The year 2006 could be a watershed for Nepal in terms of its trading relations with regional and international community. This is the year that will witness the enforcement of the South Asian Free Trade Area (SAFTA) and Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC). Furthermore, the year 2006 is also expected to witness the completion of Doha Development Round of World Trade Organization (WTO) opening up untold trade potentials for countries like Nepal . However, the internal instability and conflict, poor economic growth, need for reforms in policies and laws along with inadequate preparations on the part of private sector mean that Nepal could be staring at absolutely nothing. On the top of it, the doubt surrounding the renewal of the key Transit Treaty with India has added to the uncertainty. If the country wishes to take advantage of these regional and multilateral free trading arrangements, it would be wise to set the house in order first
By SANJAYA DHAKAL
Just as the year 2006 began with new and challenging trading prospects for Nepal , the news came that the transit treaty with India was not automatically renewed as was widely hoped for by the Nepalese business community and the government.
Indian officials refused to let the Transit Treaty renew automatically for another seven years by presenting their concerns at the second review meeting on the treaty held in New Delhi last week. Instead of renewing it automatically for seven years, India has agreed to extend it for another three months and has proposed some amendments. The Indian proposals include that only specified transit points should be used in order to transport ‘sensitive products.” Likewise, Indian side has also proposed three more changes including reducing the existing 15 transit points; allowing Indian nationals to travel to Indian territory by using Nepali territory; and amending the railway procedures for the use of Inland Container Depot in Birgunj.
On the face of it, the Indian proposals seem to be guided primarily by some legitimate Indian economic concerns. But since they have come at a crucial time when political developments in Nepal are not seemingly palatable to the South Block, the apprehensions of 1989-like trade blockade could be in the offing gained currency.
Although Indian ambassador Shiv Shankar Mukherjee has publicly termed such apprehensions as ‘unfounded’ in his recent television interview, the fact that the transit treaty has come under uncertainty is likely to be a big setback for Nepali traders.
Trade Implications
From January 1, 2006 , the SAFTA has formally come into effect. BIMSTEC is expected to come into force from July this year.
As per SAFTA provisions, the seven member states – Nepal, India, Bangladesh, Pakistan, Sri Lanka, Bhutan and Maldives - will have to reduce custom tariffs. Nepal , too, will need to cut down its tariff by at least 10 percent on goods that are not in the Sensitive List by August, 2006. In the second phase of tariff slashing, Nepal would need to cut them by at least 30 percent within next two years and within 2016 it will need to bring them down between 0 to 5 percent.
Within SAFTA, there are two categories – LDCs including Nepal , Bangladesh , Bhutan and Maldives and developing countries including rest of the member states. According to officials, Nepal ’s Sensitive List for LDCs has 1300 products while that for developing member states has 1355 products.
The BIMSTEC is different to SAFTA in that it is much broader covering issues of trade in services, trade in goods as well as investment and technical cooperation. Furthermore, it also provides Nepal with possibilities to expand trade towards East Asian countries like Thailand and Myanmar . BIMSTEC member states include Thailand , Myanmar , Nepal , India , Bhutan , Bangladesh and Sri Lanka . For the first phase of the enforcement of the free trade pact, the BIMSTEC member states have reached an understanding on the framework related to ‘trade in goods.’
On top of these, the new understanding reached at Sixth Hong Kong Ministerial of WTO also could help in improving the international trade scenario for Nepal . The developed countries have agreed to allow 97 percent of products from LDCs duty free and quota free access to their markets. Nepal is excitedly expecting that the readymade garment will be included in this 97 percent. The country has suffered a drop by 41 percent in the exports of readymade apparels to the United States in 2005 after the Multi Fiber Agreement expired. Likewise, the commitment to simplify the Rules of Origin by the developed countries and their promise to extend technical cooperation could also turn out to be beneficial.
It is still unknown what the combined implications of the SAFTA, BIMSTEC and WTO will be on Nepal ’s trade status. “Each agreements are distinct. SAFTA is mainly concerned only on trade in goods. BIMSTEC is broader as it also includes trade in services and investment whereas WTO is a wide-ranging multilateral rule-based trading regime. Basically, Nepal needs to develop products and services that it can trade with others,” said Navin Dahal, executive director of South Asia Watch on Trade, Economics and Environment (SAWTEE). According to him, these agreements could, at best, provide ‘signaling effect’ on the country’s economy.
Agrees Rajendra Kumar Khetan, noted industrialist and vice president of Confederation of Nepalese Industries (CNI). “The combined effect cannot be predicted as such,” he said, adding that the impact in real sense could be seen only after 3 to 5 years. He, however, laments the lack of awareness among private and academia on ways and means of taking advantage of the newly emerging situation.
Dahal suggests development of institutional cooperation among government officials and private sector and civil society to better prepare the country for the tough future. “There are few officials that are knowledgeable about the nuts and bolts of global trading regime. And this small team could suffer from negotiation fatigue as it has to engage in various negotiations frequently. It would, therefore, be better for all if cooperation among civil society, academia, private sector and dedicated government officials is institutionalized. That will help in enriching mutual capacity as well,” Dahal added.
In the days ahead, Nepalese trade is sure to encounter challenges as well as opportunities. The need of the hour is to overcome the challenges and tap the opportunities.
“Combined Effect Cannot Be Predicted As Such”
-- RAJENDRA KUMAR KHETAN
RAJENDRA KUMAR KHETAN is a noted industrialist. A vice president of Confederation of Nepalese Industries (CNI), Khetan is also well-acquainted with international and regional trading practices. He recently took part in Sixth Hong Kong Ministerial of World Trade Organization (WTO) as a private sector representative. He spoke with SANJAYA DHAKAL on issues related to trading arrangements and their likely impact on Nepal . Excerpts:
In 2006, Nepal will be embarking on a new path of trade with the introduction of SAFTA, BIMSTEC as well as renewed WTO commitments. How do you foresee the combined implications of these trading arrangements on Nepali trade and industry?
The impact in real sense shall follow only after 3/5 years (2010 & beyond) when the economy will be really integrated with the inter and intra regional trading arrangements including SAFTA, BIMSTEC and WTO. We still have a lot of processes to complete like custom duties, infrastructure, opening of the sectors and reforms in law and policies. The combined effect cannot be predicted as such. The strategy to enter these major three trading arrangements are for different purposes. WTO's membership is aimed at integrating Nepalese economy with global economy. Membership of SAFTA is for the purpose of having one single inter and intra market within SAARC. And BIMSTEC's membership is to boost exports. However, it seems within private sector there is not much of awareness on all these. Such awareness is absent even at academia level.
How will SAFTA, in particular, be beneficial to Nepal ? How do you, as an industrial, see this regional free trade agreement?
It will be pertinent here to quote the important provisions of SAFTA. The Para 3(2) d reads –“SAFTA shall involve the free movement of goods, between countries through, inter alia, the elimination of tariffs, para tariffs and non-tariff restrictions on the movement of goods, and any other equivalent measures. The Para 3(2) f reads – The special needs of the Least Developed Contracting States shall be clearly recognized by adopting concrete preferential measures in their favor on a non-reciprocal basis. Likewise, Para 8(g) reads – transit facilities for efficient intra-SAARC trade, especially for the land-locked Contracting States. These provisions show the aims and objectives of SAFTA. Now it is up to the governments and leaders to demonstrate political will to implement them,
What about the impact of BIMSTEC agreement? Does it hold any promise to Nepali traders and entrepreneurs?
Not much. But obviously, Nepal has expanded its market with BIMSTEC's membership both in trade and service sector. So we need to build products and competitiveness (to take advantage).
You took part in Hong Kong ministerial of WTO recently. What are your observations? Has it been beneficial to Nepal ?
Basically, the issues in favor of LDCs were well represented. For example, the understanding reached to provide duty free and quota free market access for 32 LDCs and technical assistance under integrated framework for capacity building of needy economies and the issue of cutting off subsidy in agriculture by EU by 2013 are all welcome steps.
At a time when we are talking about free trade and its benefits, there is an uncertainty over transit treaty with India . How do you see this?
I think transit treaty with India will be renewed. Only the matter of Nepal becoming transit point between India and China will take some time (to materialize) since all three capitals have to be involved and there has to be political will, as well, among all.
Don't you think Nepal needs to push the issue of 'guaranteed transit' for land-locked countries in the framework of WTO or other regional trading arrangements?
The minimum requirement of one transit point for a land locked country is not a problem under many existing international understandings and conventions.
What are your thoughts on the recent reports that the government may be planning to reduce custom tariffs substantially? Is it in line with our WTO commitments or does it have the potential to damage domestic industries?
It is obviously in line with WTO, SAFTA and BIMSTEC commitments. However, it will have impact on domestic industries. Hence, we have three tools that should be properly utilized for national benefit. First one is anti dumping law and policy. Second one is to have the tariff bound cushion. And the third is to open up all sectors where there is no threat to domestic industries. After building capacity of domestic manufacturers, the sectors could be opened for free competition by next 10 years.
ECONOMIC ORDINANCE
Risky Game
Finance Minister plans to reinvigorate tax collections by bringing down the custom tariffs. Will it work or will it backfire?
By SANJAYA DHAKAL
The risks and rewards in the planned move by the Minister of State for Finance Dr. Roop Jyoti to substantially bring down custom tariffs reportedly in over 125 import products have been analyzed by many economists, traders and experts.
While cutting down tariffs is a necessary precondition that Nepal will have to fulfill sooner or later thanks to its membership in regional and multilateral trading arrangements like SAFTA, BIMSTEC & WTO, the sudden move by the Finance Minister has triggered diverse reactions. As per these understandings, Nepal will need to eventually bring down custom tariffs between 0 to 5 percent eventually.
The representatives of trade sector have welcomed the move whereas those from industrial and manufacturing sector have called for caution. The conservative officialdom is also not quite enthusiastic about the move as they fear it could drastically reduce revenue collection at a time when the country is facing a gloomy scenario in meeting its revenue targets this year.
On Monday (January 9), at the meeting of the Council of Ministers held at Royal Palace , the government decided to approve the economic ordinance proposed by Dr. Jyoti. The ordinance, which would renew the existing budget ordinance, has proposed some changes by cutting down custom tariffs on imported goods.
News reports claim that the renewed ordinance proposes to cut down custom tariffs on over 125 products, particularly those imported from third countries – eating up revenues worth Rs 1.7 billion. After this change, the average custom tariff could come down to 8 percent from the existing 9.6 percent. Tariffs on products like electronic goods, two-wheelers and television would be decreased.
For a country like Nepal , which depends heavily on custom revenues, such move could, indeed, be risky. “And the trade agreements Nepal has signed did not require Nepal to immediately cut down the tariffs. They give us some cushion time to deal with our internal issues first,” said an economist.
In fact, under WTO, Nepal does not need to lower custom tariffs much. In agriculture Nepal has bound for 42% percent tariff on average compared to the existing 14%. Likewise, in non-agriculture products it has bound for 24% tariff on average compared to the existing 11%. On 148 IT products, Nepal has committed to bring down tariff rate to 0 within five years. It bound the tariff rate of 480 products on existing applied rate; for 58 products, it bound their rate lower than the existing one. So, there will be revenue implications (of around Rs 192 million as per studies) for Nepal on these 58 products plus 148 IT products.
Likewise, as per its obligations, Nepal will also need to do away with Other Duties and Charges at the Custom point. At present, it is imposing Special Tax, Local Development Tax and Agriculture Improvement Tax at the custom point, which will have to be gotten rid of within 10 years. Ridding ODCs will result in losses worth Rs 430 million.
The fact that the government presently earns 30 percent of total revenue from customs means our revenue is custom-based. Therefore, any decision aimed at reducing custom is likely to generate various misgivings.
Dr. Jyoti, whose family is involved in the importing/trading, last week defended his plans saying he had no other option to increase the revenue base. “I have no alternative other than to reduce custom tariff,” he said, adding that the move could benefit VAT enforcement and overall tax collection, when speaking at an interaction with business community during the program organized to submit the recommendations of Revenue Advisory Committee.
Even as trading associations like Nepal Chamber of Commerce have welcomed the plan, the Federation of Nepalese Chamber of Commerce and Industry (FNCCI) and Confederation of Nepalese Industries (CNI) have expressed their apprehensions that the move could negatively hurt domestic industries.
However, Dr. Jyoti, has tried to allay fears that domestic industries could be hurt by the move. “I want to assure (the domestic industries) that the government will not take any step detrimental to their interests and concerns,” he said.
How the confidence of Dr. Jyoti plays out in the real world remains to be seen even as business community and the government officials are keeping their fingers crossed.
