Last week, Samriddhi Foundation launched the Economic Freedom Country Audit Report. The country audit delved into six areas of economic freedom based on the forty-two components and sub-components of Economic Freedom of the World Report, 2015 produced by the Canadian think-tank, Fraser Institute.
As per the latest economic freedom of the world update, Nepal ranks 117th in the category “Freedom to Trade Internationally” with a score of 6.4 out of 10. Here are some of the problems areas within Nepal’s international trade sector as identified by the country audit.
1) High Tariffs
Nepal imposes duties on both imports and exports. Take imported vehicles for example; Nepalese customs levies up to 241 per cent tax and duties, which means, a TATA Nano which costs 170,000 INR (272,000 NPR at prevailing exchange rate) in India will cost you 1.18 million NPR in Nepal after imposing duties and taxes.
The government might have numerous arguments for imposing high duties but when the cost of doing business through official channels is high, it is likely that unofficial ways will be used. Taxing international trade implies discouraging it. This is a counter-intuitive move, especially for a poor country like Nepal, where international trade can prove to be the engine of growth.
2) Excessive Regulatory Trade Barriers
Import and export has never been easy in Nepal. The traders have to submit 11 different documents while trading internationally. Certificate of origin, permission for financial transactions, foreign exchange provision, are some of the many documents that need to be submitted. If we compare the number of documents to required for international trade in other land locked countries such as Luxembourg (4), Switzerland (4) Czech Republic (6), we can see that the number of required documents is much more in Nepal.
In addition to this, lack of clarity of roles and responsibilities among ministries, departments and implementing agencies are few of the institutional barriers that discourage international trade.
Nepal, being a land-locked country, does not have access to sea transport. Nor does it have railway systems or efficient airports. All of this already makes international trade a challenging business for Nepal. Road transport thus remains the only viable option. It is unfortunate that we have such weak economic diplomacy and regulatory regime along with incoordination between various government agencies that the only possible mode of international trade for us takes 40 days to complete an import or export process (Doing business Report 2015, World Bank).
3) Movement of Capital and People
Nepal imposes control on flow of money outside and inside the country, creating a restrictive environment for foreign investors. Foreign investors, for example need approval for direct investments, technology transfers and/or providing credit. Also, foreigners cannot own land in Nepal and have to go through stressful immigration process to acquire a business visa. Additionally, there is a minimum investment requirement of USD $50,000 which discourages FDI in Nepal. Companies, which don’t require more than $10,000 as capital, such as some software companies, will be discouraged from entering Nepalese market because of such cut-offs. Similarly, there is practically no outflow of capital as Nepal Rastra Bank imposes restrictions on Nepalese to invest abroad.
The policies for foreign employment in Nepal are also discouraging. Nepal’s Foreign Investment Policy (2014) sets a condition that as long as a Nepalese citizen can do a particular job; he/she has to be preferred to an expatriate. Foreign workers may only be hired if individuals with such skills are not available in Nepal. Such approval is to be secured from the Ministry of Labor (MoL). After hiring a foreign worker, the investor also needs to guarantee that such expertise is transferred to a Nepalese citizen so that a domestic worker may replace the foreign worker within five years. The same policy of preferring Nepalese to expatriate was originally stipulated in the Labor Act, 1992, the governing labor Act as of now. Such terms and conditions not only dissuade foreigners from undertaking employment in Nepal, but also discourage foreign investment.
The Way Forward
The phrase “making a prosperous Nepal” has never been as frequently used as since the promulgation of the new constitution. You can find the word ‘prosperity’ all over the constitution. But how exactly is Nepal planning to achieve it? Perhaps working towards a higher degree of economic freedom is the right way to go. Given that countries with high levels of economic freedom are also the ones with some of the highest economic growth, per capita income and life expectancy, it is perhaps through economic freedom that Nepal will also be able to attain this “prosperity.”
International trade can be encouraged by rationalizing the tariff regime, removing the revenue dependence on tariff and by moving away from para-tariffs. Another solution is simplifying regulatory regimes by removing requirements to contact multiple government agencies for permits and authorizations to trade, which would help resolve coordination failures amongst government agencies. Furthermore, as for the movement of capital, it can remove capital controls and facilitate foreign investment both inward and outward such that it can become a credible player in the international market.
For more details on the 2015 Economic Freedom Country Audit Report Nepal, please click here