chapter  7
17 Pages

Nepal: Yuba Raj Khatiwada

ByYUBA RAJ KHATIWADA

As a landlocked country, Nepal has initiated economic liberalisation, openness and outward orientation since the mid-1980s through the elimination of import licences and quotas, tariff reduction and rationalisation, the introduction of full convertibility of the rupee for current account transactions, and moving towards capital account convertibility. Nepal has also entered into a liberal global trading regime through membership of the WTO, SAFTA and BIMSTEC. This has significantly opened up the Nepalese economy and deepened integration with the global economy, but it has also raised vulnerability and risks to sustained growth, livelihood and poverty reduction. This chapter provides an overview and empirical analysis of the linkages

between trade liberalisation and poverty reduction in Nepal with the use of simple statistical tools and analysis of quantitative information.1 Section 2 of the chapter gives an overview of the current trade policy framework of the country and key developments/changes in the trade policy over the past few decades. Section 3 analyses the trends in economic growth, poverty and inequality over the past few decades. Section 4 analyses the link between trade liberalisation and poverty based on the indirect two-stage relationship between trade and growth and growth and poverty, or direct impacts on the welfare of the poor. Section 5 summarises the key findings of the study and draws policy implications for poverty reduction through trade policy reforms.

The history of Nepal’s trade regimes has three distinctive episodes. There was a free trade regime in 1923-56 in Nepal and it moved towards a protectionist trade regime from 1956, similar to other South Asian countries. The period of 1956-85 was a protectionist trade regime, and it started its liberalisation process in 1985. It implemented a series of trade and market-oriented reforms in the 1990s, partly related to the process of Nepal’s World Trade Organisation (WTO) membership. It has removed most of the QRs and licensing requirements during the trade liberalisation process over the last fifteen years or so. Nepal’s current simple average of tariff is around 12.6 per cent and the importweighted tariff average is around 14.4 per cent. Because of Nepal’s landlocked

nature and its special relationship with India, Nepal’s reform process was constrained and it has adopted a gradual liberalisation process. Nepal became a member of the WTO in 2004, as the first Least Developed Country (LDC) to join the WTO since its inception on 1 January 1995. This has opened up trade opportunities for Nepal as a member of the multilateral trading system. Nepal’s meaningful international trade began in the 1960s, but it accelerated

with the trade liberalisation process only from the 1980s, when exports and imports grew on average by 19 per cent and 18 per cent respectively. In the 1990s, the external sector remained robust in general – exports grew on average by 28 per cent per annum whereas imports also grew by 20 per cent. After 2000, imports witnessed compression mainly because of low economic growth, depreciation of the rupee, and decline in demand for third-country goods for re-export purposes. In addition to the unilateral trade liberalisation process, Nepal has also

become a member of a number of bilateral and multilateral trading agreements. It shares a very open, porous, and long (1800 km) border with India, and has almost free flow of goods and services across the border. This is facilitated by free and unlimited convertibility of the Nepalese rupee against Indian currency. The trade treaty with India allows duty-free market access to primary goods and selected manufacturing goods to the Indian market. Imports from India are also subject to low tariff. Border trade with Tibet (China) is also liberal – people of both Nepal and Tibet living within 30 kilometres of the border can do free barter trade as per the Trade Treaty of 1968. Nepal is a founder member of the South Asian Association for Regional

Cooperation (SAARC). Under this, South Asia Free Trade Area (SAFTA) was launched from January 2006. Nepal, as an LDC, will get three years’ grace period for its implementation. Nepal has joined another regional group – BIMSTEC (Bay of Bengal

Initiative for Multi-sectoral Technical and Economic Cooperation). The BIMSTEC FTA was established with the objective of strengthening and enhancing economic, trade and investment cooperation, and progressively liberalising and promoting trade in goods and services, among others. With the signing of the framework agreement, Nepal has agreed to enter into negotiations for eliminating the tariffs and non-tariff barriers in substantially all goods with a provision of maintaining a negative list and dual tracks (‘fast’ and ‘normal’) for liberalisation. Nepal faces problems in its trade with India and the rest of the world, such

as: (1) very stringent rules of origin (RoO); value-added requirements; and trade through specified trading corporations imposed by India after the 2002 Trade Treaty; (2) quarantine procedures for all agro products which are timeconsuming, expensive and very bureaucratic (in particular, leaf tea, ginger, cardamom, broom-grass, green vegetables, etc., exported to India face such problems); (3) export barriers in terms of entry points, trade routes and mode of transport; (4) standards often far higher than those required by the standardsetting institutions, like the Codex Alimentarious Commission and the

European Union (EU); and (5) the difficulty of fulfilling such criteria given its existing technical, human and financial capabilities and resources. Nepal is currently facing many such problems and not benefiting from the Special and Differential Treatment provisioned in the global trade rules under the WTO. At present, Nepal has a relatively open economy with almost free trade

with India and a very liberal trade regime with the rest of the world. There are no quantitative restrictions or licensing requirements for trade and no foreign exchange restrictions on current account payment, as the country has entered Article VIII of the IMF Charter. Tariff rates have been substantially reduced over the last decade or so; and although the unweighted average import tariff rate is about 15 per cent, the applied tariff for most goods is around 10 per cent.2