Oily trade

A perennial problem for Nepal is its trade deficit, which has steadily inched up year after year. Now comes a welcome break. In the first four months of this fiscal, the deficit shrunk by nearly 9 percent (to Rs 414 billion) compared with the corresponding period last year (from Rs 452 billion). Nepal exported more (up 24 percent) and imported less (down 7 percent) in the same period. After years of struggle with hefty deficits, this seems unadulterated good news. But it is not. The new trade numbers are as slippery as the palm oil that has helped Nepal increase its export volume.

Oil from palm tree, which is not found in Nepal, accounted for nearly a quarter of the exports in the review period. Nepali traders import crude palm oil from Indonesia and Malaysia, two of its biggest producers, and sell the refined version in India. After India levied an additional 40 percent duty on the import of palm oil from the big producers, palm oil refined in Nepal costs less in India than the refined oil imported from these producers. Nepal’s refined palm oil export, and the export growth it sustains, will collapse the moment India revises its trade policy.

The lower deficit also owes to less import, which again is not all good news. Nepal may be importing less building materials like cement and steel as economic activities in the country have slowed down. Also, lower imports will hit the government hard as it relies on import duties for up to 40 percent of its revenues. That said, Nepal has also made some improvements in its business climate, for instance, in electricity generation, which has reduced diesel import; political stability has helped push GDP growth to a decent 7 percent.

The problem is that the country is once again relying on a single product (refined palm oil), and a product it does not produce itself, to maintain a healthy trade balance. The drivers of sustainable economic growth are still out of whack. Big infrastructure projects are stuck, and the national pride projects have been delayed. And it will take more than steady power supply and political stability to revive Nepal’s struggling industries. For one, successfully negotiating the removal of the non-tariff barriers to Nepali products in India and China would translate into billions more in export earnings for Nepal.