Aid for Trade and Nepal Issues and Way Forward

1. Aid for Trade and NepalIssues and Way Forward Chandra Ghimire Joint Secretary Ministry of Commerce and Supplies Kathmandu, Nepal, 19th Aug 2011

2. Talking Points Understanding of Aid for Trade (AfT) AfT flows in Nepal State-of-the Art of AfT in Nepal Issues in AfT Effectiveness Silver-lining with AfT in Nepal Way forward in Nepalese Context The 4 principles for AfT Final TATWABODH

3. Methodology Applied and Limiatations • Review of the literature available around • My own observation constructed over last 2 years at Ministry of Commerce & Supplies • A bundle of frank speaking • Due to some limitations this also doesn't represent the complete picture

4. Supply side Capacity Vrs Market Access • The argument of ‘Market Access’ • Huge focus on “market access” (i.e. as of 31 July 2010, some 474 RTAs notified to the GATT/WTO) - the underlying assumption was that “removal of trade barriers leads to expanded trade ”; • Generalized System of Preference (GSP) since 1968 provided to the LDCs with the same assumption; • Special and Differential Treatment (SDT) for LDCs in WTO and RTAs; • Despite the “market access focus” the LDCs’ share in global export <1%; • True might be for developed world, the assumption falsified for the LDCs; Result:Only Market access did not lead to increased exports of LDCs Constructed by CHANDRA GHIMIRE Aug 2010 4

5. Supply-side Capacity Vrs Market Access • The missing link • The issue of supply-side constraints was not addressed • Following types of "Supply-Side Constraints" are prominent in the context of Nepal: • Availability of surplus to export (comparative plus competitive advantages); • Lack of infrastructural and institutional prerequisites to competitively supply international market; • Relatively high costs of doing business; • Lowest level of Logistics Performance Index in South Asia; 5 Constructed by CHANDRA GHIMIRE Aug 2010

6. Task Force Recommended • Objectives set for AfT : • To enable particularly LDCs to use trade effectively for growth, development and poverty reduction & their development objectives, including MDGs Goals; • To help particularly LDCs to build supply-side capacity and trade-related infrastructure in order to access to markets; • To help facilitate & implement trade reform & liberalization; • To assist regional integration; • To assist smooth integration into the world trading system; • To assist in implementation of trade agreements; Constructed by CHANDRA GHIMIRE Aug 2010 6

7. As Defined by the WTO Task Force 2006 on AfT "Aid for trade is about assisting developing countries to increase exports of goods and services, to integrate into the multilateral trading system, and to benefit from liberalized trade and increased market access"

8. Task Force Recommended II Identification of six areas for AFT: • Trade-related infrastructure e.g., road, telecom, electricity • Building productive capacity e.g., agriculture, industry, fishery • Trade development e.g., investment promotion, trade promotion, business services • Trade-related adjustment e.g., retraining of workers, compensation for retrenched workers • Trade policy and regulations e.g., training of officials and stakeholders, designing policies and comply with trade rules • Other areas e.g., recipients’ other needs that are not included above Constructed by CHANDRA GHIMIRE Aug 2010 8

9. Task Force Recommended III • 8 Guiding Principles as laid down by Paris Declaration (2005) on “Aid Effectiveness” & Accra Accord (2008): Country ownership; Aligning aid to national development strategies Harmonization of donor procedures with country contexts ; Use of programme based aid modalities ; Mutual accountability; Managing for result ; Strengthening country ownership; Building inclusive partnership • But Task Force didn’t recommend a stand-alone fund or facility, which means the resources are provided bilaterally 9 Constructed by CHANDRA GHIMIRE Aug 2010

10. AfT and EIF under WTO LDCs lack basic infrastructures to take advantage of the market access resulting from a successful Doha Round; The Doha Ministerial Declaration (2001) made technical assistance and capacity building a key component ; In 2005, the Hong Kong Ministerial Conference paved way for transforming IF into EIF & set up a new AfT mechanism 10 Constructed by CHANDRA GHIMIRE Aug 2010

11. NEPAL AID-FOR TRADE FLOWS USD in 000, 2009 constant prices (Source: WTO/OECD, 2011) NIL

12. AfT Flows in Nepal Only 60% of the committed figure is disbursed

13. Distribution of AfT in Nepal

14. Who are the AfT donors of Nepal?

15. Aid for Trade Commitment for Nepal (2002-2009), constant 2008 US$ million

16. Nepal as Compared to Other Group of Countries

17. Nepal and Its Trading Partners

18. An Indicative List of Existing and Potential Trade-related Projects in Nepal

20. State-of-the Art of AfT in Nepal • Nepal has the policy and institutional ground works well-done • Trade Policy 2009 and NTIS 2010 • Nepal's NTIS is regarded as a best one • A 3 Three-tier institutional set up in effect, i.e. NSC, NIU, FP, TCs, DF • Least duplication in the AfT funded activities as NIU is there to avoid • NTIS 2010 is well articulated as the territory for AfT, thus the practices seem to have been the "bottom-up" • Over last few months, delegates from 2 countries visited Nepal for learning out of it experiences

21. Framework for Analyzing the Issues in Nepal • (As Pascal Lamy, 2011) • Resource mobilization • Trade mainstreaming • Ground level impact – Result Showing

22. 1st Issue: Resource mobilization • The quantum mobilized so far is below satisfactory • Global vrs Nepal Growth 36% vrs 42% increased (2002/05-2006/09) • 0.07% out of the global AfT • < 2% of the AfT allocated to Asian countries • Nepal not in the list of top 10 recipient countries whereas so did emerging countries like India, Iraq, Indonesia, Vietnam, Bangladesh Ghana etc • No data base available depicting the AfT in Nepal i.e. from where and where to??? • Huge gap between commitment and disbursement • Compared 2006-2009 to 2002/2005, the gap increased as follows: • In non-AfT case from 102% to 98% • In AfT case from 98% to 59%

23. 1st Issue: Resource Mobilization • Absorptive capacity is blamed as 'poor‘ • No agency responsible specifically for AfT (In GoN apparatus and even within MoCS) • Even MoCS is not fully aware of the AfT around i.e. what is where? • Resource mobilization • AfT not mobilized as per DTIS in the past • So, projects beyond trade also funded with AfT, e.g. KTM-Sindhuali Highway • In Hardware vrs Software, DPs do love 'software‘ • Passion in some DPs for the ‘TA’ category higher than the ordinary AfT aid • Running directly by donors – outside the govt mechanism • Not recorded in GoN’s Red Book • Use of foreign consultants unnecessarily

24. 1st Issue: Resource mobilization • Foreign Aid Policy silent on AfT mobilization • Respect of Paris Declaration and Accra Plan of Action • Out of review as some AfTs are not reflected in Red Book, i.e. EC-WTO Assistance Program • Nepal has not yet seen any aid for trade adjustment although the need is high

25. 2nd Issue: Trade Mainstreaming • GoN gone to a significant extent, however, it’s DPs’ turn mainstreaming trade into their cooperation agenda • No good space for AfT in their CAS • Many DPs has no a dedicated strategy for AfT • Having poor understanding about AfT • Not all are aware of the principle of additionality • ‘Peace and conflict’ and ‘social’ sectors are the darlings of the DPs in Nepal • Trade is yet to be fully mainstreamed into sectoral policies, plans and annual programs, e.g. agriculture, forest, industry etc, yet • Continuity of the trade as a priority sector • Changing dynamics of trade sector and its sub-sectors • Private sector engagement yet not fully • Sustainability of the institutional set up erected as of now

26. 3rd Issue: Ground level Impact • There has been additionality in commitment but no additionality in disbursement. • Sustainability aspect is still blurring • The impact is subject to rigorous examination • Even the Paris and Accra based criteria for evaluating effectiveness may not necessarily reflect the true ground level impact • One regression analysis shows, + impact of AfT on export performance. 1% increase in AfT is associated with exports growth by 0.224 % • Nepal's case is taken as too early to evaluate the impact

27. Sustainability Aspect of AfT in Nepal

28. Silver Lining with Nepalese AfT • Nepal being a LDC has a great advantage • Some unique comparative advantages it has • Policy and institutional set up ready for take off • Private sector eager to have support for capacity building • Trade mainstreaming to a certain extent undertaken • DPs has a great interest as the country is a post-conflict ridden one

29. Way Forward in the Nepalese Context • Accept MoCS as the lead role in AfT mobilization • By recognizing it in the Rule of GON's Business Allocation • By keeping MoCS in loop prior to accepting any AfT from DPs • By maintaining a sound database at MoCS • By broadening the country ownership of AfT beyond MoCS and MoF • Strengthen the NIU established at MoCS • Improving HR planning • Minimizing staff turnover rate • Building the capacity of HRs for designing projects and resource absorption • Fully activate NSC, TCs, etc • Mainstream NTIS 2010 and Trade Policy into sectoral policy, strategy and annual programs

30. Way Forward in the Nepalese Context 2 • Optimize the donor group established for trade & development • Benefit from the principle of 'additionality' • Mainstream of NTIS 2010 and Trade Policy into sectoral policy, strategy and annual programs • Engage private sector as an active actor especially in formulation and implementation of Tier 2 projects • By exploring avenues for public-private partnership • By developing jointly bankable projects • Keep at top the agenda of aid effectiveness as per the Paris and Accra elements, i.e. ownership, alignment, harmonization, results, mutual accountability, predictability, country systems, conditionality, and untying • Revise Foreign Aid Policy to incorporate AfT

31. Way Forward in the Nepalese Context 3 • Promote South-South cooperation, i.e. India, China, Kuwait, Saudi Fund and OPEC Fund • Run with the idea of regional integration in the South Asia (linking Nepal to India, Bangladesh and Bhutan) while shifting from software to hardware • Secure a greater quantum of the AfT • Get the political economy right: the feasibility of reforms • Where possible, link AfT with think-tanks and national academic institutions to have close oversight on the changing/emerging dynamics of trade sector

32. Way Forward in the Nepalese Context 4 • Focus on the awareness and coordination capacity of private sectors, FNCCI, CNI, CoC and civil society for AfT • Make DPs eager in trade by: • including trade in their country assistance strategy (CAS) • providing dedicated AfT through TTF/Trade SWAp • stopping conditionalities on the sourcing of equipments and HRs • allowing local institutions and experts, as far as possible • when hiring international expert unavoidable, station them inside GoN agencies • increase the use of financial management and procurement system of GoN • effectively ban direct implementation of projects by bypassing government mechanism and by running PIU (parallel implementation unit) • building the capacity/expertise of local institutions, e.g. emphasis on ToT rather than just training • Provide AfT in grant form as far as possible • Focus on the absorptive capacity to narrow the gap between the commitment and disbursement • Enhance the understanding and capacity of the GON's bureaucrats dealing with AfT

33. Way Forward in the Nepalese Context 5 • Get all AfT assisted programs in Red Book in order to bring into review • Unpack the NTIS by creating a 'project bank' • Seek aid for trade related adjustment, where negative consequences of trade liberalization • Get private sector developing AfT project proposals in PPP mode • Get think tank institutions and private sector conducting research & studies for informed inputs to the GoN • Make investment in HRD from private sector so as to mobilize a greater AfT

34. 4 Principles by Stiglitz and Charlton on AfT Additionality: “Developing countries need aid for trade and such aid must not come at the expense of aid for development”; Predictability: “It is easy to be taken in with promises of bilateral aid, and make seemingly innocuous commitments in bilateral agreements; Country ownership: “Development cannot be imposed, it can only be facilitated." Constructed by CHANDRA GHIMIRE Aug 2010 34

35. 4 Principles by Stiglitz and Charlton on AfT • Coherence: “Trade liberalization must be carefully managed as part of comprehensive development strategies • Private sector: In “productive capacity” & public sector in “infrastructure” • Loans vs Grants: "Many have rallied to the idea of dropping the debt. I say let's rally to the idea of stopping the debt Constructed by CHANDRA GHIMIRE Aug 2010 35

36. TATWABODH Should we really go for 'Trade Trust Fund'/Trade SWAp? If YES the answer what should we do??? Formulation of different operation modalities, e.g. financial, institutional, project management etc. Motivation to trade related DPs buy-in the idea What else to make it very NEPALESE, well functioning and result oriented???