- By Gokarna Awasthi
Accession to WTO broadened Nepal’s export opportunities to 163 countries while also liberalising its domestic market. Despite a modest decline in average customs tariffs, indicating prior market openness, Nepal's exports have struggled to grow significantly post-WTO.
Nepal has completed two decades since joining the multilateral trading system. Nepal's membership in the World Trade Organization (WTO) was endorsed during the ministerial conference in Cancun, Mexico, on September 11, 2003, and was formally ratified on April 23, 2004.
As the first least developed country (LDC) to gain WTO membership through the accession process, Nepal negotiated for years to achieve this milestone. Nepal sought WTO membership to leverage the advantages of the multilateral trading system and to facilitate access for Nepali products to the global market. Another objective was to benefit from the protection offered by WTO rules in international trade politics.
In response to India's economic blockade in 1988/89, Nepal applied for membership of the General Agreement on Tariffs and Trade (GATT), the predecessor of the WTO. Article V of GATT, now an integral part of the WTO's agreements, includes provisions aimed at facilitating access to the sea for landlocked countries which motivated Nepal's initial interest in GATT. The economic blockade was eventually lifted, and GATT transformed into the World Trade Organization (WTO) in 1995.
Subsequently, Nepal pursued membership in the WTO. After approximately five years of continuous discussions and negotiations, Nepal became the first least developed country to join the WTO. Cambodia followed suit and joined the organisation just two days later.
Reflecting on the past 20 years, Cambodia's exports have increased eleven-fold during this period, whereas Nepal's exports have tripled. However, in real terms, the actual growth in exports for Nepal has been quite nominal. Cambodia's foreign direct investment was approximately $200 million in 2004 and reached $5 billion last year. In contrast, Nepal's foreign direct investment was only around $50 million last year, constituting less than 0.2% of the GDP.
Cambodia is also a Least Developed Country (LDC) like Nepal and has faced significant internal conflicts. Both countries joined the WTO during the same ministerial meeting. Therefore, instead of comparing ourselves with countries like Singapore and Switzerland, we should now focus on benchmarking against nations such as Cambodia, Bangladesh, Ethiopia and Rwanda if we are to drive meaningful reforms and progress.
China, a founding member of GATT, later diverged from it. However, recognizing the importance of the world market, China rejoined the WTO after nearly a decade. Similarly, Russia gained WTO membership after meeting stringent conditions set by the working party.
When load shedding was at its peak, Nepal was experiencing power cuts between 14 to 16 hours daily which was severely impacting industrial outputs.
The fact that countries like China and Russia joined the WTO to leverage global market benefits underscores the continued significance of the multilateral trading system. Since Least Developed Countries (LDCs) such as Cambodia, Ethiopia, Rwanda and Bangladesh are reaping benefits, there remains an opportunity for Nepal to gain access to the world market. It is imperative for us to reflect on this and realign our policies accordingly.
Nepal's WTO membership has expanded the market for Nepali products to 163 countries. Simultaneously, it has opened the Nepali market to goods from other countries. At the time of joining, Nepal maintained an average customs tariff of 12-14%, which has seen a slight decrease since then. This indicates that while Nepal's domestic market was relatively open before WTO accession, foreign markets were previously less accessible. WTO membership has changed that dynamic.
However, despite these advancements, Nepal's exports have not seen significant growth. Instead, the economy has faced multiple pressures since joining the WTO. Nepal's international trade balance has been consistently unfavourable post-membership. The trade deficit, which stood at Rs 82 billion in the year of accession, has since multiplied nearly 17 times over the years. In real terms, adjusting for exchange rates and inflation, Nepal has not experienced a significant increase in exports since joining the WTO. Instead, the country has faced numerous challenges such as armed conflicts, severe power shortages (load shedding), political instability, labour disputes and strikes, all of which have adversely affected productivity.
When load shedding was at its peak, Nepal was experiencing power cuts between 14 to 16 hours daily which was severely impacting industrial outputs. Labour issues persisted, and strikes disrupted productive activities fostering unproductive and rent-seeking behaviours. While remittances from foreign employment have contributed significantly, other sectors have struggled to generate foreign currency.
Nepal relies on limited sources of revenue, primarily from exports of goods and services, income from tourism, earnings from Nepalis working abroad, foreign investment and foreign aid. These sources collectively sustain the country's financial inflows amid challenging economic conditions. The most sustainable income source is from the export of goods and services, followed by foreign investment. However, both of these areas have witnessed a decline over the past two decades. Not only has foreign investment decreased, but domestic investment has also failed to stimulate growth in the manufacturing sector. This trend reflects a lack of competitive export products in the country.
Nepal has missed opportunities to seek assistance from multilateral agencies to support trade expansion. The WTO not only opens markets for countries like Nepal but also facilitates capacity development. One such initiative is the Aid for Trade program, aimed at assisting developing countries, including Nepal, in enhancing their trade capabilities. Now, as we are in the process of upgrading from a least developed country status, the window of opportunity is narrow but certainly exists. Negotiations are underway to secure specific benefits for graduating countries during the transitional period. Unlike the past 20 years when opportunities were missed, this period requires diligent effort to effectively address the challenges of graduation.
Nepal's path to graduation is unique, as it faces more intense and complex challenges compared to Bangladesh. The recently launched Smooth Transition Strategy offers a potential framework to mitigate these challenges. However, it assumes a minimal 4.3% impact on Nepal's exports post-graduation which is a highly speculative projection. Nepal must prioritise goods and services that have been identified as areas of comparative advantage in the National Trade Integration Strategy (NTIS), the fourth iteration developed in the last 20 years. However, the effectiveness of this strategy may be limited due to a lack of robust production infrastructure. Many of the products and services that Nepal has promoted for years are included in the NTIS, yet sustained export growth remains uncertain under current conditions.
While the government represents Nepal in the World Trade Organization, the economy is primarily driven by the private sector, which accounts for 81% of the country's GDP.
To stimulate export growth, Nepal should consider implementing a dedicated action plan for import substitution. This approach could help bolster domestic production and reduce reliance on imported goods, thereby supporting economic resilience and fostering sustainable development. Likewise, it should prioritise the private sector to enhance the production of goods and services. A study conducted by the International Finance Corporation (IFC) and the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) reveals that the private sector contributes 81% to the country's GDP. This underscores the crucial role of the private sector in fostering high and sustainable growth across various sectors.
As Nepal prepares for graduation from LDCs, it is necessary to adopt a fresh perspective. There is untapped potential in expanding service exports, particularly considering the current imbalance where tourism expenditure exceeds tourism income. Traditional tourism practices are no longer sustainable without significant infrastructure expansion and increased tourist spending. Attracting tourists who spend less than $50 per day presents a challenge.
Likewise, promoting Information and Communication Technology (ICT) is crucial for leveraging the service sector's export potential. Government support in this area can facilitate enhanced capabilities and competitiveness in ICT, paving the way for greater economic benefits from service exports.
The WTO also includes provisions for managing foreign employment through the 'movement of natural persons' under the General Agreement on Trade in Services (GATS). Full implementation of this provision could enhance the security and stability of foreign employment opportunities.
Nepal faces challenges in attracting foreign investment, attributed to administrative chaos, unstable policies, bureaucratic hurdles and easy imports from India. Recently, the government introduced amendments to eight laws through an ordinance to streamline the investment process. To further improve its investment climate, Nepal should initiate negotiations for Bilateral Investment Agreements (BITs) with prospective countries, with the Gulf Cooperation Council (GCC) being a strategic and promising initial choice.
While the government represents Nepal in the World Trade Organization, the economy is primarily driven by the private sector, which accounts for 81% of the country's GDP. Moreover, the private sector plays a pivotal role in job creation, contributing 86% of all jobs in the country. Likewise, over 96% of Nepal's exports come from the private sector. Promoting the private sector should not be viewed as a stigma, as it is the primary source of income for politicians, employees and the general public. Profit-seeking is a natural and essential aspect of business operations. Just as individuals cannot work without compensation, businesses cannot sustain their operations without generating profit.
The WTO provides access to markets in 163 countries offering Nepal a significant opportunity to expand its trade. However, to fully capitalise on this potential, Nepal must focus on producing high-quality products at competitive prices. The private sector is pivotal in this effort, as it drives the production and sale of goods and services that can benefit from WTO access. Nepal needs to ensure that it does not miss out on these opportunities repeatedly.
(Awasthi is the Director General of the Federation of Nepalese Chambers of Commerce and Industry-FNCCI)
