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International Trade Centre U N C T A D / W T O
International Trade Centre
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A
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International Trade Centre U N C T A D / W T O Asia Trust Fund

Asia Trust Fund

Export Potential Assessment in Nepal

September 2007

Export Potential Assessment in Nepal

Implemented by the International Trade Centre (ITC) Market Analysis Section

In collaboration with the Trade and Export Promotion Centre (TEPC) of Nepal

September 2007

Project NEP/A1/01A: Advisory services on export development of priority sectors of Nepal

A project financed by the EU and ITC under the Asia Trust Fund

Table of contents

Preface

vi

Executive summary

1

Introduction

17

1. Comparative analysis of the industries

20

Current export performance (Index 1)

22

World markets (Index 2)

24

Mapping industries according to Nepal’s export performance and world markets

26

Domestic supply conditions (Index 3)

27

Combining the three indices into an overall index of “Export potential”

29

Current socio-economic impact (Index 4)

30

Mapping industries according to export potential and socio-economic impact

31

2. In-depth analysis by industry

32

1. Silk and pashmina products

32

2. Cardamom

41

3. Pulses

50

4. Gems and jewellery

56

5. Leather

64

6. Tea

70

7. Ginger

77

8. Medicinal plants and essential oils

87

9. Hand-made paper

96

10. Wooden handicrafts

102

11. Cut flowers

107

12. Coffee

115

13. Honey

126

14. Mandarin orange

135

Bibliography

144

Annex

149

iii

List of tables

Table 1. Assessment of export potential and current employment impact by sector

3

Table 2. Sector positioning according to current exports and export potential

3

Table 3. Mapping industries according to export potential and socio-economic impact

3

Table 4. Export potential and priority actions by industry

11

Table 5. Overview of examined industries

19

Table 6. Assessment of export potential and current employment impact by sector

22

Table 7. Underlying indicators for the composite index “Current export performance”

23

Table 8. Underlying indicators for the composite index “world markets”

25

Table 9. Comparing Nepal’s export performance and world markets

26

Table 10. Underlying indicators for the composite index “domestic supply”

28

Table 11. Combining export potential with current socio-economic impact

29

Table 12. Sector positioning according to current exports and export potential

29

Table 13. Underlying indicators for the composite index “socio-economic impact”

31

Table 14. Comparing export potential and socio-economic impact (employment)

31

Table 15. Mulberry production area, Cocoon and Silk production in Nepal

37

Table 16. Pashmina and Silk Products: Most attractive markets by product

39

Table 17. Cardamom: Most attractive markets

44

Table 18. Area, Production and Yield of Large Cardamom in Nepal

45

Table 19. Service Providers to Large Cardamom Development in Nepal

47

Table 20. Export of Pulses to India & Overseas (Value in ‘000 Rs.)

51

Table 21. Area, production and yield of pulses crops in Nepal

52

Table 22. Trend of Pulses Production in Nepal

52

Table 23. Pulses: Most attractive markets

54

Table 24. Important gemstones in Nepal

60

Table 25. Market Access Conditions in the Target Markets

61

Table 26. Gems and Jewellery: Most attractive markets

62

Table 27. Export of hides and skins to India & Overseas (‘000 Rs)

66

Table 28. Livestock Population of Nepal (F.Y.)

66

Table 29. Leather: Most attractive markets

68

Table 30. Nepal’s Exports and Imports

71

Table 31. Tea Export to India, Pakistan and other countries

71

Table 32. Area and Production for tea in Nepal

72

Table 33. Tea: Most attractive markets

75

Table 34. Gross value per hectare from competing land uses in the hills

75

Table 35. Nepal’s export of ginger (Values in Rs.)

79

Table 36. Area, production, yield and prices of ginger in Nepal

80

Table 37. Ginger: Most attractive markets

84

Table 38. Cost of Production of Ginger and Some Other Crops in Syangja, 2004/05

85

Table 39. Exports of essential oils and medicinal herbs to overseas

89

Table 40. Top priority species according to NTFP Network Coordination Committee

89

Table 41. Top 5 species in trade in terms of royalty collected

90

Table 42. Government policies & initiatives for promotion of NTFP sector

91

Table 43. Medical Plants and Essential Oils: Most attractive markets

94

Table 44. Handmade paper: Most attractive markets

100

Table 45. Prices, expenses and profit margins of market actors

101

Table 46. Nepal - Exports of Wooden Articles and Crafts in Rs.000

103

Table 47. Wooden handicrafts: Most attractive markets

105

Table 48. Major issues effecting flower entrepreneurs

110

Table 49. Market Access Conditions in the Target Markets

112

Table 50. Cut flowers: Most attractive markets

113

Table 51. Export of Coffee to India and Oversea Markets, NEPAL

117

Table 52. Growers, area, production, and yield of coffee in Nepal

118

Table 53. Export of Containerized Cargo (per Twenty Equivalent Unit): NEPAL

120

iv

Table 54. Forecasts of Coffee Area and Production in 2015 and 2020

121

Table 55. Coffee: Most attractive markets

123

Table 56. Projected Employment in Coffee Industry, Nepal

123

Table 57. List of coffee processors and exporters in Nepal

124

Table 58. Criteria Adopted by NTCB for Grading Dry Cherries, Nepal

124

Table 59. Nepal’s export of honey (Values in Rs.)

128

Table 60. Nepal’s honey production

129

Table 61. Mandatory standards for honey

130

Table 62. Honey: Most attractive markets

133

Table 63. Nepal’s export of oranges

137

Table 64. Production of Citrus Fruits and Orange in Nepal

138

Table 65. Fruit Processing Industry in Nepal

138

Table 66. Mandarin Orange: Most attractive markets

141

Table 67. Market attractiveness index for products: Indicators and thresholds

153

List of figures

Figure 1. Priority for export potential: Underlying dimensions

21

Figure 2. Nepal’s exports of Large Cardamom to India and Overseas Markets

43

Figure 3. Nepal - Exports of Silver Jewellery Value in Rs. million

58

List of boxes

Box 1. Considerations to keep in mind when interpreting composite indices

22

Box 2. Supporting Industries

28

Box 3. Background Information – Pashmina

35

Box 4. The features of Large Cardamom : Household and Industrial Uses

44

Box 5. Role of the Government in cardamom

48

Box 6. New Development – Promising Puja PK-416 Variety of Soya Bean

53

Box 7. History of gems and jewellery in Nepal

58

Box 8. Ginger varieties in Nepal

80

Box 9. Community Forest User Group (CFUG)

90

Box 10. ANSAB (Asia Network for Sustainable Agriculture and Bioresources)

95

Box 11. Background information on Lokta Paper

97

Box 12. History of woodcraft in Nepal

104

Box 13. Coffee Product Forms

119

Box 14. Role of Government and Donor Involvement in the orange sector

139

v

Preface

This export potential assessment for Nepal is part of the Technical Cooperation Project “Advisory services on export development of priority sectors of Nepal” (NEP/A1/01A). The project is implemented by the International Trade Centre (ITC) and the Trade and Export Promotion Centre (TEPC), and co-funded by the European Union and ITC through the Asia Trust Fund (ATF).

The project is intended to identify products that show good export potential, taking demand and supply side issues into account, and to formulate practical recommendations for the development of Nepal’s most promising exportable products, with a view to develop and diversify Nepal’s export potential.

The research was undertaken from September to December 2006. Preliminary results were discussed during a Round Table Meeting on March 22, 2007. Feedback received during this meeting has been incorporated in this final version.

Inherent to a comparative analysis is that some products/product groups score high, whereas other score relatively low on the respective indicators. It should be understood that whenever the term “low” or “lower” is used in the report, this should be read as “relatively low/lower in comparison with the other products studied”. All product groups, however, are considered to have potential and, in its own right, deserve concerted action for further development."

This report was prepared as a result of teamwork between Dr. Michael Freudenberg (Senior Market Analyst), Dr. Thierry Paulmier (Market Analyst), Mr. Bastiaan Bijl (International Consultant) and Ms. Takako Ikezuki (International Consultant) at the Market Analysis Section of ITC and three National Consultants, who prepared sector specific fact sheets and conducted interviews with enterprises in Nepal:

Mr. Murari P. Gautam (for research on Cut flowers, Silk and Pashmina products, Wooden Handicrafts and Gems and Jewellery);

Mr. Ramesh Munankami (for research on Ginger, Cardamom, Honey, Mandarin Oranges and Coffee); and

Mr. Bindu D. Adhikary (for research on Tea, Medicinal Plants and Essential Oils, Pulses, Handmade paper and Leather).

The authors would like to thank Mr. Kerfala Conte (International Consultant) for the data calculations, and Mr. Koen Oosterom, Office for Asia-Pacific, Latin America & the Caribbean (OAPLAC), ITC, for his support. Lastly, the authors would like to thank all interviewees who kindly answered the ITC questionnaire.

While efforts have been made to verify the information contained in this document, the International Trade Centre cannot accept responsibility for any errors that it may contain. The views expressed in this report can in no way be taken to reflect the official opinion of the European union, the Trade and Export Promotion Centre and ITC. The usual disclaimers regarding responsibilities apply to this report.

T. Paulmier

For

(email: paulmier@intracen.org) or M. Freudenberg (email: freudenberg@intracen.org).

further

details

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present

study,

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vi

Executive summary

This study examines the potential for future export growth of fourteen product sectors in Nepal. It compares and ranks those sectors according to three major dimensions: (1) Nepal’s current export performance, (2) the world markets (notably the international demand and the market access conditions) and its prospects, (3) the domestic supply conditions of the sectors and its competitiveness prospects. Statistical analysis and a survey of companies are complemented by a literature survey. These allow us to gain first-hand insights into the domestic business and policy environment that affects enterprises in Nepal. The report contains an in-depth analysis of individual industries, including an assessment of strengths, weaknesses, opportunities and threats (SWOT analysis), and identifies possible target markets for diversification for each industry. It also estimates the current employment impact and other, more qualitative dimensions of the socio-economic impact of each sector. Finally, it also identifies key areas of intervention and related policies that can promote future export growth.

Among the 14 sectors examined, the export potential appears highest for cardamom, tea, pulses, silk and pashmina products, and cut flowers, followed by gems and jewellery, hand made paper, leather, ginger, coffee and medicinal plants and essential oils. Far behind, honey, wooden handicraft, and mandarin oranges appear to have the lowest export potential.

Background and purpose

Nepal is a small, landlocked, least developed economy located in South Asia. Owing to these circumstances, it has a number of distinct problems contributing to its rather difficult socio-economic situation. Crucially, Nepal’s export earnings are heavily dependent on garments and carpets. In addition, given the small domestic market, enterprises in Nepal tend to produce small volumes and are thus disadvantaged when competing in sectors based on economies of scale.

Given these features, it is a major priority for Nepal to broaden its industrial basis and diversify its export base. This is particularly important to combat the structural deficit in its trade balance.

The objective of this study is to identify sectors that have significant potential for future export growth. It has a clear strategic focus and aims to guide the government, as well as the private sector, towards identifying the most promising export sectors that could be targeted by the Nepalese government for export promotion.

Method

The Trade and Export Promotion Centre (TEPC) of Nepal, ITC’s market analysis team and local consultants selected fourteen product groups for an in-depth examination of their export potential and socio-economic impact. Combined, these sectors represent 11% of Nepal’s exports. To determine the priority for export promotion policy, each sector is assessed in terms of its export potential as well as its socio-economic impact. Three main dimensions determine the export potential:

The current export performance of Nepal (Index 1) is estimated by quantitative indicators such as the world market share, and the relative trade balance.

World markets (Index 2) are estimated by indicators such as growth of world imports and Nepal’s access to international markets. Additionally, the evaluation of the international environment is taken into account by a qualitative indicator – the world market prospect. It is evaluated by the team of consultants based on their analysis of the favourable or unfavourable evolution of the world markets for Nepal in the short and medium term.

1

The domestic supply conditions (Index 3) is evaluated by a survey of companies questioned about various supply issues such as the quality of products and the efficiency of supporting industries. In addition to a survey of companies, the supply conditions are also taken into account by the competitiveness prospect, which is evaluated qualitatively by the team of consultants based on their analysis of the possible evolution of the domestic supply conditions in the short and medium term.

In addition, the current employment impact (Index 4) was evaluated by the full-time employment equivalent (FTEE) indicator. FTEE indicator is based on the number of people directly employed in each sector. Since some sectors require seasonal employments (e.g. 2-3 moths per year), we have calculated the number of people as a full-time employment equivalent in order to compare employment impact on each sector. The number of employees for each sector is derived from the team of consultants or representatives from sectors’ associations.

In total, the study uses 15 indicators and provides rankings for each dimension as well as an overall ranking of export potential that can be used to draw the attention of policy- makers. The research was undertaken from September to December 2006. Preliminary results were discussed during a Round Table Meeting on March 22, 2007. Feedback received during this meeting has been incorporated in this final version.

Inherent to a comparative analysis is that some products/product groups score high, whereas other score relatively low on the respective indicators. It should be understood that whenever the term “low” or “lower” is used in the report, this should be read as relatively low/lower in comparison with the other products studied”. All product groups, however, are considered to have potential and, in its own right, deserve concerted action for further development." The resulting industry rankings are designed to give an indication of the relative suitability of each sector. They should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision.

Main results

Nepal’s export potential –which is estimated by combining Nepal’s current export performance (Index 1), world markets (Index 2) and domestic supply conditions (Index 3) – appears highest for cardamom, tea, pulses, silk and pashmina products, and cut flowers (Table 1).

The socio-economic impact based on current employment (Index 4) appears highest for tea and medical plants and essential oils.

Silk and pashmina, cardamom, and pulses are the only sectors that are high both in terms of currents exports and export potential (Table 2). On the other extreme, wooden handicrafts, honey, and mandarin oranges are low in terms of exports and potential.

Tea is the only product that scores highly both for export potential and socio-economic impact (Table 3). At the opposite, honey, mandarin oranges, and wooden handicrafts have low export potential and low socio-economic impact. Cardamom, Pulses, Silk and pashmina products, and Cut flowers score highly in terms of export potential, but have a weak impact in terms of employment. Finally, no products score high in terms of socio- economic impact and low in terms of export potential.

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Table 1. Assessment of export potential and current employment impact by sector

   

Export Potential

Socio-economic impact

Sector

Exports

Index

Assessment

Employment

Index 4

Assessment

(value)

(Index

1-3)

(FTEE)

1. Silk and pashmina products

22,131

3.2

High

5,000

1.1

Low

2. Cardamom

11,694

3.7

High

5,556

1.2

Low

3. Pulses

11,477

3.3

High

12,500

1.9

Low

4. Gems and jewellery

7,393

3.1

Medium

10,000

1.7

Low

5. Leather

5,697

2.9

Medium

6,300

1.3

Low

6. Tea

5,169

3.3

High

105,000

5.0

High

7. Ginger

2,518

2.9

Medium

11,111

1.8

Low

8. Medicinal plants & essential oils

1,979

2.7

Medium

40,000

5.0

High

9. Hand made paper

944

3.0

Medium

22,333

3.0

Medium

10. Wooden handicrafts

350

2.5

Low

4,000

1.0

Low

11. Cut flowers

211

3.2

High

2,500

1.0

Low

12. Coffee

169

2.9

Medium

7,778

1.4

Low

13. Honey

49

2.6

Low

13,333

2.0

Low

14. Mandarin oranges

0

2.3

Low

16,667

2.4

Low

Indices range between 1 (lowest ranking) and 5(highest ranking). By convention, they are considered high (3.2 points or more), medium (between 3.1 and 2.7 points), or low (2.6 points or less). Source: TradeMap, Market Access Map, and interviews with enterprises, calculations by ITC.

Table 2. Sector positioning according to current exports and export potential

 

Low

Medium

 

High

 

export potential

export potential

export potential

Important export sectors (More than USD 10 million)

 

1.

Silk and pashmina

 

---

---

2.

Cardamom

 

3.

Pulses

   

4.

Gems and jewellery

 
 

5.

Leather

Medium

export sectors

 

---

7.

Ginger

6.

Tea

 

8.

Medicinal plants & essential oils

 

Small export sectors (Less than USD 1 million)

10.

Wooden handicrafts

 

14.

Honey

Mandarin oranges

13.

9.

Hand-made paper

12.

Coffee

11.

Cut flowers

Source: Table 1.

Table 3. Mapping industries according to export potential and socio-economic impact

 

Low

Medium

 

High

 

export potential

export potential

export potential

High

 

8. Medicinal plants and

 

socio-economic

 

---

 

6.

Tea

impact

 

essential oils

 

Medium

 

socio-economic

 

---

9. Hand-made paper

 

---

impact

 
   

4.

Gems and jewellery

1.

Silk and pashmina

Low

 

13.

Honey

5.

Leather

products

socio-economic

10.

Wooden handicrafts

7.

Ginger

2.

Cardamom

impact

14.

Mandarin oranges

12.

Coffee

3.

Pulses

 

11.

Cut flowers

Source: Table 1.

The following presents the main findings by industry. Table 4 provides comments and industry-specific priority actions.

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1.

Silk and pashmina products: High export potential, low current socio-

economic impact

The silk and pashmina sector is considered high export potential. Pashmina shawl exports boomed in the late nineties reaching a staggering figure of NR 5.6 billion in 2000/01. In the following year, however, a sharp, spiralling decline reduced exports to a third of the level. Since then exports have remained stable. There are a number of explanations for the sudden decline. The main cause is thought to have been strong competition from neighbouring and other countries, which were using very low quality pashmina, non-pashmina or fake materials to manufacture and export items similar to Nepalese pashmina. In a bid to compete with foreign countries Nepalese entrepreneurs were forced to use inferior quality materials imported from China, Mongolia or India. This greatly damaged the reputation of Nepalese pashmina shawls. It is likely that by focusing on improving quality and by introducing measures to ensure consistency, such as registering pashmina as a recognized trademark, Nepal will be able to rejuvenate the pashmina export sector. Once it has re-established itself as a high quality producer there is tremendous potential to rapidly increase production, as current capacity is heavily underutilized. In addition, productivity is likely to increase greatly, as traditional processes of production are being modernized. Market prospects therefore are more favourable as previously envisaged, especially if efforts to upgrade quality are successful. However, the extent of sericulture in Nepal is still small, and as a result less than 2 percent of the silk, which is used for blending into pashmina products (mostly 70/30 ratio), is sourced locally. There are big plans afoot for large increases in cocoon production mainly by increasing the area devoted to sericulture cultivation. This appears promising.

The current socio-economic impact in terms of employment is low. The sector currently requires a much smaller number of labours --around 5,000 people at a conservative estimate. Currently, the contribution of pashmina and silk shawls to the total export earnings of Nepal remains relatively high, particularly compared to other sectors analysed in this study. The sector is labour intensive and lacks mechanisation. The collection of wool and sericulture are an important source of income for rural areas. In contrast, the manufacturing side of the sector offers little rural development. By improving rural incomes, growth in the sector is likely to contribute toward empowering women. The chances of a sustainable livelihood for the rural people – farmers and landless labourer – is likely to be improved greatly by encouraging the successful practice of sericulture and Chyangra farming. Finally, the pashmina industry can broadly be considered environmentally friendly, with the exception of the use of chemical dying materials in the final stages of production. The planting of sericulture, however, can help to control soil erosion and desertification.

2. Cardamom: High export potential, low current socio-economic impact

Cardamom is considered high export potential. The recent export trend of Nepalese Large cardamom to India and other markets has been very encouraging. Nepal is one of the major producers of large cardamom and has a share of 50% in world exports. The main consuming countries of large cardamom are located in South Asia, with only very few countries consuming this product in other world regions. 90% of the Nepalese production is exported, and mostly to India (which is then often re-exported to Pakistan or UAE). Nepal’s other major direct export destinations are Pakistan, UAE, Singapore and, recently, Afghanistan. Tariffs for Nepalese cardamom are low in the major importing countries, and Nepal (together with Sri Lanka) enjoys a very preferential tariff rate on exports to the Indian market compared to other exporters. Cardamom is considered as a high-value crop and is mostly produced in Eastern Nepal. While no formal grading takes place, informed opinion considers the quality of Nepalese cardamom to be better than the one from India or Pakistan. The major processing, which takes place in Nepal, is the drying. Efforts are currently underway to spread the use of a superior drying method. However, further value-added (grading, cleaning, etc.) is usually done in India. There is great potential for increasing production, both by increasing the area and by improving production techniques. At the same time, encouraging a number of derivative products

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such as essential oils could expand demand for the cardamom plant. Finally, there are a number of diseases, which could potentially affect the harvest of cardamom. It is worth being aware of this risk.

The current socio-economic impact in terms of employment is low. Around 5,500 people are estimated to be involved in the growing and treatment of large cardamom based on the full-time employment equivalent (FTEE), with many families partly depending on growing or processing cardamom. The farming of cardamom does not have any known negative ecological consequences. However, drying requires large amounts of firewood, which could lead to increased deforestation.

3. Pulses: High export potential, low current socio-economic impact

Pulses are considered high export potential. Nepalese Pulses consist mainly of lentils, which represent 90% of total exports. They are mostly exported to India and Nepal’s exports seem to be driven mainly by Indian demand. The diverse climatic and environmental conditions of the country allow cultivation of at least one dozen species of Nepalese pulses lentils, which are of good quality and are said to be preferred in India. The area, production and yield of lentils have been increasing over the last years. The majority of farmers in the mountains and hills grow pulses primarily for consumption while in the lower plains (Terai region) pulses are mainly grown for the domestic market and exports. Pulses are, however, susceptible to pests and diseases. There is, therefore, risk inherent in increasing production. The expansion of pulses production is further limited by its low return compared to other crops. Competitiveness prospects are average. The outlook for the continuation of production increases is favourable, provided the yield and area continue to increase. World markets prospects are very promising. Compared to other sectors, South Asian countries are mainly the most attractive markets. In the long- run, the soya bean markets may be of interest to Nepal.

The current socio-economic impact in terms of employment is low. Estimate of the total number of farmers directly involved in pulse cultivation are 12,500 people as a full-time employment equivalent (FTEE). Pulses are an important basic subsistence food in Nepal. Aggregated, pulses rank fourth in terms of acreage and fifth in terms of production after rice, maize, wheat and millet. Pulses also help farmers to supplement their low-protein diets. At the same time, they constitute a useful cash-crop allowing farmers to earn extra money by selling their excess crops. Despite their importance, pulses are considered traditional crops, of secondary importance. As a consequence, little attention has been paid by farmers to adopting new methods to improve cultivation. The number of people involved in the sector is not likely to be very high as it takes much less labour to work on a hectare of pulses than it would to work on a hectare of tea, for example.

4. Gems and jewellery: Medium export potential, low current socio-

economic impact

Gems and jewellery are considered medium export potential. Over the past 15 years, export has been growing at an annual average rate of 13 per cent. However, a decreasing trend has been noticed recently. Major markets for Nepalese silver jewellery are the US, Canada, Italy, Japan, the U.K., and Germany. Since the ancient times, Nepalese craftsmen of the Shakya and Sunwar families have produced exquisite pieces of gold and silver jewellery. The production and trading activities are mainly located in and near the Kathmandu valley. There are a total of 50,000 craftsmen in the country, and 40 per cent of them are concentrated in Kathmandu where there are over 10,000 craftsmen working on silver jewellery alone. The craftsmen are still using traditional artistic designs, skills and techniques. There are about a dozen gems processing units that supply gems to local manufacturers. Domestic supply of raw materials is not enough for export purposes. There is an absence of export-friendly and transparent legislation and simplified procedures to facilitate mining, processing, manufacturing, exporting, importing, re-exporting of precious metals, gems, stones, and jewellery. Global market conditions for silver jewellery look favourable. Nepal benefits

5

from favourable market access conditions especially to EU, USA, Japan and India. The world market prospects are very favourable. The most attractive markets for Nepalese Gems and Jewellery are some EU countries, the US, Hong Kong, and India. The most important selling point for Nepalese jewellery is the traditional, handmade production process. Nepalese jewellery often incorporates religious or traditional motifs and are considered to posses significant value. Currently, Nepalese jewellery is becoming increasingly popular outside of Nepal and appears to be competing well with similar produce from neighbouring countries.

The current socio-economic impact in terms of employment is low. It is estimated that there are currently around 10,000 households, which are directly dependent on the silver jewellery and gems business in Nepal. While the sector currently contributes only marginally to Nepal’s exports any further development in the mining and processing of gemstones will have a direct impact on Nepalese development by generating additional employment in rural populations, as well as encouraging the acquisition of skills for many individuals working in the jewellery sector.

5. Leather: Medium export potential, low current socio-economic impact

Leather is considered medium export potential. The current export performance is just average compared to other sectors. Most of the production is exported: 70 per cent in the form of wet-blue leather, 20 per cent in the form of crust leather and only 10% as finished leather. The major destinations for hides and skin are Asian countries (India, Hong Kong, China and Thailand) and Italy. Nepal has a sizeable livestock population to support the leather industry. However, there are significant problems with the infrastructure supporting the livestock. Currently, there are only two slaughterhouses in the country. Nepal’s tanneries also appear to be outdated. Adding to this, there are complaints from some tannery owners, over shortages of raw materials such as goat and buffalo skins. The suggestion is that they are consumed in the country. In addition, the insurgency has further worsened the hide collection process. Good quality finished hides for shoes and finished goat leather for leather garments are being imported. As a result, more than 70% of the finished goods made in Nepal are made from leather bought from India. Finally, there are no quality standards set in the country for this sector. Competitiveness prospects are below average. The great potential of Nepal’s leather sector remains largely unrealised and the country’s leather industry has not kept pace with the substantial growth of leather and leather goods in other developing regions. In order to be competitive, the supply value chain needs to be better organized. This may be worth pursuing as, although the total world demand for wet-blue hides has shown a decline, numerous markets like India, China, Romania and South Africa are showing strong demand. The global market for hides in crust and finished is performing very strongly. The international market access conditions are favourable around the world. World market prospects are therefore above average. Some EU countries, East Asian countries, Pakistan, India, and South Africa are the most attractive markets for Nepalese leather products.

The current socio-economic impact in terms of employment is low. The sector requires around 6,300 people who have engaged in tannery activities or intermediaries such as hides and skin collectors. In its current sub-optimal performing state, the sector already contributes to 1.3% of national export earnings. The leather industry in Nepal is important for its job creation impact. Successful development of the leather industry will contribute to poverty reduction in rural areas as well. There is legitimate concern, however, over the negative environmental impact of the leather industry, especially its contribution to water degradation.

6. Tea: High export potential, high current socio-economic impact

Tea is considered high export potential. The current export performance is strong compared to other sectors. Nepal produces both CTC (lowland), which is primarily for domestic consumption, and highland orthodox tea, which is mainly exported. The tea

6

sector experienced significant growth, following its liberalization over a decade ago. From an average of 80Mt exports grew to over 4000Mt last year. The tea industry has been expanding in recent years along with an expansion of its plantation areas from 3,500 hectares in 1996 to 15,000 hectares in 2004. There is large potential to expand the cultivated area. With the positive conditions in this sector, the government has set very ambitious production targets. However, the tea sector is unlikely to meet the targets, mainly due to problems relating to the insurgency, the fragmentation of production, and the lack of auctioning facility or quarantine laboratory. The world market, at the same time, is showing its first sign of price recovery since its slump caused by massive overproduction. Overall, Nepal has favourable market access conditions to the most attractive markets including Japan, US, EU and Russia. Its production of tea is, however, rather specialized in niche markets such as highland orthodox tea and high quality and organic.

The current socio-economic impact in terms of employment is high. The job creation impact of this sector is very high compared to other sectors. This sector seems to be a strong engine for farmer’s income generation and poverty reduction as orthodox Tea gives higher returns compared to other crops. This sector is also likely to have a high impact on total employment compared to other sectors - especially female employment- as estimates suggest that it already accounts for around 105,000 people.

7. Ginger: Medium export potential, low current socio-economic impact

Ginger is considered medium export potential. The export performance is satisfactory. The value of ginger export is increasing over the years and doubled from 1994 – 2003. Almost all export is to India. Nepal is a significant producer of Ginger and ranks within the top 15 world exporters. The total cultivated land area for ginger has been increasing over the years. More than 75% of the production is traded as fresh and almost 25% in dried form. From the fresh consumption market perspective, the quality of Nepali ginger is considered inferior to Indian and Jamaican ginger and elite varieties of other countries because of Nepal’s high fiber content and dirty look. Production is still concentrated in small, family owned business. The concept of ‘company’ has not yet penetrated into ginger trading. Forward or backward linkages in the supply chain are non-existent. Nevertheless, competitiveness prospects are satisfactory. There is still a large tract of land that could be brought under ginger cultivation. Improving production techniques could also significantly increase production. There is very high potential for diversifying Nepal ginger trade into processed products. World market index is below average. Ginger world market is dynamic but prospects are not so encouraging. The most attractive markets for Nepal are Pakistan, Netherlands, Malaysia, US, and Singapore. However, China’s exports are gaining market share at an impressive rate reaching three quarters of total world exports in 2005. The US is not likely to provide a realistic export market either owing to the high cost of transporting a bulky commodity like ginger. It may be possible to export higher value products, such as organic ginger, profitably. Chinese exporters have so far dominated other promising Asian markets, such as Bangladesh and Malaysia.

The current socio impact in terms of employment is low. The sector currently requires around 66,600 people for 2 months per year, which is estimated around 11,000 people as a full- time employment equivalent (FTEE). Ginger is Nepal’s most important spice export commodity. Ginger farming is one of the main sources of cash income for the farmers of mid-hills. Most of the farmers producing ginger are small farmers for whom it is the main source of cash income. Most workers involved in the supply chain are poor, manual workers. The net income of farmers involved in ginger cultivation is significantly higher than that of competing crops. Environmentally, ginger cultivation contributes towards reducing soil erosion in the mid-hills.

7

8.

Medicinal plants and essential oils: Medium export potential, high

current socio-economic impact

Medicinal plants and essential oils are considered medium export potential. Medicinal and aromatic herbs in mountainous areas of Nepal are increasingly finding an important place in the local and international markets. These districts have more than 700 medicinal plants found in large quantity. Various plant-based essential oils are also produced and exported from Nepal. Every year in Nepal's Himalayan highlands, villagers gather some 20,000 tons of Medicinal and Aromatic Plants (MAP) from the wild pack and dry them and sell them to traders for export. The bulk of the MAPs end up in India. The large scale cultivation of MAPs is non-existent and processing is limited to distilling of essential oils. Wastage and unnecessary losses occur due to improper drying and storage. In order to minimize these losses collectors may benefit from additional training in post harvest techniques. Much more can also be done in terms of semi-processing such as sorting and grading of qualities, powdering, boiling, cooking, making aqueous solutions etc. in order to derive more from the value chain. The global consumer has developed a strong preference for natural healthier foods, natural healthcare products and natural cosmetics. The global market for herbal products covering medicinal, cosmetic and nutraceutical purposes is estimated to be worth around USD 65billion. While there is no shortage of market for Nepal's MAPs, however, astringent non-tariff barriers limit Nepal’s export capacity.

The current socio-economic impact in terms of employment is high. There are 40,000 people involved in aromatic plant harvesting, trade and processing who derive their income solely from essential oils. By providing proper support and interventions for

favourable policy, the sector can create a number of new job opportunities (i.e. aromatic plant harvesting, collection of medical plants). As a consequence, it is capable of having

a very positive impact on poverty reduction and rural development. The proper

development of this sector has great potential as a good source of income to local communities in Nepal.

9. Hand made paper: Medium export potential, medium current socio-

economic impact

Hand made paper is considered medium export potential. The bulk of Nepalese paper and paper products are exported to the US, EU countries and Japan. Nepali

entrepreneurs believe that Nepal has quite a good market share of the high-end market in the US and EU where Nepal which it is targeting with its unique and high quality products. Built on traditional skills, Nepali handmade paper- making has been thriving primarily due

to an abundant supply of Lokta resources. Nepalese handmade paper is famous for its

unique quality, strength, durability, and resistance to insects. A diverse range of paper

products are produced for export. Indeed, the bulk of production is exported, either

directly or via tourists. Production is small scale and scattered throughout the country. As

a result, its competitiveness is below average. There is, however, a growing market

demand for Nepalese handmade paper. The Argeli plant, a close family of Lokta plant, which grows in lower altitudes than Lokta, offers a promising alternative. World market prospects appear to be above average. From a broader perspective, which includes the diverse range of handmade paper products currently available, the international market for Nepalese Handmade paper is even larger. There is great potential to increase production by diversifying into the market for stationary and art items like envelopes, cards, artist paper, book bindings and household items like lampshades etc. The most attractive markets are EU countries, Jordan and India.

The current socio-economic impact in terms of employment is medium. The full-time employment equivalent (FTEE) estimates more than 22,000 people in the sector. This sector has a high potential for job creation, and profit margins for all market actors from Lokta producers to Exporters are high.

8

10.

Wooden handicrafts: Low export potential, low current socio-

economic impact

Wood craft is considered low export potential. The contribution of wooden handicraft products to Nepalese total export earnings is small, but has shown a tendency to increase in recent years, especially with the development of strong world demand for wooden handicrafts (over USD 1.5 billion in 2005). Nepal has abundant forestry resources, indicating no threat to the supply of raw materials. In addition, Nepalese industry has a capability to design unique and traditional artistic works. Yet, the sector faces a number of constraints including a lack of quality, insufficient finance for investment in seasoning plant, inadequate training to maintain the quality of products and export expansion. Tariff barriers commonly at low rates, do not constrain the ability to export Nepalese wooden handicrafts overseas. More worryingly, the international supply of wooden handicrafts is highly dominated by countries such as China and Indonesia, which have the technology to produce low cost, innovatively designed products.

The current socio-economic impact in terms of employment is low. The full-time employment equivalent (FTEE) estimates approximately 4,000 people directly involved in this sector. While the sector is not a major source of employment, its main contribution, in terms of development, is to develop skilled labours, contributing to more value-added products.

11. Cut flowers: High export potential, low current socio-economic impact

Cut flowers are considered high export potential. Nepal’s export performance is overall satisfactory. The value of export has grown over the last six years, making Nepal a net- exporter of flower products. Currently, the Netherlands, USA, India, Japan and Denmark are the main markets. Border trades through illegal channels between Nepal and India are very common, and it is very difficult to estimate the true value of border trade transactions. Nepal is noted for its exceptionally rich bio-diversity, as it possesses a wide variety of topographical and climatic conditions within a small area. Floriculture business has been flourishing in Nepal since the early nineties driven by entrepreneurial enthusiasm and investment caused by the growth in consumption in the domestic market. Today, there are 550 small and medium-sized nurseries and flower growers, with a combined turnover, in 2006, of Rs.230 million. Despite a positive prospect for the future expansion of the flower sector, the present volume of flower production is limited by low productive efficiency. The sector has the potential to expand further provided that it obtains support in terms of resources, R&D, man power and financial support; strong market information marketing infrastructure support (e.g. cold chains) and a favourable policy regulatory environment that addresses issues such as high cost of input imports. Global market conditions seem very competitive as a number of large producers, such as Kenya, China etc, have already successfully established themselves in the international market. The most attractive markets are concentrated in the EU where Nepalese products are required to meet SPS measures.

The current socio-economic impact in terms of employment is low. According to the FAN, the 550 small and medium farm units involved in floriculture production and their associated networks employ about 2,500 people. With necessary supply-side conditions, it is possible to create employment opportunities with a direct impact on poverty reduction and improvement in women empowerment.

12. Coffee: Medium export potential, low current socio-economic impact

Coffee is considered medium export potential. The recent export trend of Nepalese coffee has been very encouraging. Japan and EU are the major export markets for Nepalese coffee, while the USA is also emerging as an important buyer. All the coffee planted in Nepal is Arabica as the climate and soil in the mid and high hills of Nepal are very suitable for the Arabica bean. The total areas under coffee cultivation, total production as well as total yield have been increasing over the last decade. Yields in Nepal are, however, still relatively low compared to their major competitors. There are approximately

9

15,000 farmers involved in coffee production. They do not appear to be facing any major production problems. While coffee production in Nepal has only emerged recently, it is mostly cultivated under conventional methods. The system of coffee processing is mostly wet process. The major problem currently facing Nepali coffee production is the great variation in the quality of dried coffee beans. The problem comes from the fact that the beans are collected from many small farmers and, in the absence of a quality standard for coffee (other than dry cherries), this has led to great variation. There are eight major processing enterprises handling almost all coffee produced in Nepal. There are a number of reoccurring processing errors in both the wet and dry processing systems. By removing many of these errors it would be possible to significantly improve the quality of the coffee. Traders also reported significant quality loss in transit due to accumulated heat in the containers. A shortage of temperature-controlled containers appears to be the major source of this problem. Competitiveness prospects are very favourable. There are still large tracts of land, which could be brought under coffee cultivation. Improving the yield rate could increase production. Very significant increases in production can be achieved through improved processing efficiency. In addition, Nepal possesses great potential for product diversification in terms of ‘Speciality Coffee’ (De-caffeinated coffee, Organic coffee, One estate coffee, One variety coffee, Highland coffee). World market prospects are very favourable. The niche in organic and specialty highland coffee offers real opportunities. For a small producer like Nepal, the fact that these niche products only occupy seven percent of the total world market is not a constraint. An indicator of future potential in this area is the great popularity of Nepalese organic coffee in Japan. The most attractive markets for Nepalese coffee are a number of EU countries and the US. It may also be possible to develop India as a market for Nepalese coffee.

The current socio-economic impact in terms of employment is relatively low. The current socio-economic impact of this sector is relatively low. More than 7,700 people directly involved in this sector are estimated as a full-time employment equivalent (FTEE). While coffee is, as yet, not a very important export commodity for Nepal, in terms of total income, its importance as an agricultural export item has been increasing. Apart from the farmers, there are a large number of ancillary workers dependent on this sector. Coffee farming also contributes towards rural development in several aspects. It has direct impact on the economy of the rural people. In addition, coffee plants contribute towards reducing soil erosion in the mid-hills.

13. Honey: Low export potential, low current socio-economic impact

Honey is considered low export potential. While export statistics for Honey are unreliable, it is estimated that Nepal exports more than half of its domestic production of honey. India is by far the most important export destination. Exports to India have, however, recently been threatened by increasing competition from rival suppliers such as China and Australia. Total domestic production is estimated at being around 600-1000 Mt (around 0.5% of world production). The production is scattered and usually small-scale, and production methods are traditional, but have recently shown some modernization. Exports are, however, controlled by a small group of traders, who have some considerable market power over producers. Quality standards are an important issue. Currently, Nepal faces problems exporting to the EU and Norway, and exports to Korea, currently the major export market next to India, are becoming increasingly difficult. Nepal enjoys preferential access in some markets (e.g. India, EU), but faces high tariffs in Japan and Korea. There is scope for improving production methods. This would allow production to increase, as well as improving quality levels. There may considerable potential to diversify export markets, however, this is likely to hinge on overcoming quality issues such as sanitary requirements.

The socio-economic impact in terms of employment is low. Only around 13,000 people full time equivalent (FTE) might rely on this sector for their livelihood. Honey plays however an important role in reducing rural poverty by providing an income to the different people involved in the production chain.

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14. Mandarin oranges: Low export potential, low current socio-economic impact

Mandarin oranges are considered low export potential. Traditionally mandarin oranges have been exported to India, mainly through informal channels. More recently Nepal has started exporting oranges to Bangladesh. Mandarin Oranges (Citrus reticulata) are the main fruit among the citrus crops and are an important commercial fruit crop in the mid- hill region of Nepal. The productive area and total production is increasing over the years. The yields remain very low. The mid-hill region is the production area of oranges in Nepal. The vast majority of the crop is traded in fresh form. There is only one major processing unit producing, orange juice and selling mainly in the domestic markets. Competitiveness prospects for mandarin oranges are below average. Yet, there is ample scope for enhancing the quantity as well as the quality of the fruit. No orange quality standards exist in Nepal. Significant losses occur due to disease, insects and bulk transportation. The oranges pass through a rather simple marketing channel involving two main stops – collection centres and assembly points. Each of the players in the supply chain is a small, family owned and operated, business. The concept of ‘company’ is not established in orange trading. World market prospects are below average. The most attractive markets for Nepal are EU countries and Russia. Informed opinion considers Nepal to be highly underrepresented in these markets. Traders are of the opinion that the Nepal oranges have great potential for exports to India and Bangladesh.

The current socio-economic impact in terms of employment is low owing to a relatively small current employment impact. Around 17,000 farm families are dependent on this sector. Orange cultivation is one of the main sources of cash income for the farmers of mid-hills and is grown in almost all mid-hill districts. But so far, oranges have not been a very important export commodity for Nepal. Orange cultivation serves a beneficial environmental purpose by helping to check soil erosion.

Table 4. Export potential and priority actions by industry

Industries

Export

Comments

Specific Priority actions

Potential

(Index)

2.

Cardamom

High

Geo-climatic advantages to produce cardamom. Higher storability than other crops. High price for farmers. Top producer of large cardamom. High competitiveness prospect: New product opportunities such as essential oil extraction and dying substances; production area expansion; production increases with improved methods. Worth being aware of a number of diseases widespread.

Develop national standards for quality and grading. Upgrade drying technology. Increase value addition through reduced dependence on Siliguri market, which value adding activities are done. Eradicate crop diseases. Explore avenues of product diversification – catering spice industry, essential oil, cardamom paper, incense, and colour extraction. Increase awareness about large cardamom in traditional small cardamom markets.

 

(3.7)

6.

Tea

High

 

(3.3)

Exponential production growth over the Setup R&D facilities for further quality improvement. last decade.

Major strides in incorporating small farmers and providing employment to over 100,000 people. Large potential of cultivation area expansion. Niche markets: highland orthodox tea and organic.

Setup a tea auction facility in Nepal to improve transparency in marketing, quality and prices. Improve road infrastructure from garden to factory. Provide further incentives for further investment and growth.

11

Industries

Export

Comments

Specific Priority actions

Potential

(Index)

3.

Pulses

High

Nepalese pulses mainly lentils. Exports driven by Indian demand (major export market) especially when domestic supply shortage. Smaller in size but considered tastier than Indian lentils. Current increase in production, area and yield. Global demand for pulses very strong. South Asian markets are top buyers. New product opportunities: new variety of soybean.

 
 

(3.3)

Improve infrastructure. Address low price received by farmers. Provide marketing support.

1.

Silk and

High

Country’s capacity currently heavily underutilized. Traditional processes of production gradually being modernized. Big plans for large increases in cocoon production mainly by increasing the sericulture area. Unhealthy competition from neighbouring and other countries spoiled Nepal's image.

Introduce measures to re-establish Nepalese brand by promoting quality exports and registering pashmina as Nepal’s trademark or geographical indicator. Launch integrated long-term silk development programme on a large scale to promote mulberry farming, pre-cocoons and post-cocoons development activities as well as the setting up of yarn reeling and twisting units. Increase productivity of sericulture and silk products. Provide design development, product adaptation, export management, and technical services. Implement simplified procedures for refund of taxes and VAT. Duty-free or VAT free imports of inputs should be permitted in bonded warehouses.

pashmina

(3.2)

products

11. Cut flowers

High

Young export sector. Great climatic advantage. Interested buyers from US, Japan and India. High cost of input imports.

Improve policy and regulatory environment. Improve supply of technical manpower for hi-tech farming. Provide R&D and technical support. Provide financial support for expensive investments in high- tech. Provide market information. Provide marketing infrastructure such as cold chain facilities.

(3.2)

4.

Gems and

Medium

Well known for unique and artistic

Set up a testing and certifying institution for gems, stones,

jewellery

(3.1)

designs and internationally recognized quality.

and precious metals. Develop R & D facilities for development of new and refined

Despite a growing world demand in this methods of production.

sector, domestic supply of raw materials is not enough for export purpose.

Support to patent the original design developed by small exporters. Reduce dependency on imported inputs by opening up the mining sector. Introduce a package of export-friendly and transparent legislation and simplified procedures. Ensure the easy, duty free, supply of tools and modern equipment. Develop new incentives designed to provide technical and financial support for private investment. Encourage the private sector to arrange training and other processing facilities in rural areas. Organize special exhibitions and support the participation in international trade fairs and exhibitions. Promote export to India by simplifying export procedures and making special provisions under the bilateral trade treaty.

9.

Hand made

Medium

Large variety of unique and high quality Introduce environmental practices to save Lokta resources

paper

(3.0)

traditional handmade papers. Major markets: EU countries. Dynamic world import market. Favourable market access conditions. High job creation impact.

and conduct research for replacements. Introduce standards for the sector. Upgrade technology of Lokta paper making.

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Industries

Export

Comments

Specific Priority actions

Potential

(Index)

5.

Leather

Medium

Abundant livestock population. Outdated tanneries. Lack of advanced technology. Low productivity relative to other neighbours. Favourable market access conditions around the world: 0% tariff for wet-blue skins, crust and finished leathers.

Improve the quality of hides and skins. Support in technology development, productivity and workmanship, High level training for leather processing. Create incentives to attract foreign investment (e.g. duty- exemption on imported raw materials). Help in securing working capital or low-cost capital (e.g. support for soft loans or funds to import machines) Solve the problem regarding irregularity in power supply. Implement effective environmental controls. Programs for market promotion, share marketing information, expertise and control. Setting up Common Facility Centre.

 

(2.9)

7.

Ginger

Medium

Exports mostly to India and Pakistan via India. Special aroma especially for making chutney but not preferred by Japan the world’s biggest market. Massive dominance of China on world markets. Opportunities do exist in the form of production of ginger oleoresin and dried ginger. Low demand prospects. Medium competitiveness prospects:

production expansion with improved technology of production and introduction of new varieties.

Diversify into oleoresin processing. Introduce higher yielding and better quality varieties.

 

(2.9)

 

12.

Coffee

Medium

Not a significant exporter to overseas, but carving itself a niche in the speciality market for highland and organic coffee. Great scope for production expansion through production area expansion, improved yield improved post-harvest handling, improved processing efficiency.

Increase production and quality through increasing production area, improvement of processing systems, introduction of national grading and quality standards etc. Increase proportion of highland and organic.

 

(2.9)

8.

Medicinal

Medium

More than 700 medicinal plants found in large quantity. Cultivation of MAPs at any large scale non-existent. Processing limited to distilling of essential oils. Non-tariff barriers obstacle for getting to foreign markets.

Establish reliable laboratory support facilities. Obtain HACCP (Hazard Analysis and Critical Control Point) certification. Develop cultivation of MAPs. Train collectors in post harvest techniques (drying & storage) to minimize wastage and unnecessary losses. Develop semi-finished and finished products. Extend further marketing support.

plants and

(2.7)

essential oils

13.

Honey

Low

Abundance natural flora and fauna Very limited exports. Current dependence on India’s market. Unfavourable market access conditions due to SPS measures. Absence of proper laboratory facility.

Establish an international standard laboratory for accreditation of product. Establish an effective quality supervision, control and certification system. Enquire organic certification. Diversify into specialized honey with specialty forage based honey e.g. mustard seed. Improve packaging.

 

(2.6)

10.

Wooden

Low

Strong world demand for wooden handicrafts. No threat to supply of raw materials due to abundance in wood resources. Lack of proper wood seasoning system for quality maintenance.

Finance and set up seasoning plant to avoid cracking. Improvement of wood supply chain. Upgrade resources and knowledge for further market penetration. Invest in training, research and development to improve existing export capability of craftsmen. Establish a united approach of entrepreneurs involved in wood craft works to protect common interest and to enhance the woodcrafts activities.

handicrafts

(2.5)

13

Industries

Export

Comments

Specific Priority actions

Potential

(Index)

14. Mandarin

Low

Exports to India through informal channels. Domestic competition from Haryana and Punjab starting to threaten Nepal's exports. Area under orange orchard increasing. Current production growth. Poor post-harvesting methods. Competitiveness prospect: expected production growth; simple grading at the farm level to improve the product quality.

Provide farmer training on techniques of grading packaging and post-harvest handling. Implement national quality and grading standards. Negotiate better access to the Bangladeshi market.

oranges

(2.3)

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Crosscutting issues

While this project seeks to identify sectors with significant export potential, it should be viewed with a broader scheme to assist Nepalese production to realise its potential. During the course of our interviews, with decision makers from a variety of different sectors, a number of reoccurring themes emerged.

As a land locked country Nepal is disadvantaged by very high transportation costs by air. At the same time, transportation by road or sea are both unreliable and complicated. Bulkier products are often sent by road through India and then loaded onto container ships at Kolkata Port. Due to the difficult, mountainous, terrain and the poor condition of roads in Nepal, trucks cannot operate with high axle loads on most parts of the road network. A maximum load limit of 10Mt, has therefore been fixed, causing extra inconvenience and cost when they later switch to Indian trucks with a 20Mt. As a consequence Nepal probably has one of the highest ratio’s in the world of freight by expensive courier. Efforts have been made to reduce the impact of these costs on exports by focussing on high value, low volume products.

Inadequate inland infrastructure. For more or less all the agro-sectors unavailability of (all-season) roads hamper getting produce to the next step in the supply chain. Similarly, access to irrigation is a problem for small farmers.

Lack of support services in the form of market information. Problems of substandard quality appear to be compounded by a lack of information on national quality and grading standards, as well as a lack of access to laboratory facilities or training facilities.

Limited value added. In many sectors, one of the major obstacles to export and export earning growth is the inability to process the commodities, and accordingly to add value and diversify products. Instead, often Indian companies benefit by processing Nepalese produce before re-exporting them.

Lack of capital is a major obstacle to export growth. Credit facilities are limited and, according to the interviewees, banks only extend credit on collateral of land and buildings. Other potential sources of collateral, such as designs, inventory, export management capability, experience, remain unrecognized.

A dearth of skilled and high-skilled labour. A large number of Nepalese migrants, currently send remittances back to Nepal. According to one source, the value of these remittances is surpassing the agricultural GDP of the country. This, however, has a major draw back which is the “brain-drain” it causes. The interviewees frequently commented on the fact that the education facilities were producing too few graduates as well as on the tendency of the few graduates to get poached by overseas job opportunities very quickly. A commonly heard recommendation was to make more use of the educational facilities in India.

Insufficient cost competitiveness. In most sectors, Nepal’s exports are curbed by high production costs. The government and other stakeholders need to pay attention to two major cost factors compromising Nepal’s competitiveness: the labour cost and the productivity and transportation costs.

Unstable political environment. The Maoist insurgency has hit most of the sectors hard, disrupting the supply chain in many sectors by making areas unsafe to transport goods and hampering investment by creating a risky environment. Numerous interviewees showed an unwillingness to expand their businesses because of the economic uncertainty. The latest political developments in Nepal are, however, very promising steps towards mitigating this problem.

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Crosscutting recommendations

Enterprises in Nepal have to adapt substantially in order to address the changing international environment and the key supply-related challenges mentioned above. The following highlights some of the main priority actions that have been proposed for many sectors.

Invest in upgrading the infrastructure and technology. It is important to upgrade the infrastructure, as an ineffective information, processing and transport infrastructure is a serious constraint to Nepalese exports.

Diversify markets and develop trade promotion activities. Nepalese exports in some sectors are very concentrated geographically, particularly in India. Market diversification is important to reduce sensitivity to demand-side shocks in individual markets.

Secure access to raw materials. In several sectors, domestic supply of raw materials and intermediate inputs is insufficient, driving up production costs (at high import tariffs and transport costs) and sometimes disrupting production because of irregular foreign supply. In order to secure their supply to the processing sector, a specific plan is needed to create and develop a sustainable source of raw materials.

Attract foreign investors. Nepal needs to develop the quality and cost of human resources in order to attract foreign investments. These include the lack of transparency and consistency in the legal and policy framework, for example in relation to taxes, the many restrictions to investment, the general business environment, cumbersome procedures, inefficient bureaucracy and corruption.

Invest in people. Well-educated and disciplined labour forces are key assets for human capital investment. An adequate supply of trained human resources is vital to the development of any industry. A key strategy to enhance exports is to further strengthen human resources by continuing in investing in basic education, vocational training and language training, especially English.

Adapt Nepalese standards to international standards and reduce health-related risks for agricultural products. This is particularly important for agricultural products because non-tariff barriers, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS) have become increasingly important in recent years. For example, Nepalese honey faces unfavourable market access to major countries such as EU due to SPS measures. Given health-related problems such as the avian influenza (“bird flu”) and the severe acute respiratory syndrome (“SARS”), it is important for example to develop an effective veterinary system, a system to protect plants and to predict natural disasters.

16

Introduction

Background

Nepal displays a number of characteristics that render its socio-economic situation difficult.

Nepal is a small least developed economy. Almost one-third of its 27 million population live below the poverty line. Nepal’s per capita GDP is USD 232 in nominal terms and nearly 65% of its population live on less than USD 2 a day. Approximately 84% of its population live in rural areas. The infrastructure and the education system are low quality and inefficient. Nepal is ranked 136 th of 177 countries in terms of human development (HDI, 2005). In economic terms, this means that Nepal is a small player in most sectors both in terms of supply and demand. Nepal also possesses only a small stock of skilled workers. As such, Nepal can be considered a price taker both for inputs and outputs, having insufficient productive capacity and a small domestic market with low purchasing power. Individual enterprises in Nepal also operate at a disadvantage in sectors based on economies of scale as they tend to produce small volumes. This makes it difficult to penetrate major foreign markets. Finally, at this stage of development, Nepal has no comparative advantage in skilled labour intensive industries.

Nepal is a relatively small country, mountainous, landlocked between the People’s Republic of China (PRC) and India and remote from major developed markets. Nepal’s area is 143,000 square kilometres most of which is mountainous or hilly land. Only 17% of the land area is arable. Nepal’s difficult terrain and geographical location constrains the movement of both people and goods, which in turn, through high transport costs, influences its economic growth prospects. Given these factors, Nepalese enterprises are disadvantaged in processing inputs and producing goods that are heavy or voluminous, or for which delivery time is a major issue. The distance from major world markets reinforces this disadvantage. Fast moving markets demand short response times to buyer’s requirements. That explains, to a large extent, why Nepal’s major trading partner is India, accounting for more than 50% of Nepal’s trade. Other major trading partners are the US, China, EU and other Asian countries.

The industrial base in Nepal is narrow, and commodities from agricultural sectors dominate production. Nepal is a predominately agrarian economy. Agriculture accounts for 38% of its GDP in 2005 whereas manufacture accounts for around 8% of GDP (WDI, 2006).

Nepal has increased its integration into the world economy obtaining a trade (goods plus services) to GDP ratio of nearly 50% (40% for goods only) in 2005 (WDI, 2006). The same year, the simple average MFN tariff rate was 13.9%. Manufactured goods account for nearly 86% Nepali exports with the remaining 14% being mostly agricultural products. Nepal’s exports are concentrated in a few products such as garments and carpets, which are easily susceptible to global economic volatility. 1

Nepal’s economic growth performance has been unsatisfactory for a least developed country. It currently has a structural trade deficit, which has been widening in recent years. Nepal experienced an annual GDP growth of 2.8% between 2000-2005, which demonstrates moderate economic growth compared to other regional economies such as Bangladesh (4.5%) or India (7.0%). It reflects to some extent, the adverse impact of domestic disruptions, related to the Maoist insurgency, on tourism and industry. Moreover, Nepal’s Trade deficit almost doubled over the period 2000-2004,

1 Nepalese industry face increased competition from countries such as China and India as well as preferential beneficiary countries of the Caribbean and African countries due to the end of Multi-Fibre Arrangement in 2005 and special preferential market access for garments to US markets.

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from USD 508 million to USD 961 million (IMF BOP), mainly due to higher import growth.

Given these constraints, it is a majority policy priority for Nepal, to broaden its industrial base and diversifying its export base. There is a dire need for foreign currency earnings as the country’s debt has been increasing annually.

Purpose

The objective of this study is to identify sectors that have significant potential for export growth in Nepal. This is of particular relevance in the initial stages of sector-specific export promotion programmes. This is the case here, as this report is part of a larger export promotion project. The study aims to enable the stakeholders participating in the design and implementation of export development programmes and, hopes to provide them with a consistent conceptual framework within which to take into account both quantitative and qualitative information. It identifies those sectors that have significant potential for export growth. It has a strategic focus, and aims to guide the government, as well as the private sector, towards the most promising sectors.

This study also identifies interesting diversification markets for each industry. The market attractiveness index is a summary measure of the attractiveness of the import markets for products exported by Nepal. In contrast with the other summary measures in this report (which are used to identify industries with the highest export potential), the market attractiveness index allows identification of those countries, which enterprises in Nepal have so far failed to penetrate, yet which appear to have great potential.

Selected product groups

The Trade and Export Promotion Centre in Nepal together with ITC’s market analysis team selected 14 product groups for an in-depth examination of their export potential. They are made of 66 products at the 6-digit level of the Harmonised System, representing about 10% of Nepal’s exports in 2004 (Table 5).

The selected industries differ substantially in terms of export value and the number of underlying products. For instance, some product groups are made of only one or a small number of items (e.g. cardamom, ginger, honey, mandarins, coffee and hand made paper), while others consist of more than ten separate items (silk and pashmina and gems and jewellery). It would have been desirable to also include services, such as tourism, in order to get an overall picture on potential sectors in Nepal, but it was decided to focus only on the goods sector, for which the assessment can be done in a comparable manner.

18

Table 5. Overview of examined industries

 

Exports in 2005

Share in exports (%)

(USD’000)

1. Silk and pashmina products

22,131

3.4

2. Cardamom

11,694

1.8

3.

Pulses

11,477

1.8

4. Gems and jewellery

7,393

1.1

5. Leather

5,697

0.9

6.

Tea

5,169

0.8

7. Ginger

2,518

0.4

8. Medicinal plants and essential oils

1,979

0.3

9. Hand made paper

944

0.1

10. Wooden handicrafts

350

0.1

11. Cut flowers

211

0.0

12. Coffee

169

0.0

13.

Honey

49

0.0

14.

Mandarin oranges

0

0.0

Sub-Total

69,781

10.7

 

Total

653,214

100.0

Source: TradeMap, calculations by ITC.

Structure of the report

The structure of the report is as follows:

Chapter 1 (Comparative analysis of industries) compares and ranks the 14 industries along each of the four main dimensions: current export performance, world markets, the domestic supply conditions, as well as their current socio-economic impact. It then explores the underlying indicators and the overall indices of export potential and pinpoints the priority for export promotion activities. Indicators for export potential also take into account qualitative dimensions (the competitiveness and world market prospects) evaluated by the team of consultants. It briefly discusses the conceptual framework, the definition of the relevant indicators, and the limitations of the method.

Chapter 2 (In-depth analysis by industry) provides a detailed examination of the individual industries. For each industry, it analyses the current export performance, the domestic supply conditions and the trends in the world markets. It also assesses strengths, weaknesses, opportunities and threats (SWOT analysis), and identifies possible target markets for diversification. The chapter also presents key industry- specific policies for future export growth.

The conclusion presents the major crosscutting issues and recommendations that affect the competitiveness of all sectors. It highlights the issues common to many industries, and discusses recommendations for general policies to improve the business environment in Nepal.

Finally, the annex gives some information on particular aspects of the underlying data and the methodology used. It discusses the conceptual framework, the definition of the relevant indicators, and the limitations of the method. It also discusses how the underlying indicators are transformed so that they can be compared, and how the indices are weighted to obtain an overall measure of the export potential for each industry.

19

1. Comparative analysis of the industries

This chapter seeks to estimate and compare the export potential of Nepal in selected industries. The term “export potential” is used here in a broad sense and is defined as the capacity to expand exports. For those selected items, Nepal has not significantly established high export value or export growth rates yet, implying a small contribution to Nepal’s current total export. However, given the necessary supply-side conditions required for export promotion, Nepal appears capable of greatly improving the level of its exports and market diversification.

An assessment of the export potential of industries needs to take into account a number of diverse multidimensional factors, both from the demand and the supply side. A large amount of heterogeneous information is summarised here with the help of composite indicators, which provide a broad, though simplistic, picture of reality that can be used to draw the attention of policy makers to the most important issues. This study takes into account 15 indicators grouped into three main dimensions:

current export performance, world markets and its market prospect, and domestic supply conditions and its competitiveness prospect. The qualitative dimensions (the competitiveness and world market prospects) as evaluated by a team of consultants are taken into account. This study also considers the socio-economic dimension, by looking at the full-time employment equivalent (FTEE) indicator. Each industry is examined along four main economic and socio-economic dimensions which are :

Nepal’s current export performance (Index 1) is estimated by indicators such as the export value in 2004, the world market share, the relative trade balance and the export growth rate between 2000 and 2004.

The characteristics of world markets (Index 2) includes indicators such as the dynamism of international demand (growth of world imports between 2000 and 2004) and Nepal’s relative access conditions to international markets, and qualitative dimension – the world market prospect evaluated by team of consultants;

The domestic supply conditions (Index 3) examines indicators such as the quality of products, the productivity and cost of production factors, and the efficiency of domestic supporting industries. This information is based on interviews of companies in Nepal, and qualitative dimension – the competitiveness prospect evaluated by team of consultants;

The current employment impact (Index 4) examines whether industries are important for the direct employment. Employment provides people directly or indirectly (through dependants) with livelihoods.

The first three economic dimensions (Index 1-Index 3) are combined for the overall measure of export potential (Figure 1). The current employment impact is used to evaluate the socio-economic impact of the sectors.

20

Figure 1. Priority for export potential: Underlying dimensions

Export potential index Export World Domestic supply performance markets conditions Export value Enterprise
Export potential index
Export
World
Domestic supply
performance
markets
conditions
Export value
Enterprise
Qualitative
Quantitative
Qualitative
Survey
Aspect
Aspect
Aspect
Export growth
Competitive-
Product and
World market
World import
Market
ness
Process
share
growth
prospect
Prospect
Relative
trade balance
Share of attractive
markets
in world imports
Averaeg tariff
advantage
(weighted by importers'
share in world imports)
Product quality
Unit labour costs
Average Production Cost
Process technology
Supporting
Industries
Average infrastructure cost
Upstream and downstream linkages

To allow comparisons, variables need to be normalised before they are aggregated into composite indicators. The method used here converts each indicator into a number within a range from 1 (weak performance) to 5 (best performance). For each indicator, it gives 1 point to industries with values below a certain threshold value and 5 points to industries with values above the threshold value. It should be noted that industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision (Box 1).

This study combines desk research with fieldwork in the country, and is based both on quantitative and qualitative information.

Quantitative information includes trade statistics and market access data. For market access conditions the tariff data is taken from ITC’s Market Access Map database (www.macmap.org). Trade data come from ITC’s Trade Map (www.trademap.org), which provides detailed export and import profiles and trends for over 5,300 products in 200 countries and territories.

Qualitative information includes a review of relevant literature and information collected from surveys based on an ITC questionnaire and interviews with enterprises and business associations. The latter is used to validate the results and to gain first- hand insights into the domestic business and policy environment that affects enterprises in the various product sectors. This survey was conducted with the assistance of three national consultants in Nepal.

The main results are as follows (Table 6).

The export potential –which is estimated by bringing together Nepal’s current export performance (Index 1), world markets and its world market prospect (Index 2), domestic supply conditions and its competitiveness prospect (Index 3),– appears highest for cardamom, pulses, tea, silk and pashmina products, and cut flowers.

The current employment impact (Index 4) appears high for tea and medical plants and essential oils.

21

Table 6. Assessment of export potential and current employment impact by sector

   

Export Potential

Socio-economic impact

Sector

Exports

Index

Assessment

Employment

Index 4

Assessment

(value)

(Index

1-3)

(FTEE)

1. Silk and pashmina products

22,131

3.2

High

5,000

1.1

Low

2. Cardamom

11,694

3.7

High

5,556

1.2

Low

3. Pulses

11,477

3.3

High

12,500

1.9

Low

4. Gems and jewellery

7,393

3.1

Medium

10,000

1.7

Low

5. Leather

5,697

2.9

Medium

6,300

1.3

Low

6. Tea

5,169

3.3

High

105,000

5.0

High

7. Ginger

2,518

2.9

Medium

11,111

1.8

Low

8. Medicinal plants & essential oils

1,979

2.7

Medium

40,000

5.0

High

9. Hand made paper

944

3.0

Medium

22,333

3.0

Medium

10. Wooden handicrafts

350

2.5

Low

4,000

1.0

Low

11. Cut flowers

211

3.2

High

2,500

1.0

Low

12. Coffee

169

2.9

Medium

7,778

1.4

Low

13. Honey

49

2.6

Low

13,333

2.0

Low

14. Mandarin oranges

0

2.3

Low

16,667

2.4

Low

Indices range between 1 (lowest ranking) and 5(highest ranking). By convention, they are considered high (3.2 points or more), medium (between 3.1 and 2.7 points), or low (2.6 points or less). Source: TradeMap, Market Access Map, and interviews with enterprises, calculations by ITC.

Box 1. Considerations to keep in mind when interpreting composite indices

It must be noted that indicators can only give a partial view of the real situation: by definition, they can only include data that can be quantified and for which sources are available. In addition, the selected indicators are backwards looking, as prospects are based on recent trend growth.

Composite indicators are also sensitive to the choice and weight of the underlying indicators. Some indicators play a more important role than others, but it is difficult to establish a hierarchy due to a lack of clear criteria with which to weight them. Likewise, other indicators might have been selected. For example, in order to assess market access conditions, it would have been useful to incorporate not only tariff barriers but also non-tariff measures, but it does not lend itself easily to strict quantitative comparisons.

Furthermore, the study cannot evaluate with accuracy the regional potential because of existing unrecorded or informal trade particularly between India and Nepal.

The remainder of this chapter provides detailed information on these overall results and compares the product groups along the four dimensions we already discussed. The first section examines the current export performance, the second one the domestic supply; the third one the world markets and the final one presents the socio-economic impact.

Current export performance (Index 1)

The current export performance index of Nepal is high for cardamom, tea, and ginger. In contrast, Nepal’s export performance is particularly unfavourable for mandarin oranges, honey, wooden handicraft, medicinal plants, and coffee.

Nepal’s current export performance index gauges how successful its enterprises perform in the international markets for the selected product groups. It reveals Nepal’s comparative advantages and shows how successful the various industries have been in terms of international trade. Well-performing sectors have already proven their export capacity and can thus be considered as also having high potential for future exports. The composite index is made up of sub indices that can show such capacity by sector:

(1) export value, (2) export growth, (3) world market share, and (5) trade balance.

Exports in value: The larger a sector’s exports are currently in value terms, the greater is its potential for future growth. Nepal has significant exports in cardamom, silk and pashmina products, pulses, and gems and jewellery products (Table 7). The success of exporters in these selected sectors suggests that they are well positioned for potential future increases. On the contrary, exports are negligible for mandarin oranges, honey, and coffee, and moreover, Nepal does not currently have a capacity to export mandarin oranges.

22

Nepal’s world market share is a good indicator of the competitiveness of an industry:

Nepal has a substantial world market share in cardamom, handmade paper, and ginger. In contrast, Nepal’s world market share is particularly low for cut flowers, coffee, honey and mandarin oranges. (Table 7). The export value favours large industries and thus introduces a bias. In contrast, the world market share can favour small industries: by dividing export value by world exports, small industries can achieve a high market share.

Export growth: Sectors with rapid export growth suggest that Nepal is highly competitive in the world markets, while stagnant or declining growth rates indicate the opposite. Nepal experienced a significant export growth in tea and cut flowers between 2000 and 2004. Particularly, the growth rate of cut flower exceeded more than 250% per year during the same period. With everything being equal, fast growth exports point at product groups for which Nepal has a particular potential worth studying in more details. These trends are likely to reflect Nepal’s future trade. In contrast, honey, silk and pashmina products, and wooden Handicrafts sectors show export decline.

Nepal’s trade balance indicates the efficiency of the productive capacity of industries. The trade balance is calculated as the difference between exports (X) and imports (M). If exports exceed imports, representing a trade surplus, national production exceeds national consumption. All things being equal, this suggests that the industry has efficient productive capacity and can be considered competitive. In contrast, if exports are lower than imports, representing a trade deficit, national production is not sufficient to cover national consumption. Rather than presenting the trade balance (X-M) in absolute terms (e.g. US dollar), it is presented relative to the industry’s total trade (X+M). This reduces bias against large industries, which tend to have either strong deficits or surpluses. Leather and Wooden handicrafts are exclusively exported with no evidence of wooden handicraft imports. In contrast, Nepal is a net importer of mandarin oranges.

Table 7. Underlying indicators for the composite index “Current export performance”

   

Share in world exports

 

Relative trade

 

Exports

Export growth

balance

Index 1:

Export

Performance

USD '000

Sub-

(%)

Sub-

(%)

Sub-

(%)

Sub-

index

index

index

index

 

2.

Cardamom

11,694

5.0

10.5

5.0

2

1.8

90

4.8

4.2

(High)

6.

Tea

5,169

2.8

0.1

1.6

83

5.0

83

4.7

3.5

(High)

7.

Ginger

2,518

1.8

0.8

4.2

19

2.5

87

4.7

3.3

(High)

9.

Hand made paper

944

1.3

1.0

5.0

35

3.1

25

3.5

3.2

(High)

1.

Silk and pashmina

22,131

5.0

0.3

2.0

-19

1.0

63

4.3

3.1

(Medium)

products

5.

Leather

5,697

2.9

0.0

1.1

24

2.7

99

5.0

2.9

(Medium)

11.

Cut flowers

211

1.1

0.0

1.0

269

5.0

81

4.6

2.9

(Medium)

4.

Gems and

           

jewellery

7,393

3.5

0.0

1.1

18

2.4

82

4.6

2.9

(Medium)

3.

Pulses

11,477

4.9

0.1

1.2

4

1.9

13

3.3

2.8

(Medium)

12.

Coffee

169

1.0