TRADE INVESTMENT AND VALUE CHAIN

Presentation By

Prof. Dr. Ram Chandra Dhakal

Executive Director, CEDA, TU, Nepal

BIMSTEC-BRICKS Engagement: The way Forward

27September 2016

At

India International Centre (IIC), New Delhi, India

Agendas in BIMSTEC meeting

• People to people contact

• Trade, Investment and Regional Value Chain

• Regional Connectivity

Nepalese Economy

• More than 60 % trade Nepal to India and around 4% to China.

• Around 1/3 of GDP obtain from agriculture sector where 2/3 population are engaged.

• Around 15 % of GDP comes from Industrial sector, and

• Around ½ of GDP comes from service sector.

• Size of Informal Sector is 96% including agriculture.

• Around 1800 KM open border toward India (East, South and West).

Nepalese Economy

• Around 1/3 share of GDP covered from foreign remittance where around 4.3 Million youth labour force immigrated to foreign countries excluding India, and

• More than 5 Million labour force to India but lacking in accountability about their number as well as amount of remittance.

Liberalization policy

• Nepal introduced economic liberalization only in the early 1990s when the Government reduced its intervention in the economy and encouraged exports.

• Trade liberalization, foreign exchange and banking deregulation, and privatization have been the major planks of this liberalization.

• Nepal also reduced the average import tariff rates to the lowest in South Asia and these policies have started to show some positive impacts with the ratio of exports to gross domestic product (GDP) rising from 6.1% in 1990 to 14% in 2001.

Geological Framework

• Hilly region (15 %), Mountainous region (68%) and Terai (17%).

• The hilly and mountainous terrain of Nepal has made the construction of infrastructure difficult and expensive.

• There are also the problems relating to the lack of essential materials and the inability to mobilize people.

Natural Resources

• Water is the country’s most important natural resource with about 6,000 rivers and rivulets totaling 45,000 KMs in length.

• Total average run-off is estimated at about 170 billion cubic meters with an estimated hydroelectric power potential of 83,000 MW.

• This is one of the largest potential capacities in the world, of which about 50% could be economically harnessed.

Foreign Direct Investment (FDI)

• FDI is seen as bringing the necessary capital, technology, skills, and bestpractices into Nepal, as well as a means to access the international market.

• Therefore, FDI contributes to economic development, leading toward self-reliance and self-dependence, through the expansion of industries and therevenue base.

• The Government reemphasized the importance of FDI and technology transfer in the development process in the early 1990s and introduced the Foreign Investment and One-Window Policy as well as the Foreign

• Investment and Technology Transfer Act (FITTA) of 1992, and established the Investment Promotion Board.

• In addition, a Foreign Investment Promotion Committee was set up to simplify procedures for attracting foreign investment.

Use of FDI

• The improvement of FDI inflows into services indicates its potential, an increased market, and the continuing need for capital.

• Other priority sectors for FDI include medicinal herbs, vegetable and flowering seed production, honey production, hydropower, petroleum exploration, and natural gas exploration.

• These were identified as priority sectors for using domestic resources and aiding in the promotion of sustainable development.

• The approval of these sectors as priority areas for FDI was relatively easy and was accompanied by the provision of certain income tax rebates.

• Automatic approval of priority sectors and more incentives seem to be necessary for attracting FDI to such sectors.

Social Status

• Nepal is a pluralistic society with diverse ethnic, caste, linguistic, and religious communities. There are 126 caste and ethnic groups, around 100 spoken languages.

• The social structure, which is largely fixed or constrained by birth, influences occupational distribution and limits moves between occupations. This has resulted in labor market imbalances that are filled by Indian laborers.

Country’s Status

• Nepal’s inability to improve competitiveness arises from various factors related to geography, policy, and institutions: the country suffers from low productivity and a poor business climate due to government instability, inefficient government bureaucracy, corruption, and inadequate supply of infrastructure.

• Other critical constraints include delays in customs and transshipment, high costs of transport and power, a rigid and formal labor market, lack of labor–employer cooperation, terrorism, and poor work ethic of the labor force.

Remittance

• Remittances play an important role in filling the savings–investment gap as reflected in the rapidly rising ratios of remittances to savings.

• This increasing ratio also means that dependency on foreign earnings can be lessened through strategic plans and programs that can mainstream remittances and funnel them into productive use.

• A conducive environment where returnees can invest their income and use their skills in productive endeavors is just as important as developing effective migration and remittance policies.

Economic situation of Nepal

• Global production Growth rate in 2015 is 3.1 %.

• Developing countries Growth rate in 2015 is 4.0 %.

• Developed countries Growth rate in 2015 is 1.9 %.

• Indian economic Growth rate in 2015 is 7.3 %.

• China economic Growth rate in 2015 is 6.9 %.

• Nepal economic Growth rate in 2015 is 0.77 %. While in last decade the average growth rate is 4.1 %.

• GDP share of Agriculture 31.6 % where around 2/3 population are engaged.

Major Challenges of Economy• 1. Obtaining higher economic growth rate through proper

mobilization of domestic and foreign investments by puttingreconstruction and new building works on top priority to avoidfurther negative impacts on the economy caused by destruction ofphysical infrastructure remains a challenging task.

• 2. Making arrangements of technology and equipment required forincreasing agriculture production and productivity, skilled humanresource, improved seeds and fertilizers, agricultureextension, marketing of production, and maintaining quality andmodernizing and commercializing agriculture sector throughadequate arrangements of means and resources for irrigation havebeen challenging tasks.

Major Challenges of Economy• 3. The task of expediting the processes for productive

industries, infrastructure building and industrializationthrough active involvement of the private sector byattracting domestic and foreign investments has been achallenge.

• 4. Constructing electricity projects in active participation ofthe private and government sectors to end increasing energycrisis in the county and addressing the problems seen inrelation to power procurement agreement, landacquisition, local obstruction, labor relation, andinfrastructure among others are other challenges.

Major Challenges of Economy• 5. Tasks for creating employment through proper utilization

of geological and cultural diversities in the tourismsector, enhancing physical and institutional structures for thesustainable development of foreign currency earnings andattracting tourists from neighboring countries have remaineda challenge.

• 6. Enhancing capacity for productive and capital expenditurethrough prioritization of expenditures, maintaining financialdiscipline and transparency, and making public expendituremanagement result oriented through effective monitoringand evaluation processes have been challenging tasks.

Major Challenges of Economy• 7. Making institutional structure, capacity enhancement, and

policy and legal arrangements for effective management ofpublic debts, limiting domestic borrowings within desired limit ofGDP, investing such borrowings in capital building sectors therebyproviding support to the national production through their usesin future are challenging tasks.

• 8. Increasing domestic employment through the arrangement ofskill oriented trainings as per the requirement of domesticmarkets, sending skilled workers for foreign employment andusing the remittance earned from such foreign employment inproductive sectors by converting it into the capital, and creatingemployment opportunities to workers within the country whohave earned skills abroad are also other challenges.

Major Challenges of Economy• 9. Curbing informal economic activities like illegal

imports and exports; illegal transactions of foreigncurrencies; illegal money transfers, and illegal financialtransactions, and bring them into the formal economyis a daunting challenge.

• 10. Maintaining financial stability, increasing access tofinance, and attaining higher economic growththrough the development and expansion of financialsector have remained a challenge.

Some opportunities and challenges between BIMSTEC member countries on Trade, Investment and Value chain

• Regional economic integration with effective production sharing to boost up value chain in EU (40%), UK (70%), USA (15 to 45 %) but in between BIMSTEC member countries it is very low.

• Some factors for low regional value chain in these region are: level of development, industrial structure, location, policy factors, FDI operation, intellectual property protection, logistic performance, quality of infrastructure, etc.

• Challenges on trade facilities investment.

• BIMSTEC not a key player in global economy.

Cont…

• Emphasis for service trade between BIMSTEC countries be major driving force for enhancing the regional trade investment.

• Lacking in comparative advantages in BIMSTEC countries due to different nature of bilateral trade agreement.

• We should develop the common issues of bilateral agreement in between the member countries to promote the comparative advantages to promote regional value chain.

• Railway road, highway link-road between BIMSTEC countries, easy visa.

• Easy linkage toward ocean for trade for land-link (landlocked) countries.

Thank You