Trade flow patterns in Nepal

Nepal’s agriculture sector is characterized by low productivity and inadequate infrastructure, along with reliance on rain-fed traditional agriculture, and a feeble supply chain that precludes a swift supply of agriculture produce even within the country. These supply side constraints have hindered production, and in turn the export of agro-products, making Nepal a net-importer of agriculture goods. Nepal is part of several regional integration frameworks such as South Asian Association for Regional Cooperation (SAARC), the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), the Bangladesh, Bhutan, India, Nepal (BBIN) Initiative, the South Asia Sub-Regional Economic Cooperation (SASEC), and the South Asian Free Trade Area (SAFTA). It has also signed bilateral treaties with 17 countries. However, inadequate compliance with international standards, poor trade infrastructure, high transaction cost, and bureaucratic hurdles have frustrated Nepal’s export potential in both agro and non-agro products. Additionally, barriers such as free movement of capital along with harmonization of standards have also limited trade with partner countries. While exports have largely remained poor, there has been steep increase in the imports. Rise in remittances, that form a major part of over half of Nepali households, as well as increasing reliance on foreign goods for meeting basic necessities caused by dismal domestic outlay are found to be the likely causes. Poor export performance has been exacerbated by supply side constraints such as inhospitable business environment, infrastructure bottleneck, and unreliable utilities such as water and electricity. The study broadly suggests three policy recommendations that would help Nepal boost exports of agro-products. First, Nepal needs to formulate policies that enabled Nepali agro firms latch on to global value chains through promoting foreign investment in agriculture sector, including offering an environment where benefits of technology transfer can be absorbed. Second, it needs to invest in both hard (integrated port, roads, metrology, among others) and soft (treaties, agreements, custom integration, among others) infrastructure. Third, it must improve the business environment by addressing bureaucratic hurdles and lowering transaction costs through liberalizing tariffs on agriculture equipment, improving access to credit and sharing information on the trade preferences to exporters. In this paper, we begin by exploring the trade flow patterns of Nepal, with a focus on agri-products. We then investigate the reasons for Nepal’s low export performance on three pillars – incentive ecosystem; backbone services and factor inputs; and proactive policy measures, based on the World Bank’s Trade Competitiveness Diagnostic Toolkit. Based on our analysis, we then propose three broad policy options that Nepal needs to implement to boost exports of agro products.