Tuesday, October 7, 2014

Export growth in South Asia

Here are two interesting charts from a recent WB’s South Asia Economic Focus Fall 2014 showing export growth in South Asia.

Nepal’s merchandise exports grew by just 3.2% over 2000-2013, the lowest in the region. India’s exports grew by 17.5%. Nepal clearly could not benefit from the increase in competitiveness as a result of depreciation of the currency. It raises few (mundane) issues:
  1. Despite favorable external condition (fairly strong external demand and recently the increase in competitiveness due to currency depreciation), the country could not boost exports as a result of the binding supply-side constraints, most notably the inadequate supply of infrastructure (energy, roads, irrigation, etc), recurring strikes and political instability. Some structural issues such as low labor productivity, lack of skilled manpower and policy implementation paralysis are also at play here. These have affected services export as well (most notably tourism).
  2. Nepal imports a lot of raw materials and intermediate goods as inputs to produce final products for export. A depreciation of currency tends to escalate input cost and hence the cost of the final product. This, added to the increase in cost of production due to supply-side constraints, makes exports less competitive.
  3. Exports to India account for almost 60% of total exports. Nepal has pegged its currency to the India rupee since 1993. It might have also resulted in low export growth as the country could not take full advantage of the relative increase in competitiveness arising from depreciation against convertible currencies.

Another interesting part of the report is the analysis on Dutch disease, which is potentially seen in Afghanistan, Bhutan, Maldives, and Nepal— all due to the massive foreign exchange inflows that are relatively independent from international trade, resulting in appreciation of real effective exchange rate. An earlier paper on remittances and Dutch Disease is here (presentation slides here), which shows an appreciation of REER, growth in real wages and declining manufacturing sector.

The report forecasts South Asia’s regional growth to be 6.0% in 2015 and 6.4% in 2016, largely driven by higher growth rates in India. Indian economy is forecast to grow at 5.6% in 2015. Nepal's GDP is expected grow by 4.5-5% in 2015. ADB forecast FY2015 growth at 4.6% in August 2014 issue of Macroeconomic Update.