
coastal country of a similar le.el of de.elopmentB (ibid)3
$nterestingly- Sno, et al3 (/00>) ha.e disclosed that
compared to their coastal transit countries the landloc:ed
countries do e*port- on a.erage- 70J less .alue per capita3
"b.iously- decreased e*ports result in a %3 +igher
transport costs coupled ,ith unpredictable delays in transit
hampers the e*port competiti.eness of landloc:ed countries
thereby ma:ing their imports more e*pensi.e ,hich leads
to a smaller trade .olume and
diseconomies of scale (A%4 /007: 7)3 #ocusing on the costs
of landloc:edness- Ar.is et al3 (/006)- emphasi)e- BQ,Rea:
positioning in the global mar:et entails lo, trade and
pre.ents most ''%Fs from reaping scale economies3B
'1,1< /olitical nsta%ilit-= Con>ict and Trade Defcit
he issue of causality bet,een political instability (P$) and
% is debatable3 he P$ can arise from many sources li:e
changes in current po,er structure- social disorders-
insurgency- economic crises- ineKiciency of go.ernment-
foreign interestsUinter.entions and so on3 $n Nepal among
others- the Maoist insurgency- arguably one of the internal
shoc:s remained a main determinant of P$ for a decade3
%uring ;558D/007- there ,ere t,el.e prime ministers in
po,er that best pro.ides a glimpse of P$ in the country3
According to 9oirala et al3- P$ is li:ely to increase the %
since businessmen loo: for high proft by importing more
goods ,hen there is policy uncertainty and go.ernment is
in defence of its continuity3 he argument is that the import
is an easy means to meet domestic demand rather than
production at home (9oirala et al3 /008:
71)3 he authors ha.e sho,n a positi.e relationship bet,een P$ and
% in
their regression model3 9umar (/008: /0D/;) has
e*emplifed the impact of NepalBs conflict as the closing
do,n of industries and enterprises- declining tourism and
hence surge in imports and a defcit in trade3 he
causality bet,een conIict and % is most li:ely an
empirical question rather than a theoretical
underpinning3
Chapter +
Structure and Direction of )orei$n
Trade of
Nepal
$n this chapter- eKorts ha.e been made to present the
structure and direction of foreign trade of Nepal3 he
composition of import and e*port bas:ets is ta:en into
consideration to analyse the structure ,hich can ha.e
direct andUor indirect relationship ,ith the ongoing %3
Similarly- the direction of foreign trade is discussed ,ith
the help of trade balance N positi.e or negati.e3
+1& Trade Structure
he commodityD,ide data that are a.ailable (since ;557) for e*port
(see able
>3; and >3/) and import bas:ets (Appendi*: AD4) of Nepal display
that there are limited number of manufacturing goods in the
former ,hile the latter contains .arieties of capital and consumer
goods3
Table .1
!"por#s of So$e %a&or 'o$$odi#ies #o (ndia ((n %illion )upees)
#$ricultural products %!&'( ()*%'& +,%'( +("*'*! ,,*,'+
-orest .roducts *'* +&*') *&& *,('*! )!*,')
Ghee (/e$eta0le) ),&! ,&&%'+ )!*+)'" *"")'(! &+%"'*
1ute Goods )&,'( )%",'* %+'( ("&)'*! ,((!'(
2hread n'a' ))*%' ,!('& &"'*! +))
2ooth .aste )!& (,,+'( (*+!') +&)'*! !)('&
.ol3ester 3arn &",'& )!!)') )&++ )"")'+! ,("'*
2e4tiles n'a' ,('% )!))'& *,&'"! ,),)'
5inc sheets n'a' ,&'" &,'( (",,'%! +!"'
6opper 7ire rod n'a' *()', +"!') ,,"'+! &(,'%
1uice n'a' (%%'" ",*'+ )(&*'%! (!'%
.lastic utensils n'a' (!', )+*+'& !!!')! )*%'%
8thers ,*&,'* *"&'& )**"&'& !,&&'&! &)+')
To#al 1*+,+.6 -51.* 59.6.* 5-,+-.1+ -961.6
Source: 9:B, ';uarterl3 <conomic Bulletin' /arious Issues and author's calculation
Items
27o-3ear total
)%%*-%"
)(
)%%&-%% !!!-!) !!-!( !!+-!,
"ut of total e*ports to $ndia- the combined share of
agricultural and forest products are e*hibiting an
increasing trend3 hough there are some do)ens of
manufactured items that are e*ported to $ndia- fe, of them
ha.e maintained a signifcant share in the total transaction3
he e*port share of .egetable ghee-
Aute goods and thread hold more than /0J of the total
share3 Products li:e toothpaste- polyester yarn- te*tiles-
)inc sheets- plastic utensils and Auice are other main e*port
items3 After the introduction of ne, bilateral trade treaty
,ith $ndia in ;557 there ,as a remar:able increase in the
e*ports of some manufacturing and agricultural products3
4ut alongside the re.ision of the treaty in /00/ by
introducing some restricti.e quota pro.ision (see Appendi*D
!) for some Nepalese products the gro,th rate of e*ports
declined3
NepalBs e*ports to other countries (other than $ndia)
contain lo,Dtech products3 Eoollen carpets- readyDmade
garments (RMC) and pashmina together hold more than
78J of the total e*port to these countries3 +o,e.er- the
e*ports of RMC and ,oollen carpets ha.e shrun: since the
mid ;550s (able >3/)3
Table .,
!"por#s of %a&or 'o$$odi#ies #o /#0er 'oun#ries ((n %illion )upees)
Items
27o-3ear 2otal
)%%*-%" )%%&-%% !!!-!) !!-!( !!+-!,
Woollen 6arpet
:ead3made Garments
)"(*,'( )%**') )+&!+'& )!%%"', ))"!"'+
)%"!'+ (*++'( !%,"'" )++!') )(&'"
.ashmina n'a' **,'! ,(**' )'" *"'*
=andicraft (>etal and Wooden) ""') (%)'* +*"'" %"&', )!",')
Silver7are and 1e7elleries (*+'% +,*') +&,'* ")*'+ *+,'*
.ulses )(&*'* )!!'& ")"') +%,'* %&'
9epalese .aper ? .aper .roducts )+%') &%'% (%"' ,+)'* +%*'&
To#al 61,9.* 51-*-.6 *.61,.5 *66*., 9+..,
Source: 9:B, ';uarterl3 <conomic Bulletin', various Issues and author's calculation
After mid ;550s- there ,ere some e*ternal shoc:s
such as global economic slo,do,n- less demand from the
(S and !urope after the SeptemberD;; 4esides- the
conflict became more intensifed in the country3
he import bas:ets from $ndia and other countries
include .arieties of goods3 hey are as basic as agricultural
products to highDtech manufacturing goods3 $n case of
$ndia- the most dominant are manufactured goods-
petroleum products- ra, materials- medicines and
signifcant si)e of agricultural products3 $t re.eals the
e*tent of NepalBs dependency on $ndia3 Accordingly- most of
the Nepalese imports from other countries are relati.ely
priceDinelastic manufactured goods3 "ut of them- thread-
ra, ,ool and sil: for the production and e*port of RMC-
,oollen carpet and pashmina are mentionable3 'i:e,ise-
gold and sil.er- petroleum- machineries- electronics-
transport equipments and parts are other :ey imports3 Some
of them are essential capital goods ,hich enhance the
producti.e capacity of the economy
and are li:ely to strengthen the future e*ports of the country3 And-
some
others are purely consumption and lu*urious goods ,hich generally
propel the
%3
+1&1& 4verseas Trade Composition of Nepal
Apart from $ndia NepalBs o.erseas trade is mainly
concentrated to America- !uropean (nion (!() and Asian
countries3 "ther !uropean countries outside the !( hold
less ,eight in terms of .alue3 Similarly- trade ,ith Africa is
.ery negligible ,hile in case of "ceania- the e*port is quite
lo, but the share of import and the % is noticeable (able
>3>)3
Table .
'o$posi#ion of /verseas Trade of Nepal (1)
Destination
<4ports to Imports from
!!@
!(
!!(@ !!+@ !!,@ !!*@
!+ !, !* !"
!!@ !!(@ !!+@ !!,@ !!*@
!( !+ !, !* !"
#sia
(<4cludin$
India)
)(') )"'& )&'& ),'& )%'+ "+') "') "+'* *&'% ")'!
#frica !'! ') !' !', )'" !' !'* !'+ !', )'
#merica ,,'* ++'( +)'" +!', (*'( ,'% "'! "') %'% )'!
<A %' (', (,', (&', ("'" ),' ))', )!', ))'& )!'(
<urope
(<4cludin$
<'A')
)'" '& (') ('& (', ') ', '% +'& ')
8ceania !'+ !', !'* )'! )'+ ('" +', +'* +'* ('+
To#al 2alue
(in %n N)s) ,5.1 ,1-, 195,6 19+6, 1-19. 5-+ 5-1++ 5961. 55* -996
Source: 2rade and <4port .romotion 6entre, 9epal
"n a.erage- the e*port to Asian countries (other than
$ndia) is impro.ing regardless of decreasing trend of total
e*ports3 Asian countries ha.e been supplying signifcant
(almost 6/J) si)e of NepalBs imports and the deficit ,ith
them is tremendous3 America and !( countries are the
maAor destinations of NepalBs e*port3 After the SeptemberD
;;- the e*port to America started gradually to decline and
it ,as further propelled by the ending of Multi #ibre
Agreement (M#A) in %ecember /00?3 +ence- the Bdemand
shoc:sB ,as a .isible reason for the declining e*port to the
(S3
Accordingly- the !( countries appear as an e*panding mar:et for
Nepalese e*ports3 $mport from the !( area displays a
decreasing trend and the trade surplus ,ith them has been
e*panding3 !.en the e*port to nonD!( countries is
increasing despite the do,n,ard trend of total e*ports
during the latest years3 Furrently- the ,hole !urope
emerges as an area of ad.antage for o.erseas trade3
+o,e.er- the total .alue of e*ports to these countries has
been continuously falling ,hereas imports ha.e sho,n a
mi*ed pattern of falling
and rising3 $t ,ill not be a mere coincidence as total
import has suddenly increased in /007 N the end of tenD
year long armed conIict in the country3
+1&1' Num%er of /roducts E:ported and mported
Measured in number of commodities in :inds- the imports of
Nepal until /00? is almost double than its e*ports3 #rom
/008 on,ards- the gap is declining ho,e.er (#igure >3;)3 $ts
e*ports are not as di.ersified as imports- and to a great
e*tent- Nepal depends on imported goods3
Figure .1
Nu$ber of 3roduc#s4 !"por#s and ($por#s
Source: WB, 'World 2rade Indicators-!!&'
+1' Direction of )orei$n Trade of Nepal
he si)e of total foreign trade in terms of C%P has been
follo,ing an up,ard trend until ;556 but after ;556 it has
been declining contrary to trend of % (#igure >3/)3
Figure .,
%ove$en#s of To#al Trade and Trade Balance
2otal 2rade ( ri$ht scale )
)%"! )%&! )%%! !!! !)!
3ear
2BBG?S 2otal 2rade (C of GD.)
Source: WB, 'WDI-!!"'
2
B
B
G
?
S

(

C
o
f

G
D
.
)
-
)
!
-
,
!
(
!
+
!
,
!
*
!
2
o
t
a
l

2
r
a
d
e

(

C
o
f

G
D
.
)
-
)
,

!
As the share of e*ports and imports ,ent do,n for some years after
the mid
;550s- the total trade also follo,ed a similar path3 #all in
imports ,as stronger than the e*ports3 he reasons are
discussed in chapter ?3 hroughout the study period the
direction of 4 remained al,ays negati.e3 here are some
historical e.ents in the country ,hich ha.e influenced its
e*ternal sector3 Nepal adopted the economic liberalisation
policy in ;51?U18 ,hich ,as further speeded up after ;55;3
$n ;515D50- $ndia imposed economic sanction on Nepal
,hich had had detrimental impacts in Nepalese economy
(4lanchard et al3 /000: /?6- Shrestha /006)3 A ne,
industrial policy ,as in eKect in ;55/ ,hich ,as a
complement to the e*ternal trade3 'i:e,ise- Nepal and $ndia
established a
fi*ed !R regime in ;55> and all foreign currencies ,ere
crossDpegged ,ith $ndian currency3 "n the other side- the
Maoist insurgency started in ;557 ,hich lasted in /0073
%uring the insurgency- the economic en.ironment of the
country ,as nonDconduci.e- e.en damaging (4hattarai
/008:/0)3 he countryBs economy faced both the internal
and e*ternal shoc:s due to massacre of the Royal family in
Nepal and the terrorist attac: in the (S in /00;3 #inally- in
April /00? Nepal accessed the membership of E" ,hich
further opened the door for imports and imports3 hese
issues are reiterated in chapter ?3
"n a.erage- % in goods is sho,ing an increasing trend
after ;567 e*cept mild impro.ements in some years (#igure
>3>)3 Nepal has e*perienced a surplus in ser.ice account
since ;5673 $t ranges from one to four per cent until ;55>
and post /00/3
Figure .
Trade Balance in Goods and Services
Source: WB 'WDI-!!"'
After ;55? the tourism industry ,as booming until it pea:ed
in ;556 promoted by the national campaign B&isit Nepal
;551B3 $t has sharply declined after ;555 as the conIict in
the nation intensifed and security condition deteriorated3
he State of !mergency imposed by the go.ernment and the
Royal massacre are t,o strong causes- among others- for
the decline of ser.ice trade3 he trade
surplus in the ser.ice sector is not suKicient to compensate
the total defcit in goods- ho,e.er3 he combined trade
balance in goods and ser.ices is again negati.e due to the
higher deficit in goods3 $t is distinct that the combined
trade balance is follo,ing the mo.ement of % in goods3
Ne.ertheless- in late
;550s a signifcant surplus in ser.ice account has
compensated similarDsi)e deficit in goods3
Accordingly- from ;567 to /00;- the income account
,as positi.e and higher than the surplus in ser.ice
account despite a number of oscillations (#igure >3?)3
Figure .*
Trade Balance in Goods and Services (co$bined) and (nco$e
Source: WB 'WDI-!!"'
$t sharply declined after ;51/ as there ,as a global
recession in that year3 he recessionary effect hit this
sector in the succeeding years3 After ;51? the country
initiated liberalisation of economy and the income account
remained almost )ero in those initial years3 $t ,as
measured nearly 6J of C%P in /000 ,hen remittances
,ere soaring3 $nterestingly- it ,ent negati.e after /00;3
he impact of SeptemberD;; (terrorist attac: in the (S)
could be one of the possible ans,ers for the do,nturn in
,orsening income balance3 %uring the study period the
a.erage net income ,as /3?J of C%P ,hich ,as oKsetting
some of the defcit in merchandise trade3 +o,e.er- the
oscillating nature of income account does not resemble it
as a reliable source for the Nepalese economy3
he o.erall balance of trade in goods- ser.ices and
income is also negati.e and follo,ing the mo.ement of
deficit in traded goods (#igure >38)3 $t has- ho,e.er- reached
around ;8J of C%P after /00/ mainly due to the negati.e
income balance in that period3
Figure .5
Trade Balance in Goods5 Services and (nco$e ('o$bined)
Source: WB, 'WDI-!!"'
+1'1& 7ovement of Trade with ndia and 4ther Countries
$ndia ,as a main destination for NepalBs e*port until ;518
but it did not remain so after mid ;550s to late /000 (able
>3?)3 After the economic liberalisation of ;518 and ne,
political system in ;550- NepalBs e*port started e*panding
to Bother countriesB3 $n the pea: period (/00;) of armed
conIict in Nepal- and E" membership in /00? the e*ports
to other countries ha.e narro,ed do,n3 As the M#A quota
ended in /00?- Nepal too suKered from it (Shaa:ha /001)3
As a result- the e*port to other countries declined from
/008 on,ards3 he decline in imports from other countries
during /00;D08 can be the ne, pro.ision of petroleum
imports from $ndia3
Table .*
3eriodic Trade Balance (19-66+5)
(In >illion :s)
.eriod
<4port to Import from
India
8ther
6ountries
2otal India
8ther
countries
2otal
)%"*-&! *"&'+(,*) ,('"(++) )))') ),&%'&(,*'*) ))%'"(+('+) &!%',
)%&)-&, ))+('+(*!'") "(&'%((%'() )&&'( %*)'%(+,'") (,),'(,+'() *+""')
)%&*-%! ))&!'%("') (),"'("'&) +((&'! +*&('*(()) )!++,'%(*%) ),)%',
)%%)-%, ++',()('&) )+!*(',(&*') )*(!&'! ),*!(('+) ()"&"'((*"'*) +"!+"'(
)%%*-!! ),,'"((*')) ),"'*(*('%) (+*&('( ("!'&((+',) *!&(*,',) %+"(!'&
!!)-!, ()+%!',(,&'%) )%%*'"(+)'&) ,(+&"' ",)"*'"(,*'&) ,"*&(+(') )(+++'*
Source: 9:B, ';uarterl3 <conomic Bulletin' /arious Issues, (percenta$e are $iven in parenthesis)
+1'1' Direction of Defcit Compared to Tradin$ /artners
able >38 supplies the direction of deficit compared to some
:ey trading partners and neighbouring countries3 here are
4angladesh- Pa:istan and Sri 'an:a incurring a % as big
as the magnitude in Nepal3 +o,e.er- diKerences are
distinct in their direction- for e*ample- the trend of defcits
in 4angladesh and Pa:istan is decreasing in e.ery
successi.e period ,hile Nepal is e*periencing an up,ard
trend3
Table .5
Trade Balance (Goods and Services) in 7ifferen# 'oun#ries (1 of G73)
.eriod )%"*-&! )%&)-&, )%&*-%! )%%)-%, )%%*-!! !!)-!+
9epal -+'+ -&', -)!' -)!'& -)!'( -))'+
Ban$ladesh -)!'! -%'( -"' -,'+ -,'% -,',
.akistan -)!'( -))', -&', -('( -'* !')
Sri Danka -"'* -)(', -)!'( -)!'! -&') -"')
India -)', -' -)', -!'+ -)'+ -)',
6hina -!' -!') -!'+ )', (' '+
German3 -(')& -(')% -!',* -!'* +'"( ('&,
1apan !'+ )'& '( )'% )'( !'%
Anited States -!'" -)'* -' -!'% -' -+')
Source: WB, 'WDI-!!"' and author's calculation
$n the latest decade- NepalBs % as percentage of C%P is
nearly double of 4angladesh3 $n ;567D10- NepalBs position
,as t,ice as better than 4angladesh3 After /8 years (/00;D
0?)- NepalBs position is t,ice as B,orseB than 4angladesh3
Sri 'an:a ,as on the same path as Nepal until ;51;D18 but
it has been impro.ing its position after ;517D503 Pa:istan
sho,s a similar trend as Sri 'an:a but the degree of
impro.ement is far better than all the countries on the list3
$ndia- on a.erage- sho,s smallest si)e of defcit among
South Asian countries3 Accordingly- Fhina e*hibits negligible
si)e of % until ;517D503 After ;557D00 ho,e.er- it enAoys a
trade surplus3
'i:e,ise- Cermany has sho,n a rapid progress in its
43 Furrently- it is one of the biggest countries ha.ing a
trade surplus3 Gapan has al,ays had a trade surplus since
;567 to date3 he (SA ,as relati.ely better oK in ;567D10
and ;55;D58 ha.ing a % of quite a small si)e3 $t has sho,n
an increasing trend in rest of the period3 o conclude-
NepalBs ongoing trend of % and its si)e is critical
compared to its neighbouring countries and trading
partners3
+1'1+ Trade Defcit in ;oods: ndia and 4ther Countries
he % of Nepal is .olatile since ;578 (#igure: ;3; L >37)3
(ntil ;565- the deficit (in merchandise) ,ith $ndia ,as
higher than all other countries (#igure
>37)3 %uring ;510D;55; and ;55>D/00;- the defcit ,ith $ndia lagged
signifcantly behind the other countries3 After ;510- as Nepal ,as
e*panding its
trade relation ,ith ne,er countries the % ,ith $ndia
do,nsi)ed along ,ith the .olume of trade3 #urther- in that
period the pre.ailing trade treaty ,ith $ndia e*pired3
Figure .6
Trade Balance 8i#0 (ndia and /#0er 'oun#ries
Source: 9epal Rashtra Bank, ';uarterl3 <conomic Bulletin' /arious Issues (-iscal Eear #dFusted)
he deficit ,ith $ndia has been again rising after /00/
due to the ne, pro.ision of petroleum imports3 he
BupgradedB bilateral trade treaty in /00/ ,ith $ndia brought
about many changes in the ongoing trade structure3 Around
;515U50- ,e can see that the defcit ,ith $ndia ,as at its minimum
due to the
reduced imports from $ndia ,hen it imposed an economic
sanction on Nepal3 Nepal succeeded to impro.e its % ,ith
$ndia during ;556D55 ,hen the e*ports of .egetable ghee-
toothpaste- polyester yarn- pashmina and thread increased
under the fa.ourable trade treaty signed in the end of ;5573
Regarding the % ,ith other countries- it has reached
the highest (6;J) point in ;515U50 and ;557D513 As argued
earlier- the economic sanction imposed by $ndia di.erted
the Nepalese imports to other countries3 %uring
;557D51- imports of petroleum- aircraft spare parts-
machineries- and some industrial ra, materials ,ere
sharply increasing3 he defcit has been reduced since
;5513 $ncreased e*ports of readymade garments- pashmina
and other handmade products could be the possible reason
for this upturn3
+1'1, ;rowth Rate of E:ports and mports
$f the annual .olume of trade is follo,ed by- on a.erage- a
higher import gro,th than the e*port N a persistent trade
defcit cannot be denied3 #rom #igure >36- it is apparent
that the a.erage gro,th rate of import has led the e*port
gro,th3 he a.erage gap is either ,idening or maintaining
a constant pattern o.er successi.e years leading to a ne.erD
ending deficit3 he noticeable decline of both .ariables in
;551 ,as due to decline in the imports of traded goods and
do,nturn in the ser.ice sector3 $n /00;- there ,as a State
of !mergency in the country ,hich pushed bac: the trade
sector for some years3
Figure .-
!"por# and ($por# (Goods onl9) Nepal
Data Source: WB, 'WDI-!!"'
+1'1* Current "ccount 2alance
he FA of Nepal is influenced by the magnitude and
direction of defcit in traded goods3 $t has remained
negati.e throughout ;566D/00; (#igure >31)3 A sharp
impro.ement in the FA balance can be noticed since ;5513
$t has gained positi.e sign after /? years in /00/3 $ncreasing
trend of remittances and surge in foreign aid can be t,o
potential causes of this impro.ement3
Figure ..
'urren# :ccoun# Balance
Source: WB, 'WDI-!!"'
+1'1. Nepal?s Trade /olic-
NepalBs trade ,as limited to $ndia and ibet (Fhina) until
;570s3 $n the third f.eDyear plan (;578D60)- NepalBs priority
,as to di.ersify the e*port ,hile substituting the imports
,ith the application of high tariff barriers and quotas3 he
obAecti.es ,ere to narro, do,n the % and promote
industriali)ation and di.ersifcation of the economy
(SAE!! /006)3 4esides- the go.ernment of Nepal ,as
adopting a dual !R system- a cash subsidy programme- duty
e*emption on e*portable commodities- simplifcation of
licensing and custom procedures3 Mean,hile- introduction
of a ne, industry and trade policy ,ere additional efforts
made by the go.ernment (ibid)3
Nepal introduced its frst trade policy in ;51>3 he :ey
features of this policy ,ere delicensing of e*ports- remo.al
of income ta* on e*port earnings- introduction of duty
dra,bac: system- harmoni)ation of custom procedures- and
establishment of National !*port rade %e.elopment
Founcil (9hanal et al3 as cited in SEA!! and AAN /006:
;/D>)3 rade Policy ;55/ is thought to be a milestone in
NepalBs history of trade policy3 $t ,as the outcome of
go.ernmentBs ongoing effort on economic liberalisation3 $t
has clearly emphasi)ed on the promotion of internal and
e*ternal trade@ more roles to pri.ate sector@ di.ersifcation
of foreign trade in terms of commodities and destinations@
reali)ation of bac:,ard lin:ages- enhancement of
employment through trade and reducing the ongoing trade
imbalances (ibid)3 Moreo.er- rade Policy ;55/ remo.ed any
import ta*es on ra, materials- e*emption of income ta* on
the e*port earnings- no licensing for trade
;?
3 $t has accepted
the StateBs role as a catalyst and ad.ocated for the massi.e
in.ol.ement of pri.ate sector3
$n this regard- the policy put forth the plan of
pri.atising public sector trading enterprises and ,as
implemented partly3 Still- there are a fe, big trading
corporations under the State control3 $t has pursued
policies to attract #%$ through a liberal industrial policy3
$n order to maintain coherence among policies- necessary
reforms ,ere made in fiscal- monetary and foreign e*change
policies3 Specifically- the pro.ision of full con.ertibility in
trade and ser.ices sector ,as an encouraging factor3 he
$ndian currency is fully con.ertible in the country3 More
importantly- it has not only agreed to implement effecti.ely
all the bilateral and multilateral e*isting trade treaties but
bringing up the ne, ones into place so as to promote
foreign trade3 hough e*port promotion is the core of this
policy- it has reali)ed and categori)ed the need of imports in
order to Iourish the economic
de.elopment3 $t focuses on the sustained foreign trade sector by
narro,ing
do,n the importDe*port gap3 here are no more
restrictions to import ra, materials- consumer goods-
industrial machinery- and ser.ices3
Chapter ,
"nal-sis of Causes of Trade Defcit of
Nepal
$n order to ans,er the research question the analysis has been
framed in light
of the theories discussed in chapter /3 $t captures both the
e*ternal and internal sources of %3 Specifcally- e*ternal
shoc:s- budget defcit (fscal policy)-
e*cess MS and !R misalignment- direction of economic gro,th-
trade
competiti.eness- economic liberalisation- landloc:edness- and
political
instability are considered as main focus .ariables3
Fomparison of some rele.ant statistics of NepalBs
neighbouring countries and trading partners has also been
made as a complement3 Since $ndia is a neighbouring
country and a main trade partner- its greater inIuence on
Nepalese 4 is e*amined depending on a.ailable data3
,1& E:ternal shoc#s and Trade Defcit
!*ternal shoc:s (mainly from demand and price)- as already
discussed in section /3?3?- play a role in the trade and
current account balances of a country3 %epending upon the
nature of e*ternal shoc:s- trade balance of a country is
e*pected to change its direction and magnitude3 #igure ?3;
e*hibits the pattern of e*ternal demand shoc:s emerged in
the ,orld economy and its resultant impact on the e*port
sector of Nepal
;8
3 Since readyDmade garment (RMC)-
,oollen carpet and pashmina
;7
are three maAor items of
Nepalese e*port to o.erseas countries- they ha.e been
chosen as focus .ariables3
Figure *.1
!"#ernal 7e$and S0oc;s (<e9 'o$$odi#ies)
Source: 9:B ';uarterl3 <conomic Bulletin', /arious Issues) and >o- '<conomic Surve3 !!(@!+'
!*port of Nepalese carpet and RMC ,as rapidly increasing
until ;55>3 4ut as there ,as an e*hibition in Cermany
regarding the use of child labour in ma:ing of Nepalese
carpets- and its documentary broadcast by Panorama
tele.ision ne,s (in April ;55?) the demand for ,hich
drastically declined in
!urope and the (S (N!SP!F as cited in Fha:rabarty /006:
6>)3 he demand shoc:s in Nepalese ,oollen carpet e*port
can best be understood by the follo,ing statement:
B"ne of the main reasons of the carpet shoc: in ;55?D58 ,as
due to anti child labor demonstrations in Cermany and other
importing countries3 Accusations by national and international
nonDgo.ernmental organi)ations almost led to a complete
boycott of NepalBs carpet e*portB (Fha:rabarty /006: 6/)3
Nepal could not maintain its fast gro,ing e*ports of
carpet thereafter
since Cermany and the (S ,ere the t,o biggest importers of
Nepalese carpets3 hroughout the second half of ;550s- the
,orld and (S economy ,ere booming- and the !ast Asian
economies ,ere stepping to,ards reco.ery despite the crisis
in Russia and Me*ico3 heir positi.e eKect can be seen in the
fgure3 !*ports of both the RMC and ,oollen carpets
reached their pea: in those years3 he incident of September
;; and its ine.itable impact in the (S and ,orld economy is
quite clear in the fgure3 !*ports of all the three :ey
products ha.e sharply gone do,n due to decreased demand3
hough the
e*port of RMC climbed up in /00/ it could not sustain the
same pace and position due to the ne*t do,nturn in the
,orld and the (S economy /00>3 Another demand shoc:s
for Nepalese e*ports appeared in /008 ,hen the Multi
#ibre Agreement ,as terminated in %ecember /00?3 he
decline in the e*ports of RMC can be seen in #igure ?3;3
4esides- the impact of these demand shoc:s can be
seen e.en in the
o.erall e*ports and imports to other countries but not necessarily to
$ndia
(#igure ?3/)3
Figure *.,
!"#ernal 7e$and S0oc;s4 (ndia and /verseas 'oun#ries (:ll 'o$$odi#ies)
Data Source: 9:B, ';uarterl3 <conomic Bulletin' /arious Issues
he e*ternal demand shoc:s resulting from the Bcarpet
shoc:B in ;55?U58 and SeptemberD;; ,ere strong enough to
influence the total e*port to o.erseas countries@ ho,e.er-
they produced lo, or no impact on the e*port to $ndia3 he
impact of termination of M#A is also seen in the aggregate
e*ports to o.erseas countries3 he demand shoc: in $ndian
mar:et for Nepalese products ,as apparent in ;515D50
,hen $ndia imposed an economic sanction on Nepal3
'i:e,ise- the demand for four :ey commodities of Nepal in
$ndia ,as largely contracted due to the restricti.e quota
pro.ision in the rene,ed bilateral trade treaty /00/3
Mohanty (/00>) also sees the role of trade and transit treaty
on $ndiaBs trade surplus ,ith Nepal3 o sum up- demand
shoc:s are hea.ier and responsi.e to the e*ports to o.erseas
countries3 hese shoc:s are relati.ely less responsi.e in
case of $ndia3 #urthermore- it is possible that the impact of
those e*ternal shoc:s could ha.e retained some le.erage
from the domestic Bshoc:sB li:e the royal massacre in /00;
and the Maoist insurgency during ;557D/0073
Another face of e*ternal shoc:s is price shoc: that can
hit the trade balance of a country3 he impact of price
shoc:s in Nepal- as in other countries- is generally
transmitted from the rise in the price of petroleum
products3 hough terms of trade is a good measure to
e*amine the eKect of price shoc:s- due to una.ailability of
longer timeDseries data- $ ha.e chosen
annual consumer price indices (FP$) of Nepal- $ndia- the (S
and the ,orld as a pro*y3 hese indices ha.e been plotted
against the a.erage price of crude oil in the ,orld (#igure
?3>)3
Figure *.
/il 3rice S0oc;s5 (nfla#ion and 7irec#ion of Nepal=s Foreign Trade
)%"! )%&! )%%! !!! !)!
Eear
.etroleum .riceBWorld (AS G@ 0arrel) 6.IB9epal
6.IBIndia 6.IBAS
6.IBWorld
Source: I>- 'International -inancial Statistics 6D-:8>' and WB, 'WDI-!!" '
.
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$nIation in the ,orld and Nepal has not sho,n a
noticeable shift in their inflation cur.es despite the
oscillatory prices of crude oil including the biggest
hi:e in ;565D;510 and t,o other soaring pea:s in /000 and
/00?3 he inIation in $ndia ,as almost the same ,ith Nepal
,hile it ,as remar:ably high in the
(S until mid ;550s3 $t is true that the inflation in Nepal ,as
significantly higher
than the ,orld until ;55?3 #rom ;558 on,ards the gap
bet,een them is small3 Ci.en the historic ;>>J rise in ;565
and another ;1J rise in ;510 in the price of petroleum- the
rate of change in FP$ of Nepal is small3 Some possible
reasons could be the limited e*tent of integration (in ;565D
10) ,ith the global economy- smaller si)e of e*ternal trade
and foreign dependence- and smaller demand for petroleum
products3 $nterestingly- despite the sharp fall in oil price in
;517 and ;551 the ,orldBs as ,ell as NepalBs inflation has
continued to rise as usual3 'ogically- Nepalese e*ports due
to higher rate of inIation at home than in the rest of the
,orld are less competiti.e and hence % is not a surprise3
Accordingly- as the ,orld and domestic inIation are almost
the same after ;558- there cannot be seen a uniform
impro.ement in the ongoing % (#igure ?3?)3
Figure *.*
(n#erna#ional 3rice of 3e#roleu$ and Trade 3erfor$ance of Nepal
Source: WB, 'WDI-!!"'
Ci.en the signifcant rise in price of oil- the amount of
import bill has naturally gone up in most of the cases li:e
;565D10- /000 and /00?3 "n the other hand- irrespecti.e of
a fe, e*ceptions- e*ports ha.e either contracted or gone
insignifcant changes3 he corresponding increase in %
after the oil price rise is .i.id in the years ;510- /000 and
/00? but surprisingly % has impro.ed in ;555 despite >6J
rise in petroleum3 $ncrease in oil price has not al,ays and
immediately led to proportionate rise in %- for e*ample- in
;565-
;516 and ;5503 $t is clear from the fgure that the inIation
brought about by oil price is immediately hitting the
import bas:et but not strongly the e*port bas:et3 his
response is- ho,e.er- enough to produce a % since the
gap bet,een them ,idens3 And- for a fall in oil price- %
has either declined (in
;551) or stopped from ,orsening (as in ;517)3 'i:e,ise- for a
relati.ely smaller
fall in oil price as in ;511- the % has not been pre.ented
from rising3 o sum up- the e*ternal price shoc:s produced
by the surge in petroleum price- on a.erage and depending
upon the magnitude of rise- is ,idening the ongoing trend of
%3 +o,e.er- in cases ,ith relati.ely smaller price hi:es-
these shoc:s are not able to produce signifcant differences3
,1' 2ud$et Defcit and Trade Defcit
he relationship bet,een budget defcit (4%) and %
(also :no,n as t,in deficits) in Nepal has been plotted in
#igure ?383 $t is hard to fnd any unidirectional or
bidirectional relationship bet,een these t,o .ariables in
Nepalese conte*t3
Figure *.5
T0e T8in (Budge# and Trade) 7efici#s
2rade Deficit ( :i$ht Scale )
)%&! )%&, )%%! )%%, !!! !!,
Eear
Bud$et Deficit (C of GD.) 2D (C of GD.)
Data Source: >o-, 9epal, '# 6ollection of Bud$et Speeches of 27ent3-si4 Eears'
)"
(in 9epali) ? WB,
'WDI-!!"'
here are limited cases ,here an increase in 4% has
pushed up the trade deficits or .ice .ersa3 #or e*ample-
from ;51;D1> and /00/D08 they ha.e follo,ed similar
direction- regardless of magnitude3 $n other cases- they are
e*hibiting the re.erse directions- for e*ample- ;518D11-
;55/D5? or ;558D513 'i:e,ise- the 4% during ;51/D50 and
during ;557D/008 is fairly stable e*cept some e*ceptions3
4ut- the % is more .olatile3 After the stabilisation policy in
;51?- the 4% has impro.ed for some years but the % continued to
scale up3
$t can be seen that 4% has hea.ily controlled after ;55>-
ho,e.er- the trade deficit :ept on s,inging3 $n ;550- there
,as a ne, political system (and go.ernment) in the
country- ,hich adopted an e*pansionary fiscal policy but
the % remained almost same3 $n sum- 4% in Nepal- do not
e*hibit a strong
*
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and con.incing cause for the ongoing %3 heir
mo.ements are hard to predict and contradictory to the
pre.ious findings of similar nature3
he role of fscal policy can also be e*amined from the si)e and
direction
of gross domestic sa.ings (C%S) and in.estments3 As
already discussed in chapter /- the gap bet,een them
(Sa.ing and $n.estment) resembles the e*act si)e of the %
(in Coods L Ser.ices) ,hich is distinct in the graph (#igure
?37)3 $t is ob.ious from the fgure that the gross capital
formation has al,ays been higher than the C%S during
the study period3
Figure *.6
Saving6(nves#$en# Gap and Trade Balance
Source: WB, 'WDI-!!"'
$n the fgure ,e notice that these t,o .ariables are
neither al,ays follo,ing the same direction nor maintaining
the same gap3 $n some years- in.estments are more
dominant to determine the si)e and direction of % ,hile in
other cases sa.ings are more dominant3 #or number of
occasions- they ha.e maintained the same gap thereby
:eeping the % fairly stable3 Fompared to in.estment- the
sa.ings in the economy are found either decreasing or
constant irrespecti.e of some e*ceptional years3 $t is fair to
argue that the negati.e sa.ings in the public sector (4%)
,as one of the possible e*planations for decreasing or lo,
C%S3 he a.erage C%S (;567D0?) is around ;/J ,hich is too
lo, to cope ,ith the a.erage gross in.estment of /; per
cent3
,1+ E:cess 7one- Suppl- and Trade Defcit
As discussed in chapter /- monetarists belie.e that e*cess
MS has direct and positi.e relationship ,ith trade and
current account defcit3 #igure ?36 sho,s the trend of
e*cess MS
;1
and 4 during ;567D/00? in Nepal3 #rom the
graph- it has been clear that these t,o .ariables in the
conte*t of Nepal are not displaying uniform or consistent
mo.ements3 #or e*ample- gi.en the increase
in e*cess M/ (or broadDmoney)
;5
for ;> occasions- (;565- ;51/D1>-
;516- ;550-
;55?- ;557D56- ;555D00 and /00/D0?) the % has increased
;0 times ,hile it decreased in > occasions3 Similarly- gi.en a
decline in e*cess M/ during ;8 occasions- the % has
increased and decreased se.en occasions each but remained
unchanged once3 #urthermore- the magnitude of change in
the % is not same for e.ery change in the e*cess MS
/0
3
Figure *.-
!"cess %one9 Suppl9 and Trade Balance
)%"! )%&! )%%! !!! !)!
Eear
2rade Deficit C of GD. <4cess > $ro7th (C)
Data source: 9:B, ';uarterl3 <conomic Bulletin and WB, 'WDI-!!"'
+ence- the % is changing its direction (and magnitude) not
on a uniform and adequate pattern to support the theory of
monetarists3 $t has- of course- contradicted ,ith some
pre.ious studies and questioned any causal relationship
bet,een the e*cess MS and % in Nepal3
,1, Real E:chan$e Rate and Trade Defcit
he R!R is considered as one of the determinants of a
countryBs foreign trade- trade and current account balances3
$n case of Nepal- during ;56>D;51>- Nepalese Rupee (NRe)
,as dual pegged ,ith $ndian Rupee ($Re) and the (S dollar3
#rom ;55> on,ards- the NRe has been pegged ,ith $Re3 All
other foreign currencies are crossDpegged ,ith $ndian
currency3 here is full con.ertibility for $ndian currency
,hile other currencies are con.ertible for specific purposes3
he full con.ertibility ,ith $ndian currency has arguably
promoted more trade ,ith $ndia3 As NepalBs :ey e*port
products are based on imported ra, materials- any
depreciation of NRe ,ith the $Re can ha.e damaging effect
to NepalBs e*port since they ,ill raise the cost of
production3 #igure ?31 depicts the trend of o.er or
under.aluation of real e*change rate (R!R)
/;
and trade
balance ,ith $ndia3
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Fontrary to the longer oscillations and lesser .olatility of
4- the R!R has smaller oscillations
''
but relati.ely more
.olatility3 Stated other,ise- the magnitude of change in
4 is higher than the R!R3 #or e*ample- gi.en the
under.aluation in ;566- the deficit scaled by almost ;7
percentage points3 Similarly in ;51?- defcit soared by 6
percentage points despite the under.aluation by 7
percentage points3
Figure *..
%ove$en# of )!) and Trade Balance 8i#0 (ndia
(
Data Sources: 9:B, WB, 'WDI-!!"' and author's calculation
he positi.e impact of under.aluation can be easily noticed in ;517-
;511-
;55?- ;558- ;556 and /00?3 he o.er.aluation and resultant
,orsening of % are distinct in the years ;55/ and /0003
Ci.en a negati.e and ,ea: correlation coeffcient (D03;1) it
is easy to understand a nonDlinear relationship bet,een
them3 Saruni (/006) in case of an)ania had found that
under.aluation of R!R ,orsened the %3 And- in case of
Nepal- %e.:ota (n3d3) found no signifcant role of R!R in
promoting the e*port3 #rom the discussion- $ ,ould argue
that the !R is not a strong factor to be attributed as one of
the causes of the % in Nepal3 $t ,ould be a ,ea: policy
measure to correct the NepalD$ndia %3 he effect of
o.er.aluation or under.aluation of R!R depends on gi.en
elasticity (greater or lesser) regarding the demand for
imports and e*ports (hir,all as cited in Purohit /006: /0)3
#igure ?35 captures the relationship bet,een the R!R
mo.ement and 4 ,ith other countries3 +ere too- the t,o
trend lines of 4 and R!R e*hibit diKerent patterns3
%espite the smaller magnitude of o.er and under.aluation
of domestic currency- 4 has been- as in the earlier case-
s,inging ,ithout a consistent pattern3 A small correlation
coeKecient (0307) has indicated a nonD linear relationship
bet,een them as also displayed by the figure3 is too lo, to
support a linear relationship3 Ne.ertheless- this
relationship contradicts ,ith
similar research- for e*ample- FalderVn et al3 (;555) ,hile
analysing the FA deficit of de.eloping countries found that
appreciation (depreciation) of local currency increases
(decreases) the FA deficit3
Figure *.9
%ove$en# of )!) and Trade Balance 8i#0 /#0er 'oun#ries
Data Source: WB, 'WDI !!"' and author's calculation
#rom the discussion- $ ,ould argue that the !R has less
inIuence on the 4 ,ith other countries3 $t is possible that
due to the elasticity eKect of goods in e*port and import
bas:ets- the po,er of R!R is not eKecti.e as it ,ould be3
"r- it is equally li:ely- as %e.:ota (n3d3) argues- that !R is
not a proper means to chec: % for Nepal because of its
larger import and a smaller e*port base3 +ence- !R could
not be a strong policy tool to boost the e*port of Nepal and
o.ercome the defcit3
Notably- the 9athmandu Post (/ Gune /00>)- analysing
the ongoing !R regime- states that an automatic
appreciation of NRe ,ith the (S dollar resulting from the
appreciation of $Re is damaging for Nepalese e*ports3 $n
contrast- corresponding de.aluation of NRe is not easy to
raise e*port competiti.eness since they are .ery li:ely to
produce costDpush inIation in the economy3
,1* Trade (i%eralisation and Trade Defcit
Ci.en a tradeUC%P ratio of nearly 80J- an a.erage tariK rate
of around ;?J and almost no nonDtariK barriers ma:es
Nepal as one of the most liberalised and tradeDdependent
economies in South Asia ($#EC /00>: 1)3 he process of
economic (and trade) liberalisation started in ;518 and
geared up after ;5503 4y
/00? (the year of E" membership)- Nepal continued to broaden
the
openness and pushed do,n tariK ,alls and other :inds of
import restrictions3 +o,e.er- ,hen the domestic
manufacturing sector is in its infant stage and the country is
foreignDsource dependent for de.elopment finance- the costs
of
liberalisation may out,eigh its benefits3 After ;55;- both
the e*ports and import increased significantly compared
to the pre.ious decade but it could not minimi)e the gap
bet,een them (see #igure >37)3
able ?3; sho,s NepalBs a.erage periodic 4
before and after the liberalisation3
Table *.1
Trade Balance Before and :f#er >iberalisa#ion
.eriod
#vera$e 2rade Balance in G ? S (C of GD.) :emarks
)%"*-&+ -*' Before li0eralisation
)%&,-%) -)!' )
st
phase of li0eralisation
)%%-!+ -)!'"
nd
phase of li0eralisation
!!,-!" -)&'* #fter W28 mem0ership
Data Source: WB, 'WDI- !!"', 6BS (9epal)
he increasing trend of % after the economic liberalisation
is distinct from the table3 !.ery successi.e phase of
liberalisation in Nepal has been follo,ed by remo.al or
minimi)ation of tariK and nonDtariK barriers- encouraged
foreign capital inflo,- and pri.ati)ation of public
enterprises3 he positi.e relationship bet,een economic
liberalisation and the % is .isible from the table3 +o,e.er-
,e cannot undermine the ancillary impacts of other factors
such as Maoist insurgency after ;557 ,hich demolished
many economic infrastructures of the country3 'i:e,ise the
frequent bloc:ades and NepalD bandh during the royal coup
regime (/00/D08) could also be responsible to some e*tent3
$n sum- there could be cumulati.e role of liberalisation and
political instability for the gro,ing % after ;55/ but in the
first phase of liberalisation (;518D5;)- there ,ere no such
.isible factors to charge e*cept the
liberalisation3 he e*periences of an)ania and other countries (see
section /3/)
also sho, that % ,orsened after liberalisation3
$n contrast- able ?3/ presents the 4 in neighbouring
countries that does not re.eal the same story3 he a.erage
% in 4angladesh and Pa:istan after
the liberalisation has remar:ably declined in both phases
,hereas in case of $ndia- it has increased (decreased) in
the frst (second) phase3 +ence- the generalisation- on the
basis of a.erages- has become a comple* Aob3
Ne.ertheless- there are t,o important diKerences in this
comparison3 #irstly- the reference periods are not the same
,ith Nepal3 Secondly- the nature and degree of
liberalisation (,hich is beyond the scope of this paper)
plays a .ital role to reach an inference3
Table *.,
Trade Balance in Neig0bouring 'oun#ries4 Before and :f#er >iberalisa#ion
.eriod (phase) #vera$e 2B in G ? S
(C of GD.)
:emarks
Ban$ladesh post-li0eralisation
India post-li0eralisation
.akistan post-li0eralisation
Source: WB, 'WDI-!!"' and author's calculation
,1. Economic ;rowth and Trade Defcit
he !C and 4 o.er the years of Nepal ha.e been plotted
in #igure ?3;03 $n contrast to the %- the economic gro,th
(!C) rate of Nepal has ne.er reached double digits (the
ma*imum is 536J in ;51?)3 As discussed in section
/3?38- a higher !C is e*pected to necessitate more
imports of capital and consumer goods (and ser.ices)
thereby leading to a higher %3
Figure *.1+
!cono$ic Gro8#0 and Trade Balance
Source: WB, 'WDI-!!"'
)%"-& -&'" pre-li0eralisation
)%&(-%!()) -"'&
)%%)-!+() -,'*
)%*,-"+ -)' pre-li0eralisation
)%",-%!()) -)'"
)%%)-!+() -)')
)%"*-%) -%', pre-li0eralisation
)%%-%*()) -('%
)%%"-!+() -)'%
here are limited cases (for e*ample- in ;511- ;55?- ;557-
/000) ,hen an increase in !C has ,orsened the %3 "n the
contrary- gi.en the decrease in !C (for e*ample- in ;566-
;510- ;51>- /00/) the % has ,orsened remar:ably3
$n remaining years- these t,o .ariables are changing
the direction nominally or irrespecti.e of the magnitude of
changes in each other3 "ne can put hisUher argument
diKerently that despite a higher %- !C has not declined
rather increased3 he graph- ho,e.er- does not indicate a
clear linear
relationship bet,een !C and %
/?
3 4ut- in comparing the a.erage !C
and %
of other SAARF
/8
countries- a diKerent relationship appears3 NepalBs
a.erage
% (D530J) during ;567D/00> is more than double against
the ,eighted a.erage % (D?3;J) of fi.e South Asian
countries3 "n the other hand- NepalBs a.erage !C (?3/J) of
the same period is signifcantly less than the ,eighted
a.erage !C (630J) of those fi.e countries3 $t has gi.en
ground to argue that a higher % is li:ely to cause a slo,er
!C and .ice .ersa3 o sum up- the !C rate of the country
has no clear le.erage to magnify its %3
#igure ?3;; e*amines the interrelationship bet,een
a.erage !C rate of trading partners and 4 of Nepal3
Specifically- the fgure sho,s ,hether or not higher (lo,er)
economic gro,th in trading partners dampen (,orsen) the
% of Nepal due to increased (declined) demand for
domestic e*ports3
Figure *.11
!cono$ic Gro8#0 in %a&or Trading 3ar#ners and TB in Nepal
Source: WB, 'WDI-!!"' and author's calculation
Ci.en the increasing !C of $ndia (the biggest trading
partner) in successi.e years@ NepalBs % has been increasing
,hich contradicts ,ith the theory in general (see /3?38)3
Similarly- the mo.ement of !C rates in the (S and
Cermany (second and third biggest trading partner
respecti.ely) too do not reIect a uniform response ,ith
NeplaBs %3 Regardless of the magnitude- Gapan has
decreasing !C o.er the years ,hich is some,hat
consistent ,ith decreasing % of Nepal in the same period3
As such- there appears no .isible relationship bet,een
highUlo, economic gro,th of trading partners and
impro.ingU,orsening % of Nepal3 he contradiction
might ha.e emerged
from the fact that NepalBs e*ports to and imports from these
countries are too small (in their total trade) to e*hibit any
consistent pattern3
,18 (ac# of Competitiveness and Trade Defcit
Apart from di.ersifcation of product and destination-
competiti.eness is considered to be one of the maAor
determinants of NepalBs % (see Section
/3>)3 rade competiti.eness- in a narro, sense- is primarily
lin:ed ,ith a.erage cost eKecti.eness and producti.ity3
Foncurrent fscal- monetary and trade policies@ fnancial
and physical infrastructures- a.ailability and quality of ra,
materials and human resources are .ital determinants of
competiti.eness3 Nepal is a labourDabundant country and
hence its labour cost is competiti.e among the neighbouring
countries- ho,e.er- labour producti.ity is quite lo, (able
?3>)3
Table *.
:nnual 3ercen#age '0ange of >abour 'os#s and >abour 3roduc#ivi#9 of !ig0# :sian
'oun#ries
*
6ountr3 Da0our 6osts Da0our .roductivit3
9epal
India
!',
')
+'
+'+
6hina %'! )!')
Indonesia &') &'
2hailand &'+ )!'"
Sri Danka ,'( !'&
>ala3sia %') %'
.hilippines "'+ )!')
Source: Anited 9ations Industrial Development 8r$aniHation (A9ID8), Year Book of Industrial
Statistics
2001 and International Da0our 8r$aniHation (ID8) Year Book of Labour Statistics 2001 in I-WG (!!()
Since Nepal e*hibits the lo,est gro,th rate of ,ages
depicted in able ?3>- the unit labour cost is the lo,est
among these eight countries3 %espite the lo, labour cost
per ,or:er- Nepalese manufacturing sector is passing
through a minimum .alueDadded per ,or:er compared to
other Asian countries (able
?3?)3 %espite the ad.antages of lo, unitDcost per labour-
Nepal has smaller
labour producti.ity among its neighbouring (and
competitor) countries3 his lo, producti.ity has led to a
higher unitDcost of labour in the list (column F)3
Table *.*
(nde" of 'os# 'o$pe#i#iveness (ndica#ors of Nine :sian 'oun#ries5 1999
6ountr3
Da0our 6ost per
Worker (#)
"
/alue #dded per
Worker (B)
Anit Da0our 6ost (6)
)!! )!! )!!
Source: A9ID8, Yearbook of Industrial Statistics !!!) and ID8, Yearbook of Labour Statistics !!) in
I-WG (!!()
'i:e,ise- NepalBs competiti.eness in regard to infrastructural cost
is also higher compared to its neighbouring countries (able ?38)3
"n the one hand- the supply of electricity is not regular due to
loadDshedding- and on the other- the tariK rate is remar:ably higher
than neighbouring countries3
Table *.5
'o$para#ive 'os# of !lec#rici#9 and ?a#er @se
9epal !'!%( !'!&+ !'(() to !'(,"
India !'!+( !'!*+ !')+ to !'+
Ban$ladesh !'!+) !'!*& !'+*
.akistan !'!*, - !'!"+ to !')%)
Sri Danka !'!"% - !')+
Source: I-WG (!!()
he 'ogistics Performance $nde* ('P$)- Clobal
Fompetiti.eness $nde* (CF$) and Eorld Co.ernance $nde*
(EC$) are belie.ed to intensi.ely measure the challenges
and opportunities in the trade performances of
countries3 Fompared to its neighbours (also competitors) and
trading partners-
Nepal stands the ,ea:est competitor in 'P$ and CF$
,hile it is relati.ely better than $ndia but ,ea:er than
others in EC$ (able ?37)3
9epal
India )(! !, &)
6hina )&! ") "
Ban$ladesh ))! )(! %!
Indonesia )! "* &"
2hailand +&! (%! %+
Sri Danka )*! )%, )!,
>ala3sia %*! %!% %(
.hilippines *!! "+ %(
6ountr3
<lectricit3 2ariffs G@kWh (!!!)
Water 2ariffs for
Industrial Ase G@6u0ic
>eter
#v$' 8verall 2ariff Industrial 2ariff
Table *.6
>ogis#ic 3erfor$ance (nde"4 Neig0bouring 'oun#ries and Trading 3ar#ners
9epal ')+ )* ))) -)('%
Ban$ladesh '+" ))) )!" -,'(
India ('!" ,! )! -('+
.akistan '* )!) "* )')
Sri Danka '+! "" )!) -%')
6hina ('( (! &( '*
1apan +'! % ) )'*
AS# ('&, ) ( -+',
German3 +')! " ! +'%
Source: WB, 'World 2rade Indicators-!!&' and World <conomic -orum, 'Glo0al 6ompetitiveness
:eport !!&-!%'
"n the table- higher score in 'P$ is better than the lo,er
one ,hile smaller score is better in regard to CF$ and EC$3
he better inde* (and 4) of de.eloped and emerging
nations- on the one hand- and the poor position (and
,orsening %) of Nepal- on the other- is easily
understandable from the table3 #urthermore Nepal- in
general- e*hibits a ,ea:er competitor (and higher %@ see
able >38) among the f.e countries of SAARF3 o conclude-
lac: of competiti.eness is one of the :ey determinants of %
of Nepal3
,1< (andloc#ed ;eo$raph- and Trade Defcit
As discussed in section /3> and /3?36- landloc:edness
ma:es a countryBs imports and e*ports more e*pensi.e3
NepalBs landloc:edness is unique in nature since it is
surrounded by $ndia in the !ast- South and Eest and by
Fhina in the North3 he inland transportation ,ith Fhina is
confined to fe, transit points due to the diKicult terrain of
the Himalyas and inadequate road net,or:s3 Nepalese
e*porters ha.e to pay up to /0J more in transportation
cost and they bear 80J longer time for deli.ery of their
supplies compared to other suppliers ,ithin the region
(Shaa:ha /001: />8)3 $t fuels the % .ia reduced
(increased) e*ports (imports)3
$n line ,ith the (NFA%Bs report (/006: ;76)- $ ,ould
argue that the economies of landloc:ed countries are bound
to shrin: ,ith lo, .olume of trade ,hich do not benefit
from the beneft of economies of scale in transportation3
Among others- the reasons for a smaller .olume of Nepalese
trade are limited road net,or:s- transport facilities- ris:s
and uncertainties- and the si)e of the mar:et3 $n able ?36-
(nde"
)an;ing
TB in ,++*
,.
(1 of G73)
>3( (overall5
,++.)
,9
G'( (,++-6
+.) in )an;
?G( (!ase of doing
business5 ,++-)
+
4 of f.e (landloc:ed and coastal) South Asian countries
has been sho,n3
Table *.-
TB of Sou#06:sian >andloc;ed and 'oas#al 'oun#ries
6ate$or3
2B in C of GD. (.eriodic #vera$e)
Wei$hted
()
#vera$e 2B
()%&)-!!) C
of GD.
)%&)-%) )%%-!
>andloc;ed
'oun#ries
(>>'s)
9epal -)!'(
Bhutan -)*'
#f$hanistan n'a'
Ban$ladesh -,'*
.akistan -'*
Sri Danka -))'" -&'*
61+.5
'oas#al
'oun#ries
66.-
Data source: WB, 'WDI-!!"' and author's calculation
#rom the table- the indi.idual % of ''Fs in ;51;D5; and
;55/D0/ is higher than the coastal countries ignoring the
one e*ception of Nepal and Sri 'an:a (in ;51;D5;)3
Moreo.er- the a.erage % of ''Fs throughout ;51;D0/ is
>31 percentage points higher than the coastal countries in
the region3 +ence- the crossDcountry comparison has left a
ground to attribute the landloc:edness as one of the
subsidiary determinants of Nepalese %- ,hich could ha.e
direct implication ,ith the economies of scale and
competiti.eness of the country3
,1@ Con>ict and Trade Defcit
%uring the period of conIict (;557D07)- there ,ere
undeniably other factors at function ,hich could also
inIuence the 4 of the country3 Specifcally- all the factors
discussed in earlier subDsections ,ere acti.e at the same
time3 +ence-
the causality bet,een conflict and % is diKicult to quantify3 And- the
eKect of
conflict is less li:ely to appear immediately3 $n obser.ing
#igure >3> ,e do not see a significant change in the ongoing
% in goods3 he defcit slightly ,orsened in ;556 but it
impro.ed dramatically in ;551 and /0003 Actually- the
conIict ,as not intensifed in those initial years and the
fa.ourable NepalD $ndia rade reaty signed in ;557 ,as
most li:ely ameliorating negati.e eKects from the conIict3
$n /00;- the conIict ,as in its ape* and the % again faced
a do,nturn e*acerbated by other equally stronger factors- .i)3-
SeptemberD
;;(terrorist attac: in the (S) and the Royal family tragedy
in /00;3 Moreo.er- the rene,ed trade treaty ,ith $ndia in
/00/ ,as an impediment to the e*port of some :ey products
of Nepal to $ndia (Mo#- /00>U0?)3 he trade in ser.ice-
ho,e.er- re.eals a continuous (e*cept ;555) do,nturn after
;556 until /00/ (#igure >3>)3 ourism industry- the maAor
-%',
-')
n'a'
-&'!
-%'
source of ser.ice- ,as se.erely affected by the conflict
,hich could other,ise compensate some of the defcit in
goods (see #igure >3?- left panel)3 he a.erage 4 in goods
and ser.ices before and during the conIict has been
summari)ed in able ?313
Table *..
Trade Balance in Goods and Services (1 of G73) in 'onflic# 3eriod
2B
9ine Eears Before 6onflict
()%&"-%,)
9ine Eears Durin$ 6onflict
>/
)%%*-!!!
(Be$innin$ phase)
!!)-!+
(.eak phase)
)%%*-!+
Source: WB, 'WDI-!!"' and author's calculation
he deficit in goods during the conflict years is higher than
the preDconIict period3 Surplus in ser.ices remar:ably
climbed up e.en in the beginning of conflict3 4ut the
,orsening eKect of conflict is .ery distinct in the pea:
phase of conflict ,here ser.ices ha.e sharply declined by
63>J points3 "n a.erage- the defcit in goods and ser.ices
before and during the conflict is almost same3 Ne.ertheless-
in the absence of crossDcountry comparisons andUor
application of some econometric model the fndings might
hold a methodological bias3
Goods -)+') -)%'" -),'! -)"'*
Services (') %'( '! *'!
Good and Services -)!'" -)!'( -))'+ -)!'&
Chapter *
Conclusion and /olic- Recommendations
his research paper began ,ith one principal obAecti.e
and one research question3 $t solely aimed at ans,ering
the principal causes of % of Nepal3 ,o hypotheses ,ere
made3 he frst hypothesis ,as founded on the role of
e*ternal shoc:s3 4oth the demand and price shoc:s N t,o main
components of
e*ternal shoc:s N ,ere analysed to the e*tent of their .isible impacts
on
Nepalese e*ports and imports3 he second hypothesis ,as on the
foundation
of internal bottlenec:s@ mainly the economic- geographical and
political factors3
*1& Conclusion
he causes of % in Nepal begin from the e*isting structure
of the foreign trade3 $t suKers from an absence of e*port
di.ersifcation in terms of commodities in particular- and
destinations in general3 Moreo.er- the e*ports bas:et
comprises mainly those commodities ,hich are priceD
elastic3 $n contrast- the imports bas:et includes a full range
of di.ersifed products ranging from basic consumption
goods to .arious highDtech commodities that are relati.ely
priceDinelastic3
$n ;576- NepalBs % in terms of C%P ,as almost )ero
(03;J) per cent
but it ne.er regained that position until /00?3 Not only the
% ,ith $ndia gre, larger but it also continued after late
;550s3 he defcit ,ith other countries (in aggregate) is also
high (87J on a.erage)3 Merchandise trade is found al,ays
in deficit ,hile the ser.ice sector ,as in surplus ranging
from one to thirteen per cent of C%P3 Ne.ertheless- the
surplus in ser.ice account ,as not suKicient to ameliorate
the defcit in merchandise3 %uring most of the study period-
the income account- though .olatile- stood positi.e3 he si)e
of the % of Nepal
is found signifcantly higher than its neighbouring and other maAor
trading
partners3
$n regard to .alidation of the frst hypothesis- the
analysis pro.ided a ground to attribute the e*ternal shoc:s
as stronger causes of % in Nepal3 +o,e.er- the impacts of
these shoc:s in Nepalese 4 are of diKerent magnitudes3
Some stronger demand shoc:s that resulted from the
reAection of Nepalese carpets in Cermany (in ;55?D58)- the
(S and other !uropean countries due to the alleged childD
labour use ,ere .ery po,erful in intensifying the % in late
nineties and succeeding years3 Similarly- the demand shoc:s
from the aftermath of the SeptemberD;; attac: (/00;)-
recessionary trends in the (S and global economy (in /00/)
and the ending of M#A (/00?) ,ere also potent to e*pand
the defcits further3 $t is found that the % impro.ed
alongside stronger (S and global economy3 $n regard to
demand shoc:s from $ndia (there are fe, cases)- there is
obser.ed a relati.ely smaller impact3 Particularly- the
economic sanction imposed by $ndia on Nepal and the
restricti.e quota pro.ision in the rene,ed rade reaty
/00/ are mentionable3 (ndeniably- the resultant impacts of
demand shoc:s on 4 ,ere stronger but
those factors ,ere not solely responsible3 hese shoc:s
,ere much stronger in hitting the e*ports to o.erseas
countries rather than $ndia3
$n addition- the price shoc:s- especially brought about by surge in
oil prices
,ere- on a.erage- effecti.e in demonstrating a .isible
deterioration in the %3 he magnitude of oilDprice hi:es
,as important in determining the si)e of effects3 $n a
number of cases- these price shoc:s ,ere unable to pro.e
their presence in ,orsening the %3
$n regard to the second hypothesis- internal factors are
also found stronger to determine the direction of 43 4ut
some of them had lo, or no significant effect3 he paper
does not see causation bet,een 4% and %3 Ci.en the
decreasing si)e of 4% in some years- the % did not e*hibit
any
impro.ements3 +ence- controlling of 4% may not ser.e as a
good policy tool to impro.e the %3
#rom sa.ingDin.estment perspecti.e- it is found that the
former- on a.erage- is 5J point lo,er than the later3 $n a
de.eloping economy li:e Nepal higher in.estment (domestic
and foreign) is naturally preferred (in normal condition)
hence the % could be attributed to lo, rate of domestic
sa.ings3 Accordingly- contrary to con.entional theory- this
study could not establish a clear and uniform relationship of
% ,ith e*cess MS and R!R3 !.en in the case of fi*ed !R
regime bet,een $ndia and Nepal- as there are some
arguments that Nepalese currency is o.er.alued- the
analysis does not capture a
con.incing relationship3 he !R- thus may not be a stronger policy
option to
promote the e*ports in case of Nepal3
$nterestingly- the paper unco.ers that the a.erage %
of Nepal has been ,orsening alongside the process of
economic liberalisation3 Although there ,ere other internal
and e*ternal factors in play@ during ;518D5; the economic
liberalisation stood as one of the causes of %3 he findings
contradict ,ith the e*periences of other South Asian
countries ,here % has been declining o.er the years3 As
the degree- duration and nature of liberalisation do matter-
the fndings are hard to reAect fully3 he .olume of trade-
ho,e.er- increased (albeit decline in some years of late
;550s) sharply after the liberalisation3
As the paper assessed the causality bet,een % and economic
gro,th in
home country and in maAor trading partners- if any- no
such con.incing e.idence is found3 Ne.ertheless- an
impro.ement in the (S and global economy helped
promote the e*ports of :ey commodities to o.erseas
countries3 $n regard to the contribution of higher economic
gro,th (in home country) in magnifying the %- as argued
by some theories and empirics- this paper does not fnd
such causality3 Rather- it noticed a slo,er economic gro,th
gi.en a higher %3 Specifically- it noticed a lo,er % and
relati.ely higher economic gro,th in neighbouring
countries3
$t is argued in some Nepalese literatures that the lac: of
competiti.eness
in merchandise trade is another principal cause of %3 his
study has found that Nepal is fairly better in terms of unitD
labour cost but producti.ity is lo, compared to its trading
partners and neighbouring countries3 #urthermore- it is a
,ea: competitor in terms of t,o main indices of
competiti.eness N the 'ogistics Performance $nde* and
Clobal Fompetiti.eness $nde*3
he paper identifes that the landloc:ed countries in South Asia
including
Nepal ha.e higher % compared to coastal countries of the same
region3
#inally- the paper e*amined the a.erage % before and
after the inception of conflict in the country3 he 4 in
ser.ices sharply declined during the pea: period of conIict
but remar:ably increased in the beginning phase3
Similarly- the defcit in goods further scaled in that period3
+o,e.er- the o.erall 4 in goods and ser.ices during the
nine years before and after the conIict ,as almost the
same3 After the ne, trade treaty ,ith $ndia in /00/- the
e*ports of some manufactured goods declined sharply and
% ,orsened further3
o sum up- NepalBs 4 is frequently responsi.e to
e*ternal demand and price shoc:s3 Ne.ertheless- these
shoc:s are not the sole forces in determining the magnitude
and direction of Nepalese 4 but the internal forces are
also influential3 +ence- the interplays and o.erlapping of
e*ternal and internal forces are the principal causes of
Nepalese %3 Surely- during some periods the e*ternal
shoc:s are seen dominant and during other internal forces
are obser.ed po,erful3
*1'
Recommendation
s
"n the basis of o.erall analysis- the follo,ing policy
recommendations are made:
#irstly- impro.ement in the trade structure of the country
is a must- ,hich- in turn- requires di.ersifcation of e*ports
in terms of commodities and destinations that can help in
mitigating the e*ternals shoc:s3 he "ffcial publication of
the go.ernment of Nepal itself ac:no,ledges the
damaging effects of NepalD$ndia rade reaty /00/ on
Nepalese e*ports to $ndia3 $t suggests a better
assessment of farDreaching impacts before signing off any
bilateral or multiDlateral trade treaties in the future3
Secondly- lac: of competiti.eness is an immense problem of
the manufacturing industry ,hich requires- among others-
good infrastructure- s:illed human resources- procurement
of quality ra, materials- fa.ourable fiscal and monetary
policies- effcient bureaucracy and in.estment in research
and de.elopment3
hirdly- though not enough to ameliorate the deficit in
merchandise trade-
the trade in ser.ices has al,ays accrued surpluses
,hich resemble a good potential and see: priorities
accordingly3
#ourthly- there could be t,o possible ,ays to minimi)e
the ongoing le.el of %- .i)3- (i) imports substitution or (ii)
e*ports promotion or both3 NepalBs e*cessi.e dependency on
foreign goods (including ra, materials) restricts the scope
of imports substitution3 $n a globali)ed ,orld and for a
member of E"- e*ports promotion ,ould be a frst choice
for Nepal3
#inally- NepalBs trade policy seems sound but is lac:ing
in quality in terms of implementation- e.aluation and
effecti.e monitoring3
Recommendation for )urther
Research:
Since the % ,ith $ndia has been high (??J of total defcit-
on a.erage) for a long period the impact study of e*isting
f*ed !R regime (after ;55>) on Nepalese foreign trade is
o.erdue3
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!conomic #orum3
Co.ernment of Nepal (;55/) Brade Policy of Nepal ;55/B
Qelectronic .ersionR3
http:UU,,,3n e palchamb e r 3org Upol ic ie s Ut r a de3php
(accessed /; Guly /001)3
Cris,old- %33 (;551) B$s the (3S3 rade %eficit Really 4ad Ne,sOB
Qelectronic .erD sionR3
h ttp :UU , ,,3ca to 3org Up u b Xd isplay3phpOpubXidW8156
(accessed // Guly
/001)3
Cusep- 3 (/008) BCael Raballand: The economic marginalisation
of Fentral Asia beD gan in the ;6th FenturyTB Qelectronic
.ersionR3
http:UU,,,3 c a uca)3co m UhomeXeng Ub re.eXcontenu3phpO
idW/;0 (accessed
;8 "ctober /001)3
+ossain- %3 (/00?) B4angladesh: $mpact of Clobalisation and
Co.ernanceB Qelectronic .ersionR- ,outh Asian Journal3
http:U Us o u th asia n me d ia3 n etUMa g a)in e UGour n al U7Xban g Xim p a
c t3 h tm (acD cessed ;0 "ctober /001)3
+ossain- M3A3 and M3 Alauddin (/008) Brade 'iberalisation in
4angladesh: he ProcD ess and $ts $mpact on Macro
&aribles Particularly !*port !*pansionB- Journal of
Develpoing Areas >5(;): ;/6D;803
$#EC (/00>) BNepal rade and Fompetiti.eness StudyB Qelectronic
.ersionR3
http:UU,,,D
, d s3,orldban:3orgU e * te r n a lUd e fault UE %SFontentSer. e r UE
% S P U$4 U/008U
;0U;/U0000;/005X/008;0;/;8>/?7URenderedUP%#U>>65>0re.0final
dtis;n
epal;//oct0>3pdf (accessed /1 September /001)3
$M# (;55?) BEorld !conomic "utloo: ;55?B3 Eashington- %3F3:
$nternational MoneD tary #und3
$ndiaDNepal #oreign reaty of rade Agreement- /00/3Retrie.ed /0
"ctober /001-
from htt p :UU,,,3in f odri . eind ia 3c omU!*i m U r a d e D
A gr e em e n tU$nd ia DNe p alD #reeDradeDAgreement3asp*3
B$nternational #inancial Statistics F%DR"MB (/007)3 Eashington- %3F3:
$nternational
Monetary #und3
B$s NF o.er.alued against $FOB(/00>)7 (he 8athmandu Post3 / Gune /00>3
Gac:son- G393 (/001) B(3S3 rade %efcit and the $mpact of Rising
"il PricesB QelecD tronic .ersionR3
http: UUfpc3 s ta te 3go.Udo c u m e ntsUorg a ni ) a tionU711/>3p d f (acD
cessed 1 "ctober /001)3
Gansen- 93 (/001) B$nternational Macroeconomic Policy
FoordinationB QA Flassroom 'ecture Note gi.en at $nstitute
of Social Studies ($SS) for the Fourse B$nternaD tional
#inancial Reform- MA /006U01BR3 the +ague3
Gaya,ardena- A3S3 (/00/) B!conomic Performance of Sri 'an:a in
the NinetiesB QelecD tronic .ersionR3
http: UU,, , 3ic r ier3o r gUpdfUASGa y a3pdf (accessed >; "ctober
/001)3
93F3- R3 (/001) B!conomy: 'opsided ScenarioB7 (he Rising -epal3
;8 September /0013 9oirala- 43- R3P3 Cyan,aly and S3 Shrestha
(/008) Bhe Relationship 4et,een Political
$nstability and !conomic Cro,th in Nepal (;568D/00>)B3 Ne, %elhi:
South
Asia Net,or: of !conomic Research $nstitutes (SAN!$)3
9umar- %3 (/008) B$mpact of Fonflict on Security and the #uture: he Fase
of NepalB-
Journal of ,ecurity ,ector Management (Asian Special $ssue): ;D/83
'abonte- M3 and C3 Ma:inen (/008) Bhe 4udget %eficit and the
rade %efcit: Ehat is their RelationshipOB Qelectronic
.ersionR- /R, Report for /ongress3
http:UUd ig ital3l ib rar y 3un t3eduUgo. d ocsUcrs Uper m al in : U meta D
c rsD6/ ; 8:; (acD cessed ;1 Guly /001)3
'e.y- '3S3 (/00?) Bhere $s No Such hing As A rade %efcitB Qelectronic
.ersionR-
2inancial ,ense Online
http:UU,,,3 f in a n cialsense3co m Uedi torialsUrealityU/00 ? U0
5/?b3html (acD cessed // Guly /001)3
Ma:in- G3+3 (;555) BFauses of the rade %eficitB Qelectronic
.ersionR3
http:U Ug o . in fo 3l ib rar y 3unt3 e duUtdrcUheari n gsU;5aug5 5 Uma:i
n3ht m l (accessed
;5 Guly /001)3
Manrique- R3S3 (/00?) B"il Price $ncreases Push $mport 4ill (pB
Qelectronic .ersionR- %usiness $orld3
http:U U, ,,3 c le a n a irnet3org Uc ai a s ia U;? ; / UarticleD
815;?3html (accessed 1 "ctober /001)3
Mas:ey- N3M3 (/000) (he "9change Rate Policy of -epal vis.a.
vis the )ndian /urrency (;st ed3)3 9athmandu: Nepal
#oundation for Ad.anced Studies (N!#AS)3
Mo# (/006) A /ollection of %udget ,peeches for (*enty.si9
:ears ;in -epali< 9athmandu: Ministry of #inance-
Co.ernment of Nepal3
Mo# (/00>U0?) "conomic ,urvey 2=.!3 9athmandu: Ministry of
#inance- Co.ernD
ment of Nepal3
Mo# (/00?D08) B$nternational rade and 4alance of PaymentsB- in "conomic
,urvey 2!.
& (pp3 5/D;08)3 9athmandu: Ministry of #inance-
Co.ernment of Nepal3 Mohanty- S393 (/00>) BRegional rade
'iberalisation under SAPA and $ndiaBs rade
'in:ages ,ith South Asia: An !mpirical AssessmentB- R), Discussion
Paper
!'>2=3
Moon- 43!3 (/00;) Bhe %angers of %efcits: Reconsidering
"ut,ardDoriented %e.elD opmentB Qelectronic .ersionR3
http:UU,,, 3 l ehigh 3e d uU Y b m 08U d e fcitsU c o n fe r e n c eX d r a f t3p d
f (accessed /8
Guly /001)3
Moon- 43!3 (/008) B%eficits in trade- %eficits in %e.elopmentOB
Qelectronic .ersionR3
http:UU,,, 3 l ehigh 3e d uU Y b m 08U d e fc itsUisa/ 0 0 8 Xco n f e renc
eX/003p d f (acD cessed /8 Guly /001)3
Moon- 43!3 (/007) BReproducing the NorthDSouth %i.ide: the role
of trade deficits and capital Io,sB Qelectronic .ersionR3
http:UU,,, 3 l ehigh 3e d uU Y b m 08U d e fcitsU$ S A/007 X re . i sed 3/;
03pdf (accessed
/8 Guly /001)3
Morici- P3 (/00>) BRe.ersing the Fhina rade %eficit: (ni.ersity of
Maryland !*poert B Qelectronic .ersionR3
http:UU,,,3n e ,s d e s: 3um d 3 edu Usocis s Ur elease3 c fmO
Article$%W1>; (accessed
>0 Guly /001)3
Mueller- A3 (/008) BEhatBs 4ehind the rade %eficit NumbersB
Qelectronic .ersionR3 http:UU m is e s 3o rgUstoryU;1?8
(accessed ;0 August /001)3
Mueller- A3 (/007) Bhe +idden %anger of rade %efcitsB
Qelectronic .ersionR3 http:UU m is e s 3o rgUstoryU/;00
(accessed ;> Guly /001)3
Nayar- 43R3 (/007) )ndia?s 5lobali4ation+ "valuating the "conomic
/onse@uences3 Eashington- %3F3: !astDEest Fenter3
Nepal Rashtra 4an: (NR4) (/00>) B!*ternal rade and
PaymentsB- 3uarterly "conomic
%ulletin >6(>): 85D613
Nepal Rashtra 4an: (NR4) (/006) B!*ternal rade and
PaymentsB- 3uarterly "conomic
%ulletin ?;(>): 6;D583
Nepal Rashtra 4an: (NR4) (/001) BMonetary AggregatesB-
3uarterly "conomic %ulletin
?/(>): ;D53
Nepalne,s3com (/007) Nepal Ran:s ;;0th in Clobal
Fompetiti.eness Sur.ey3 from
http:UU,,,3n e palne,s3 c o m Uar c hi . e U/ 0 0 7Usep Us e p/1 Un e , s
08 3php
Nicholas- +3 (/001a) B4alance of PaymentsB QA Flassroom 'ecture Note
gi.en at $nstiD
tute of Social Studies ($SS) for the Fourse BMacroeconomic
Policies and AdD Austments- MA /006U01BR3 the +ague3
Nicholas- +3 (/001b) Bhe $nternational rading SystemB QA
Flassroom 'ecture Note gi.en at $nstitute of Social Studies
($SS) for the Fourse !conomics of ClobalD isation- MA
/006U01R3 the +ague3
":e- "3A3 (/006) B$nternational rade As An !ngine of Cro,th $n
%e.eloping FounD tries: a Fase Study of Nigeria (;510D
/00>)B Qelectronic .ersionR- ,earch. $arp7com3
http :UUs earch, a r p3co m Us, a /;>>>53htm (accessed /0
August
/001)3
"nafo,ora- "3A3 (/007) BAn !mpirical $n.estigation of 4udget
And rade %eficits: he Fase of NigeriaB- (he Journal of
Development Areas >5(/): ;8?D;6?3
Pant- R3%3 (/006) BFurrent !conomic Scenario and !merging
rendsB7 (he 8athmandu
Post3 ;0 %ecember /0063
Pari:h- A3 and F3 Stirbu (/00?) BRelationship bet,een rade
'iberalisation- !conomic Cro,th and rade 4lance: An
!conometric $n.estigationB Qelectronic .erD sionR- H$$A
Discussion Paper 2'23
http:U Up a p ers 3ssrn3 c o m Usol > Up apers 3cfmO
abstractXidW876078 (accessed ;1
"ctober /001)3
Poudyal- N3 (/006) BRates %etermining Nepalese #oreign radeB-
,ocio.economic Develop. ment Panorama ;(/)3
Prasad- (3S3 (/006) BNepalBs Regional and 4iDlateral rade
Agreements: Performance
and ProspectsB 3 9athmandu: !nhancing NepalBs radeD
Related Fapacity (!NreF)- Ministry of $ndustry-
Fommerce and Supplies- Co.ernment of Nepal
Purohit- P3 (/006) $ndiaBs !*ternal Furrent Account: %ynamics and
%eterminants-
MA hesis3 $nstitute of Social Studies ($SS)- the +ague3
Rahman- M3M3 (/008) B4angladeshD$ndia 4ilateral rade: causes
of $mbalance and Measures for $mpro.ementB Qelectronic
.ersionR- $orking Papers: pp3;D;1 (acD cessed ; "ctober
/001)3
Rodri:- %3 (/00;) Bhe Clobal Co.ernance of rade As if
%e.elopment Really MatD teredB Qelectronic .ersionR3
http:U U:sghome3har.ard3ed u UY d r odr i:Uundptrade3pdf
(accessed ;? Guly
/00;)3
Saruni- M3 (/006) B%eterminants of the rade 4alance in
an)ania- ;560D/00/B- in A*arded (heses 2A (pp3 75D11)3
Eashington- %3F3: Eorld 4an:- Eashington %F3
SAE!! and AAN (/006) (rade and )ndustrial Policy "nvironment in
-epal3 9athamndu:
South Asia Eatch on rade !conomics and !n.ironment and Action
Aid
Nepal
SAE!! and AAN (/006) "9port Diversification ,trategy for -epal7
9athmandu: South
Asia Eatch on rade !conomics and !n.ironment and Action Aid
Nepal
Schol)- G33 (;561) BNepal in ;566: Political %iscipline or +uman RightsB-
Asian ,urvey
;1(/): ;>8D;?;3
Sch,art)- A3G3 (;515) BFommentaryB- in A3!3 4urger (ed3)- B7,7
(rade DeCcit+ /auses# /onse@uences# and /ures (pp3
/65D/18)3 Masschussets: 9lu,er Academic PubD lishers3
Sesit- M3R3 (/006) Bhe dangers of trade balance theoryB
Qelectronic .ersionR3
http:UU,,, 3 i ht 3c omU a rticl e sU/006 U01U 0 8 Ub lo omb e rgUb*at m 3
php (accessed
// Guly /001)3
Shaa:ha- 93P3 (/001) BFountry Reports on Foping ,ith Restricti.e
Policies and MainD taining Fopetiti.eness: NepalB- in
Bnveiling Protectionism+ Regional Responses to Remaining
%arriers in the (e9tiles and /lothing (rade (pp3 />/D/>1)3
Ne, Mor:: !SFAP- (N3
Shai:h- A3M3 (;555) B!*plaining the (3S3 rade %eficitB Qelectronic .ersionR3
http:U Uh ome p a g e 3n e, s c h o ol3 e d u UY A S h a i: h U( S tr d ef3 p df (accessed ;0
Guly
/001)3
Sharma- C3 (/00?) BNepal: 'o, !quilibrium rapB Qelectronic
.ersionR- ,outh Asian Journal3
htt p :UU,,,3s o u th asianmedia3netUM a g a )in e UGour n alUn e pa lXt
rap3htm (accessed ? "ctober /001)3
Sharma- "3 and R3 4handari (/008) B#oreign rade and $ts
!ffects on Nepalese !coD nomic %e.elopmentB- (he
Journal of -epalese %usiness ,tudies $$($): ;>D>/3
BShould ,e be afraid of the massi.e trade deficitO Eould it
Aeopardise the economyOB (/6 Guly /001 )7 (he ,unday
(imes- from
http:U Us undaytimes3l : U0106/6 UF o lu mnsUeco3html
Shrestha- A3 (/006) B!conomic Sanctions D $s it concerned only
,ith Co.ernmentOB Qelectronic .ersionR3
http : UU,, , 3t a : in g itg loba l3o r gUe* p r e ss Up a n o r a m a U a r t ic le 3 ht
mlOFontent$%W;
71?; (accessed ;6 "ctober /001)3
Singh- S3M3 (/001) BNepalBs rade Cap Needs AdAustmentB7 (he Rising
-epal3 /7 May
/0013
Sno,- 3- M3 #aye- G3 McArthur and G3 Sachs (/00>) BFountry Fase
Studies on the Fhallenges #acing 'andloc:ed %e.eloping
countriesB Qelectronic .ersionR- Oc. casional Paper3
http:U Uh d r 3undp3orgUenUr e portsUg loba lUhdr/00>Upap e rsU land l
oc: e d Xco u n tri esX/00>3pdf (accessed ;8 "ctober /001)3
Solanes- G3C3- G3R3 'Vpe) and G3'33 FhacVn (/006) B%emand
Shoc:s and rade 4alD ance %ynamicsB Qelectronic
.ersionR- $orking Paper ,eries: ;D/;3
http:UU,,, 3 u po 3es Us e r.UbibU,psUe c o n 0 6;03pdf (accessed ;1 "ctober
/001)3
Stein- S3 (/008) Brade "ut of Ehac:B Qelectronic .ersionR- Policy
Revie*3
http:UU,,,3hoo . e r3org Upubl ic a t ionsUpol ic yr e . ie , U>?>/>6;3
h tml (accessed
/0 Guly /001)3
aneAa- N3- M3 Sar.ananthan- 4393 9armacharya- and S3 Pohit (/00?)
B$ndiaBs $nformal
rade ,ith Sri 'an:a and Nepal: An !stimationB- ,outh Asia
"conomic Journal
8(;): /6D8?3
(d,andia- #3!3 and 3 Agmon (;511) Brade %eficits: A 'oo: 4eyond the
!conomic
&ie,B- (echnological 2orecasting and ,ocial /hange(>>): ;05D;;13
(NFA% (;555) BPayments- %eficits- 'iberali)ation and Cro,th in
%e.eloping
FountriesB- in (rade and Development Report D666
(&ol3 /- pp3 68D51)3 Ne, Mor: and Cene.a: (nited Nations
Fonference on
rade And %e.elopment3
(NFA% (/006) BRegional Fooperation in rade 'ogistics- !nergy and
$ndustrial
PolicyB- in (rade and Development Report 2E
(pp3 ;85D;11)3 Ne, Mor: and Cene.a: (nited Nations
Fonference on rade and %e.elopment
&atanse.er- M3 and M3 9utlay (/001) B+o, the +i:e in "il Prices
+its ur:ish !conD omyB Qelectronic .ersionR3
http:UU,,, 3 t ur : ish,e e : ly3net Uc omm e n ts 3phpOidW/5>/
(accessed 1 "ctober
/001)3
Eorld rade $ndicators (/001)3 from
http:UUin f o3, o rl d b an:3org U et o ols U, t i/0 0 1U d o csU$ n di
cators3 h tm3
BEorld %e.elopment $ndicatorsB (/006) Eashington %3F3:
the Eorld 4an:3 (R': http: UU, , ,3tepc3go.3npU
Notes
;
According to a.ailable data
/
$n merchandise trade
>
Ministry of $ndustry- Fommerce and Supplies- Nepal
?
(nited Nations Fonference on rade and %e.elopment
8
Asian %e.elopment 4an:
7
South Asia Eatch on rade- !conomics and !n.ironment
6
supported by $M#- $F- (NFA%- (N%P- E" and the E43
1
Ministry of #inance
5
other than $ndia
;0
#riedmanBs equation is e*pressed as M& W PH or P W (MUH)3&
,here M- &- P and H stand for quantity of money- .elocity of the
money- price le.el and real output respecti.ely3
;;
#or monetarists- money is a stoc: ,hich comprises notes- coins
and current account deposit in the ban:ing system also :no,n as
M;3
;/
M; does not capture other monetary measures li:e credits-
bonds- nonDcommercial ban: deposits and securities3
;>
Fombined data for t,o successi.e fiscal years- for e*ample ;557U56 and
;556U51
;?
e*cept some e*ceptions
;8
Fommodity ,ide data are a.ailable only after ;5163
;7
No data are a.ailable prior to ;551
;6
#iscal year adAusted into calendar year
;1
he e*cess MS is calculated as:
!*cess MS W(J change in M/ gro,th D J Fhange in Real C%P at constant
Price)
;5
M/ comprises sum of currency outside ban:ing sector
including demand- time- sa.ing and foreign currency deposits
of resident sector other than go.ernment3
/0
he correlation coefficients of the 4% to e*cess MS- and M/ to % are
obser.ed D
03; and D03>5 respecti.ely3
/;
$t has been calculated as follo,s:
R!R W (JFP$
%
D JFP$
P
) D J N!R- ,here FP$
%
- FP$
P
and N!R
stand for
consumer price inde* of domestic and trading partners-
and nominal !R respecti.ely3 $n case of other countries different
,eight has been assigned to the (S- Cermany- Gapan- #rance and
the (9 depending on Nepalese e*ports to them3
//
$n the #igure- mo.ements abo.e (belo,) the *Da*is are o.er.aluation
(under.aluation)3
/>
%eficit in merchandise trade
/?
correlation coeKicient W D 0306
/8
South Asian Association for Regional Fooperation that
includes Afghanistan- 4angladesh- 4hutan- $ndia- Maldi.es-
Nepal- Pa:istan and Sri 'an:a3
/7
%uring ;550s
/6
AW a.erage labour cost per ,or:er manufacturing- 4W
.alue added per unit of labour- F W labour cost per unit of
output manufacturing according to the internationally
accepted definition of the (S %epartment of Fommerce3
/1
he data for the (SA and Gapan is of /00>3
/5
$t includes- among others- efficiencies in custom and boarder
procedures- quality of transports- logistic competence- domestic
and international transport costs- number of documents for
e*ports and imports- and days and costs of e*ports and imports3
>0
$t is- among others- a main component of this inde*3
>;
"n the basis of C%P si)e3
>/
%ata are a.ailable until /00?3
"ppendices
:ppendi"6:
($por#s of so$e %a&or 'o$$odi#ies fro$ (ndia ((n %illion )upees)
Item
27o-3ear 2otal
)%%*-%" )%%&-%% !!!-!) !!-!( !!+-!,
.etroleum .roducts ! ),('* +)("'( (&%&)') ,%")!'"
2e4tiles ()!&'( ,& "++,'" "+*)'" !
/ehicles ? Spare .arts ("%'" ,")&') &&%+', &&!*'! )!,"!'&
>edicine +,",' ,%+"'% ,**%', *,**'* "&+'&
8ther >achiner3 ? .arts +)"*', +,&%'% (%"+'( ,&*"') "+*,
>'S' Billet n'a' ),(!') ,"&)', """+'" """'
6ement **,' (),+'( +%(+'" ,,('* +(%)
6hemicals (!)"'" (&!"') %!) ++"!' ,*"*'*
#$ri' <Iuipment ? .arts "()'" )+!!'" )!%%'% ))&"'+ ))!'%
2hread )*"*'& ()', (&%' )!%'" +%&"'"
6old@=ot-rolled Sheet in coil n'a' )(('% (*"+'* %++'& +&&'
#$ricultural .roducts ,(()'" %+))'" *(,,'* &,' ))"%"
8thers +("(' ,%&%,', "(!%'" "")"+'* &&*&)'%
2otal ,)&+'( ")""%'& )))(( )+%**('" )%,&)&'*
Gro7th :ate(C) n'a' ("'* ,,') (+'+ (!'&
Source: 9epal Rashtra Bank, ';uarterl3 <conomic Bulletin, /arious Issues
65
:ppendi"6B
($por#s of so$e %a&or 'o$$odi#ies fro$ /#0er 'oun#ries ((n %illion )upees)
Items
27o-3ear 2otal
)%%*-%" )%%&-%% !!!-!) !!-!( !!+-!,
#$ricultural .roducts (*(%') (,'+) +!!+'" *,)"') ,(,&
Gold ? Silver +"%&('& )*,,!'% "((, +"!'" (!%')
.etroleum .roducts ),,+'& )*(!,'% "(*'+ ,&)', "&%'&
8ther >achiner3 and .arts *(+(' *"!"') ,,% +(%*'+ ,*!&'
2e4tiles !&)'% (,*!'* +&+*'+ +"&+') ,%,')
.ol3thene Granules )%,('& **'& +!+'( ,*(+'" ,%!('+
2ransport <Iuip' .arts ((&*', +!,, +!*,' (()!') +!*('
2hreads )(&'% +&!+') ,"%'& (+(('* +"!)'(
>edicine %()') %&!'* )%,'* )!'+ )&)!',
#ircraft Spare parts )")+') *")') ,+*') (%"'( "*'
:ead3made Garments *!%', )"(+'" +"!', )&&"'% +)%'(
6opper 7ire rod, scrappers ? Sheets )(%'& )!+' *!,'& )&+', (((&'(
6omputer .arts &%&', ))*('+ (*,*') *%+'+ +",'%
:a7 7ool and silk *(!&'% ,,%') (()&'% ("%' (,!&'
<lectrical Goods ()+% (""&'% %'& (!*!') +)"'+
2elecommunication <Iuip' .arts *(%' *)*'+ (!'( +&+'" +(!
8thers (!%%% +,"+*')% ,!**,'( ,%&!'& *&&(*'+
2otal )(!(")') )+,!'+ )))",(' ))!%*,', )"+(,'(
Gro7th :ate - -+'" -)!') -!'" )+'&
Data Source: 9epal Rashtra Bank, ';uarterl3 <conomic Bulletin', /arious Issues
:ppendi"6'
'orrela#ion 'oeffiecien#s Be#8een 2arious 2ariables4 Neig0bouring coun#ries
Ban$ladesh !'),* -!')&%+ !'"+) -"'" +'+
6hina -!')&+ -!'*!% !',&& )'! %'*
India -!'!&)" !')"&% !'!)& -)'+ ,'()
9epal -!'!",, -!'))&( -!'*)%, -%')" +')%
.akistan -!'+*(* !'+*"% -!')* -*' ,')
Sri Danka -!')"( -!',+( -!'))( -%',) +'*(
Data Source: WB, 'WDI-!!"' and author's calculation
:ppendi"67
?or;er=s )e$i##ance Gro8#0 in Nepal (in T0ousand @S dollar)
Eear #mount Eear #mount
)%%( ,,!!! )%%% &(!!!
)%%+ ,!!!! !!! )))!!!
)%%, ,"!!! !!) )+"!!!
)%%* ++!!! !! *"&!!!
)%%" +%!!! !!( ""))!!
)%%& *&!!! !!+ &*!!
Source:WB, ' WDI-!!"'
6orrelation 6oefficients >ean
2B-<conomic
Gro7th
Inflation-2B >-2B
2B <conomic Gro7th
:ppendi"6!
)es#ric#ive 3rovision in =(ndia6Nepal Foreign Trea#9 of Trade :gree$en# ,++,=
Annexure " C "
Nepalese manufactured articles allo,ed entry into
$ndia free of customs duties on a f*ed quota basis3
Sl1no1 Nepalese "rticle
5uantit- in 7T
per -ear
; &egetable fats (&anaspati)
;00- 000
("ne hundred
thousand)
/ Acrylic Marn ;0- 000
(en thousand)
>
Fopper products under Fhapters 6?
+eading 183?? of the +3S3 Fode
;0-000
(en thousand)
a3 $mports into $ndia of the abo.e four commodities
for quantities in e*cess of the fi*ed quota
mentioned abo.e ,ill be permitted under normal
M#N rates of duty- not,ithstanding any concession
in any other preferential arrangement3
b3 $mports into $ndia of the abo.e commodities ,ill be
permitted through the land Fustoms Stations ('FS)
at 9a:arbhittaUNa*albari- 4iratnagarUGogbani-
4irganAURa*aul- 4hairaha,aUNautan,a- NepalD
gunAUNepalgunA Road and MahendranagarU4anbasa3
c3 he detailed administrati.e arrangements for
operationalisation of the fi*ed quota i3e3 identifying
the agencies for allocation and moniD toring of e*ports
and imports of fi*ed quota ,ill be fnalised by both
the Co.ernments3
Source: h ttp: @@ 7 7 7 'inf o dr i v eindi a 'c om@< 4 i m@2r a de- #$ r e ement @In d i a - 9 e pal- - r e e-2ra d e- # $re e m e nt' a s p 4
(accessed on )& 8cto0er !!&)