export potential assessment in nepal (2007)

International Trade CentreU N C T A D / W T O

Export Potential Assessment in Nepal

Asia Trust Fund

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

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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

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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

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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

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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.

For further details on the present study, please contact T. Paulmier (email: [email protected]) or M. Freudenberg (email: [email protected]).

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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.

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− 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 (value)

Index (Index 1-3) Assessment Employment

(FTEE) Index 4 Assessment

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 export potential

Medium export potential

High export potential

Important export sectors

(More than USD 10 million)

--- --- 1. Silk and pashmina

2. Cardamom 3. Pulses

Medium export sectors ---

4. Gems and jewellery 5. Leather 7. Ginger

8. Medicinal plants & essential oils

6. Tea

Small export sectors

(Less than USD 1 million)

10. Wooden handicrafts 13. Honey

14. Mandarin oranges

9. Hand-made paper 12. Coffee 11. Cut flowers

Source: Table 1.

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




High socio-economic

impact --- 8. Medicinal plants and

essential oils 6. Tea

Medium socio-economic

impact --- 9. Hand-made paper ---

Low socio-economic

impact

13. Honey 10. Wooden handicrafts 14. Mandarin oranges

4. Gems and jewellery 5. Leather 7. Ginger 12. Coffee

1. Silk and pashmina products


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

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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

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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.

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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.

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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

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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

Potential (Index)

Comments Specific Priority actions

2. Cardamom High (3.7)

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.

6. Tea High (3.3)

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

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Industries Export Potential (Index)


3. Pulses High (3.3)

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.

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


High (3.2)

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.

11. Cut flowers High (3.2)

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.

4. Gems and jewellery

Medium (3.1)

Well known for unique and artistic designs and internationally recognized quality. Despite a growing world demand in this sector, domestic supply of raw materials is not enough for export purpose.

Set up a testing and certifying institution for gems, stones, and precious metals. Develop R & D facilities for development of new and refined methods of production. 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 paper

Medium (3.0)

Large variety of unique and high quality traditional handmade papers. Major markets: EU countries. Dynamic world import market. Favourable market access conditions. High job creation impact.

Introduce environmental practices to save Lokta resources and conduct research for replacements. Introduce standards for the sector. Upgrade technology of Lokta paper making.

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5. Leather Medium (2.9)

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.

7. Ginger Medium (2.9)

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.

12. Coffee Medium (2.9)

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.

8. Medicinal plants and essential oils

Medium (2.7)

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.

13. Honey Low (2.6)

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.

10. Wooden handicrafts

Low (2.5)

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.

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Low (2.3)

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.

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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.

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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 136th 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.

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Table 5. Overview of examined industries

Exports in 2005(USD’000)

Share in exports(%)

1. Silk and pashmina products 22,131 3.42. Cardamom 11,694 1.83. Pulses 11,477 1.84. Gems and jewellery 7,393 1.15. Leather 5,697 0.96. Tea 5,169 0.87. Ginger 2,518 0.48. Medicinal plants and essential oils 1,979 0.39. Hand made paper 944 0.110. Wooden handicrafts 350 0.111. Cut flowers 211 0.012. Coffee 169 0.013. Honey 49 0.014. Mandarin oranges 0 0.0 Sub-Total 69,781 10.7 Total 653,214 100.0Source: 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.

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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.

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Figure 1. Priority for export potential: Underlying dimensions

Export value

Export growth

World marketshare

Relativetrade balance

Exportperformance

World importgrowthShare of attractivemarketsin world importsAveraeg tariffadvantage(weighted by importers'share in world imports)

QuantitativeAspect

Marketprospect

QualitativeAspect

Worldmarkets

Product qualityUnit labour costsAverage Production CostProcess technology

Product andProcess

Average infrastructure costUpstream and downstream linkages

SupportingIndustries

EnterpriseSurvey

Competitive-nessProspect

QualitativeAspect

Domestic supplyconditions

Export potential index

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.

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Table 6. Assessment of export potential and current employment impact by sector Export Potential Socio-economic impact

Sector Exports (value)

Index (Index 1-3) Assessment Employment

(FTEE) Index 4 Assessment

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.

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− 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”

Exports Share in world exports Export growth Relative trade

balance USD '000 Sub-

index

(%) Sub-

index (%) Sub-index (%) Sub-

index

Index 1: Export

Performance

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 products 22,131 5.0 0.3 2.0 -19 1.0 63 4.3 3.1 (Medium)

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 0.0 1.0 49 3.7 30 3.6 2.3 (Low) 8. Medicinal plants and essential oils 1,979 1.7 0.1 1.4 3 1.9 56 4.1 2.3 (Low)

10. Wooden handicrafts 350 1.1 0.0 1.1 -6 1.5 100 5.0 2.2 (Low)

13. Honey 49 1.0 0.0 1.0 -56 1.0 4 3.1 1.5 (Low) 14. Mandarin oranges 0 1.0 0.0 1.0 0 1.7 -100 1.0 1.2 (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, calculated by ITC.

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World markets (Index 2)

Based on the indicators used, the world markets are favourable for pulses, cut flower, and gems and Jewellery, hand made paper. In contrast, the international environment is particularly unfavourable for wooden handicrafts, ginger, mandarin oranges and coffee (Table 8).

The composite indicator concerns the characteristics of world markets, examining whether the international environment is favourable for Nepal in each of the selected industries both quantitatively and qualitatively. Quantitative measures consists of three sub-indices taking into account respectively (1) world import growth, (2) share of attractive markets in world imports, and (3) the average tariff compared to Nepal’s top five competitors in each market. The qualitative indicators were used to capture non-quantifiable information such as NTB. This measure was based on an evaluation of the market prospects by a team of consultants, with expertise in each industry

Quantitative indicators suggest that the world markets are favourable for honey, mandarin oranges, and pulses.

− World import growth in value: The most dynamic industries are honey, ginger, and pulses, while growth is low for cardamom and coffee. Fast growing global markets are more likely to produce net gains for an exporting country than stagnant markets. All things being equal, the more dynamic the world markets (or “international demand”) the higher the probability of future export growth. The dynamism of international demand for each industry is measured by the growth rate of world imports between 2000 and 2004.

− The share of attractive markets in world imports is largest for honey and handmade paper, followed by mandarin oranges. This index is based on the market attractiveness index (MAI), which identifies countries that are interesting import markets for Nepal’s products2. The higher the share of attractive markets in world imports, the higher the potential for Nepal to export to these markets.

− Nepal enjoys good market access conditions for cardamom and honey, but globally unfavourable conditions for handmade paper and leather. Tariffs can penalize and even prevent an export-ready industry from translating export potential into real exports. All things being equal, the better the country’s market access conditions, the higher an industry’s export potential. These conditions can be absolute or relative, For example, tariff barriers can be low in absolute terms or low relative to main competitors. Nepal benefits from various international trade agreements. As a Least Developed Country (LDC), it enjoys preferential accesses to a number of developed markets through: Everything But Arms (EBA) in the EU market, GSP status in Canada, Japan and US, and Nepal-India trade agreement. The preferential access to import markets is measured by the tariff difference between Nepal and the average tariff faced by its five major competitors in each import market.

It is very important to note that importing countries apply the lowest tariffs to goods from Nepal, meaning that Nepal is assumed to comply with any conditions (i.e. rules of origin) and fully utilize its available preferential programs from its trading partners, where applicable. So far, according to enterprise surveys, 76 firms have been able to comply with rules of origin.3

2 The market attractiveness index (MAI) are identified by four dimensions: whether and to which extent Nepal is under-represented in each market, how dynamic the import markets are, how open they are in terms of tariffs, and whether Nepal has a tariff advantage or disadvantage compared to its main competitors. 3 Some studies argue that the restrictive rules of origin could be one factor for the low utilization of preferences. For instance, certain products may be required to meet certain inputs from certain areas, which constrain a beneficiary country to import use the lowest and the most efficient input to manufacture products. If a country does not comply with rules of origin, products from the country are expected to face higher duty rates (i.e. MFN rates).

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Moreover, it would have been useful to incorporate not only tariff barriers but also non-tariff measures, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS). Non-tariff measures have become increasingly important for several reasons. There is a growing consumer-led concern, especially in developed countries, regarding environmental and sanitary risks, though some may argue that this is simply a convenient justification for protectionism. Further, low tariffs make the residual obstacles more important in relative terms. Many of Nepal’s current exports, such as honey and cut flowers, may face non-tariff barriers. While major markets are prohibited from imposing either high duty rates or strict rules or origin, SPS or TBT measures may still constrain Nepal’s ability to export these products. Non-tariff barriers will be included, where possible, in the brief descriptions for each product group.

Additionally, the team of consultants evaluates the world market prospect qualitatively based on their analysis of the favourable or unfavourable evolution of the world markets for Nepal in the short and medium term. Qualitative aspect suggests that the world market prospects are high for pulses, cardamom, tea, coffee, cut flowers, and gems and Jewellery.

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

Quantitative aspects Qualitative aspects

World import growth in value

Share in world imports of attractive market (Index>4) for Nepal

Average tariff advantage compared to top 5 competitors in

market (weighted)

Average World market prospect

% p.a. Sub-index % Sub-index % Sub-index Index Index

Index 2: World market

3. Pulses 16 4.7 34.7 3.7 0.9 1.6 3.3 4.5 3.9 (High) 11. Cut flowers 11 3.8 37.4 4.0 0.8 1.5 3.1 4.0 3.5 (High) 4. Gems and jewellery 12 3.9 21.3 2.4 1.7 2.0 2.7 4.0 3.4 (High) 9. Hand made paper 9 3.3 52.6 5.0 -0.2 1.0 3.1 3.5 3.3 (High) 5. Leather 14 4.4 29.1 3.1 -0.2 1.0 2.8 3.5 3.2 (High) 2. Cardamom -6 1.0 6.3 1.0 13.0 5.0 2.3 4.0 3.2 (High) 13. Honey 20 5.0 47.7 5.0 7.8 5.0 5.0 1.0 3.0 (Medium) 6. Tea 7 2.8 12.6 1.5 1.2 1.7 2.0 4.0 3.0 (Medium) 8. Medicinal plants and essential oils 6 2.7 30.4 3.3 0.5 1.3 2.4 3.5 3.0 (Medium)

1. Silk and pashmina products 2 1.7 22.1 2.4 3.8 3.0 2.4 3.5 2.9 (Medium)

12. Coffee -2 1.0 19.5 2.2 0.1 1.2 1.4 4.0 2.7 (Medium) 14. Mandarin oranges 13 4.1 43.0 4.5 0.8 1.5 3.4 2.0 2.7 (Medium) 7. Ginger 17 5.0 14.5 1.7 0.8 1.5 2.7 2.0 2.4 (Low) 10. Wooden handicrafts 3 2.1 7.7 1.0 0.8 1.5 1.5 3.0 2.3 (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 and Market Access Map, calculations by ITC.

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

Mapping the industries along the two dimensions of “Nepal’s export performance” and “world markets” brings out four polar cases (Table 9):

− Performers in attractive markets: where both world markets and Nepal's export performance are high and/or dynamic. Exporters of these products from Nepal have proven their competitiveness over recent years. Trade promotion efforts for these products are less risky, as they are already successful industries, which can serve as reference points. Promotional efforts should aim at broadening the supply capacity. Hand made paper and cardamom are part of this group.

− Underperformers in unattractive market: represent the opposite case, as both world markets and export performance are low and/or have little dynamism. This, in particular concerns wooden handcrafts. Trade promotion efforts for product groups in this category face an up hill task, as export prospects tend to be bleak.

− Performers in unattractive markets: while world markets for these industries are unfavourable, export performance by enterprises from Nepal is strong. These industries represent particular challenges for trade promotion efforts in Nepal. Niche marketing strategies are required to isolate the positive trade performance from the overall decline in these markets. Ginger is considered to be part of this group.

− Underperformers in attractive markets: while world markets for these industries are favourable, the export performance by enterprises from Nepal is at present weak. These industries represent particular challenges for trade promotion efforts in Nepal, as the problems are generally not the world markets (demand is strong and/or markets are open), but domestic supply factors. It is essential to identify and remove the specific bottlenecks that impede a more dynamic expansion of exports. There are no products in this group.

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

Low export performance index

Medium export performance index

High export performance index

High

world markets index

Underperformers in attractive markets

--

3. Pulses 4. Gems and jewellery

5. Leather 11. Cut flowers

Performers in attractive markets

2. Cardamom 9. Hand-made paper

Medium

world markets index

8. Medicinal plants and essential oils 12. Coffee 13. Honey



6. Tea

Low

world markets index

Underperformers in unattractive markets

10. Wooden handicrafts

-- Performers in unattractive markets

7. Ginger

Source: Table 7 and Table 8. Source: TradeMap and Market Access Map, calculations by ITC.

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Domestic supply conditions (Index 3)

Based on the indicators used, cardamom, coffee, silk and pashmina products, tea score high in terms of the domestic supply conditions. In contrast, handmade paper and leather score the lowest (Table 10).

For domestic supply conditions, the study is based on qualitative information stemming from a survey questionnaire sent to 76 companies as well as interviews carried out by national consultants from September to December 2006. The better the supply conditions and competitiveness, the greater the future export potential, everything else being equal.

The composite index concerning Nepal’s domestic supply conditions used here indicates whether domestic productive capacities are well-performing and competitive in terms of (1) product quality and the efficiency of the production process, and (2) the importance of backward and forward linkages and the efficiency of supporting industries.

In addition to a survey of 76 companies, the team of consultants based on their analysis of the possible evolution of the domestic supply conditions in the short and medium term, qualitatively evaluated the competitiveness prospect of each sector.

Product quality and efficiency of production processes The more efficient the production process, the higher the product quality, and hence the higher the export potential can be considered. An efficient production process means that production costs are low compared to the competitors.

The questionnaire used for this study included four questions: (1) quality of exported products; (2) unit labour cost relative to major competitors; (3) production cost relative to major competitors; and (4) the state of process technology in the sector. Each of these criteria was scored from 1 (worst possible performance) to 5 (best possible performance). A simple average score for “process and products” was then calculated.

Among those industries for which the information is available, the composite index for “process and products” is highest for medicinal plants and essential oils, cut flower and coffee. In contrast, the index is low for ginger, honey, and mandarin oranges.

Importance of backward and forward linkages and efficiency of supporting industries

A dollar of exports from one industry may not affect the economy in the same way as a dollar of exports in another industry. In fact, industries differ in the way they are linked to the rest of the domestic economy, and some industries are stronger integrated into the national economy than others, through backward (upstream) linkages to suppliers and forward (downstream) linkages to clients for further processing. Strongly integrated industries can exert positive pull and push effects for other domestic industries. But the effect can also go the other way, i.e. industries with intense upstream linkages tend to benefit more if the supporting industries are efficient. Thus, industries with strong upstream or downstream linkages and efficient supporting industries tend to have a higher export potential than other industries.

The questionnaire thus included three questions relating to the importance of backward and forward linkages and the efficiency of domestic supporting industries: (1) The general efficiency of supporting industries (Box 2); and (2) the extent of upstream or downstream inter-industry linkages. Each criterion was scored from 1 (worst possible performance) to 5 (best possible performance).

Among those industries for which the information is available, the composite index for “supporting industries” appears highest for ginger, cardamom and wooden handicrafts. In contrast, it is low for handmade paper and medicinal plants and essential oils and tea.

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Box 2. Supporting Industries

Supporting industries refers to the supply of intermediate inputs into the production of finished products, i.e. the “industry” in the middle of a vertical supply chain. Activities include parts manufacturing (screws, springs etc) and processes (pressing, forging etc.), though the definition of supporting industries depends on the sector (some also include services such as human resource development). The type of industry also determines the scale of supporting industry necessary. The rationale for supporting industries is to increase the competitiveness of assembly firms, which means that it is vital that these companies can satisfy quality, cost and delivery standards.

Source: Ichikawa (2005), Ohno (2005).

Competitiveness prospects Statistical information cannot necessarily capture the whole picture of the export potential due to the lack of qualitative dimensions on domestic supply conditions, which are discussed at great length in the next section (in-depth analysis by Industry). In this regard, a team of consultants, with expertise in each industry, evaluated the competitiveness prospects in order to complete the evaluation of the domestic support conditions. The competitiveness prospect appears high for cardamom, coffee, silk and pashmina products, tea, honey and mandarin oranges (Table 10)

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

Enterprise survey Qualitative aspect

Product and Process Supporting Industries Number of inter-viewed firms

Product quality

Unit labour costs

Production costs

Process tech-

nology

Average Infra- structure

cost

Up-/down-stream

linkages

Average Average

Competitive-ness

prospect

Index Domestic

supply conditions

2. Cardamom 5 3.2 3.0 3.3 2.4 3.0 4.1 2.3 3.2 3.1 4.5 3.8 (High)12. Coffee 5 3.6 2.8 3.3 3.4 3.3 3.2 2.8 3.0 3.1 4.0 3.6 (High)1. Silk & pashmina 5 4.0 3.0 3.2 2.2 3.1 2.4 3.7 3.1 3.1 4.0 3.5 (High)

6. Tea 5 4.2 3.0 1.9 3.8 3.2 2.4 2.7 2.5 2.9 4.0 3.4 (High)13. Honey 5 3.6 2.5 3.0 2.4 2.9 3.6 2.6 3.1 3.0 3.5 3.2 (High)14. Mandarin oranges 5 3.0 2.8 3.3 1.0 2.5 3.8 2.4 3.1 2.8 3.5 3.2 (High)

4. Gems & jewellery 10 3.9 3.3 3.0 2.8 3.2 2.9 3.3 3.1 3.2 3.0 3.1 (Med.)

11. Cut flowers 5 4.2 3.8 2.7 2.4 3.3 2.8 3.1 2.9 3.1 3.0 3.1 (Med.)3. Pulses 5 3.8 3.0 3.0 3.0 3.2 4.0 2.0 3.0 3.1 3.0 3.1 (Med.)10. Wooden handicrafts 5 3.4 3.0 3.1 2.4 3.0 3.0 3.4 3.2 3.1 3.0 3.0 (Med.)

7. Ginger 6 3.5 1.8 3.3 1.3 2.5 3.9 3.0 3.5 3.0 3.0 3.0 (Med.)8. Medicinal plants & essential oils

5 4.0 3.0 2.4 4.0 3.3 2.4 2.2 2.3 2.8 3.0 2.9 (Med.)

9. Hand made paper 5 4.0 3.0 2.3 3.4 3.2 1.9 2.3 2.1 2.6 2.5 2.6 (Low)

5. Leather 5 3.4 2.8 2.9 3.4 3.1 3.1 2.5 2.8 3.0 2.0 2.5 (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: Interviews with enterprises in Nepal, calculations by ITC.

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

Combining Nepal’s current export performance (Index 1), world markets (Index 2) and domestic supply conditions (Index 3) gives an indication of the export potential of a sector. The export potential appears highest for cardamom, pulses, and tea. In contrast it appears low for honey, mandarin oranges, and wooden handcrafts (Table 11).

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

Export value (USD 1,000)

Index 1: Export

Performance

Index 2: World market

Index 3: Domestic supply

Conditions

Average 3 indices

Assessment

2. Cardamom 11,694 4.2 (H) 3.2 (H) 3.8 (H) 3.7 High

3. Pulses 11,477 2.8 (M) 3.9 (H) 3.1 (M) 3.3 High

6. Tea 5,169 3.5 (H) 3.0 (M) 3.4 (H) 3.3 High

11. Cut flowers 211 2.9 (M) 3.5 (H) 3.1 (M) 3.2 High

1. Silk and pashmina products 22,131 3.1 (M) 2.9 (M) 3.5 (H) 3.2 High

4. Gems and jewellery 7,393 2.9 (M) 3.4 (H) 3.1 (M) 3.1 Medium

9. Hand made paper 944 3.2 (H) 3.3 (H) 2.6 (L) 3.0 Medium

12. Coffee 169 2.3 (L) 2.7 (M) 3.6 (H) 2.9 Medium

7. Ginger 2,518 3.3 (H) 2.4 (L) 3.0 (M) 2.9 Medium

5. Leather 5,697 2.9 (M) 3.2 (H) 2.5 (L) 2.9 Medium

8. Medicinal plants & essential oils 1,979 2.3 (L) 3.0 (M) 2.9 (M) 2.7 Medium

13. Honey 49 1.5 (L) 3.0 (M) 3.2 (H) 2.6 Low

10. Wooden handicrafts 350 2.2 (L) 2.3 (L) 3.0 (M) 2.5 Low

14. Mandarin oranges 0 1.2 (L) 2.7 (M) 3.2 (H) 2.3 Low

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

Table 12 maps the industries according to current exports in 2004 and export potential. Silk and pashmina, cardamom, and pulses are the only sectors that are high both in terms of currents exports and export potential. On the other extreme, wooden handicrafts, honey, and mandarin oranges are low in both dimensions.

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




Important export sectors

(More than USD 10 million)

--- --- 1. Silk and pashmina


Medium export sectors ---

4. Gems and jewellery 5. Leather 7. Ginger

8. Medicinal plants and essential oils

6. Tea

Small export sectors

(Less than USD 1 million)

10. Wooden handicrafts 13. Honey


9. Hand-made paper 12. Coffee

11. Cut flowers

Source: Table 11.

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Current socio-economic impact (Index 4)

The current socio-economic impact is favourable for tea and medicinal plants and essential oils. Handmade paper sector is in an intermediate position. The current socio-economic impact is relatively low for the remaining sectors (Table 13)

So far the sectors have been examined on purely economic conditions. This final indicator introduces more subjective criteria to refine and validate the ranking measures, and to assess the broader impact. For this, the full-time employment equivalent (FTEE) indicator is use for the index. The FTEE indicator is based on the number of people directly employed in each sector. Since some sectors require only seasonal employments (e.g. 2-3 months per year), we have calculated the number of people as a full-time employment equivalent level 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 Nepal. We would like to point out that these numbers may be rough estimates, yet, the magnitude of current employment’s situation in each sector can still reflect the reality.

In order to assess the current socio-economic impact, local companies in each sector were asked to evaluate the sectors in terms of their social desirability (employment creation, employment of women, poverty reduction, rural development), contribution to development (industrialisation), environmental sustainability, and ability to create human capital. These indicators are important factors, yet some of representatives from some sectors have expressed different views from the enterprise surveys. For instance, the tea industry, which is discussed in the section under the In-depth analysis by Industry, should have been ranked as high in this category, but the interviewees scored this part modestly. In order to avoid any risks to mislead our analysis for export promotion in Nepal, we have concluded to use only FTEE indicator. The Annex 4 shows a methodology and information on employment for each sector.

− The current socio-economic impact is high for tea and medicinal plants and essential oils. These sectors require a large number of people as a full-time basis. For instance, in case of tea sector, according to Himalayan Orthodox Tea Producers Associations Nepal, many of the daily-wage workers are landless and live at the estates on a permanent basis. Compared to other sectors such as silk and pashmina products, the contributions to Nepal’s total export from these two sectors are small.

− Handmade paper sector is in an intermediate position, after tea and medical plants and essential oils. The sector still requires a quite large number of people, yet it exports less than USD one million.

− The current socio-economic impact is relatively low for the remaining sectors, currently requiring much smaller number of labours than tea, medical plants and essential oils, and handmade paper sectors. Among the selected sectors, silk and pashmina products, cardamom, and pulses export more than USD 10 million, yet, FTEE index is low for these sectors.

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

Sector Exports in 2005(USD’000)

Full-time employment equivalent

Index Assessment

6. Tea 5,169 105,000 5.0 High8. Medicinal plants and essential oils 1,979 40,000 5.0 High9. Hand made paper 944 22,333 3.0 Medium14. Mandarin oranges 0 16,667 2.4 Low13. Honey 49 13,333 2.0 Low3. Pulses 11,477 12,500 1.9 Low7. Ginger 2,518 11,111 1.8 Low4. Gems and jewellery 7,393 10,000 1.7 Low12. Coffee 169 7,778 1.4 Low5. Leather 5,697 6,300 1.3 Low2. Cardamom 11,694 5,556 1.2 Low1. Silk and pashmina products 22,131 5,000 1.1 Low10. Wooden handicrafts 350 4,000 1.0 Low11. Cut flowers 211 2,500 1.0 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). Regarding handmade paper sector, the number presented in the table is the simple average of two different figures from National Consultant and Nepal Handmade Paper Association. Source: Information on employment is collected by ITC National Consultants and associations for some sectors, calculations by ITC.

Mapping industries according to export potential and socio-economic impact

The export potential of each sector can now be compared with its socio-economic impact. Four extreme groups can be distinguished, though not all exist in the case of Nepal (Table 14).

− Tea is the only product that scores highly for both export potential and socio-economic impact.

− 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 are less desirable for socio-economic reasons.

− Finally, there is no product that score high in terms of socio-economic impact and low in terms of export potential.

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




High socio-economic

impact --- 8. Medicinal plants and

essential oils 6. Tea

Medium socio-economic

impact --- 9. Hand-made paper ---

Low socio-economic

impact

13. Honey 10. Wooden handicrafts 14. Mandarin oranges

4. Gems and jewellery 5. Leather 7. Ginger 12. Coffee



11. Cut flowers

Source: Table 11 and Table 13, based on TradeMap, Market Access Map, and interviews with enterprises, calculations by ITC.

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2. In-depth analysis by industry

This chapter provides an in-depth analysis of each industry. Industries are ranked in decreasing order or their export value in 2004.

1. Silk and pashmina products Export potential High

Current socio-economic impact (employment) Low

The export potential for silk and pashmina products is high. Pashmina is high quality wool renowned for its fine, soft, fabric as well as its light weight and warmth. 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 spiralling decline. The main cause is thought to have been unhealthy 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 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 modernized. Market prospects therefore are not as unfavourable 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 the lack of 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.

Priority actions Domestic supply

− Initiate a feasibility study to launch long term Chyangra and Pashmina development programmes in the Northern mountain belts of Nepal.

− Launch an integrated long term silk development programme on a large scale, incorporating appropriate components to promote mulberry farming, pre-cocoons and post cocoons development activities as well as the setting up of yarn reeling and twisting units, all under private sector management. Such a programme should

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consider (a) introducing a proper management system, (b) encouraging private sector involvement in processing and marketing, (c) implementing duty-free input goods, and (d) modifying in areas of looms and processing technology.

− Provide technical assistance to establish facilities in order to test the quality of silk and pashmina yarns. The addition of a certifying laboratory, to encourage uses of genuine materials and promote quality export from Nepal, is a necessary measure to ensure consistency of quality.

− Provide human resource development in the areas of design development, product adaptation, export management, technical services on silk and pashmina development and production technologies.

− Establish a separate umbrella organization, similar to the Carpet and Garment Associations, which would provide technical support in the production as well as the marketing of silk, pashmina and other wool-based products in Nepal.

Business environment

− Implement simplified procedures for refund of taxes and VAT. Reduce service charges certification fee imposed by TEPC, HAN, NCC and Department of Customs. Duty-free or VAT free imports of inputs should be permitted in bonded warehouses and bank guarantee should be advanced to small entrepreneurs.

− Make commercial banks to extend export credit facilities to any export oriented transaction.

World markets

− Register the word “Pashmina” as Nepal’s trademark or restrict the geographical origin of products able to use the pashmina label, in both Nepal, as well as in major markets for pashmina products, such as USA, UK, Germany, France, Italy and Japan. Arrangements should be made to ensure that no imports of similar products from countries other than Nepal be allowed to use the word pashmina.

− Facilitate participation in international trade fairs and exhibitions and support to organize special promotion campaigns in major markets such as India, USA, UK, Germany and Japan.

− Approach the US Government to request for GSP or duty free facilities on imports of pashmina products from Nepal.

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SWOT Analysis for pashmina and silk products Strengths Weaknesses Resources: Favourable climatic and geophysical conditions to

produce quality silk and Pashmina. Skilled hands in artistic works with capacity to improve

and adapt products to suit the buyer’s requirements. Product: High value and low volume product. Simple technology and low investment requirement for

quality product. Labour intensive. Flexibility to supply small quantities of assorted colour

and special designs to special customers and niche markets or boutiques.

Guaranteed quality products with many looms and equipment.

Well-developed quality assurance and control systems. Good upstream linkages. World Markets: Support of foreign designers. Excellent relationships with buyers.

Production: Lack of highly skilled technicians in knitting new designed

items. High-tech handloom products expensive. Weak export management system in terms of production

quality, delivery programming or scheduling. Lack of capital and technology for hi-tech quality

exportable production. Marketing: Limited market information based on professional

research and authentic or reliable surveys. Weak in taking appropriate market promotion measures.

Opportunities Threats Production Difficulty in meeting continued and increasing demand for

genuine quality items. Scope for increasing export with further investment in

future. World Markets Quality image in the markets.

World markets Competition from low-grade fake products from China and

India. Competitors have abused the "Pashmina" brand by

applying it to viscose, acrylic or poly yarn make products. It has positioned Nepal Pashmina in a bad quality image.

Price competition in the markets. Production Labour unions. Lack of guaranteed and genuine raw materials. High cost of imported raw materials.

Source: Collected from various source and interviews by national consultants.

Current export performance Nepal exports predominantly shawls made from wool or fine animal hair (60%), and silk (18%) and pullover made from wool or fine animal hair (20%)4. In 2004, these three products represented 98% of total exports.

In the past few years Nepal has also exported silk cocoon, silk yarn and silk fabrics. This, however, only occurred on an occasional basis and varied from year to year. Most of these exports went to India.

The current export performance of pashmina and silk products is far from being satisfactory. Mirror data shows a dramatic fall in exports over the period 2000-2004. Exports of pashmina and silk shawls started to increase in the mid-nineties reaching Rs.15 million in 1996/97. From then onward they grew rapidly to above Rs. 5.3 billion during the years 1999/2000 and 2000/20015. However, exports took a dramatic downturn over the period 2001-2003. Since then they have been slowly recovering. There are many reasons6 behind the decrease in manufacturing and exports of pashmina and silk

4 Here are the codes: Shawls, scarves, veils& the like, of wool or fine animal hair, not knitted (621420, 60%), Pullovers, cardigans&similar article of wool or fine animal hair, knitted (611010, 20%) Shawls, scarves, veils and the like, of silk or silk waste, not knitted (621410, 18%) 5 Many stakeholders puzzled to find how the prevailing infrastructure, manpower and entrepreneurs could handle such a huge business within a short span of time. 6 These reasons for decrease in exports are also the constraints in production and export development of Pashmina products.

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shawls and other such products: unfair competition from neighbouring and other countries, instability in the country and over activeness of labour unions.

Nepal exports are concentrated in a few markets. According to official data, the three major markets for Nepalese pashmina and silk shawls are India, USA and UK. Together they represented between 55-60% of overall export over the period 2001-20067. During the same period Germany emerged as a major market (9% in 2005/2006) while Japan dropped to about 5%, a market share currently comparable with France and Italy.

Nepal remains a very small player in the world market. It represents only 4% of world market share for Shawls of wool or fine animal hair (621420), 1% of Shawls of silk (621410) and less than 0.1% of Pullovers of wool or fine animal hair (611010).

Domestic supply conditions Pashmina is a high quality wool renowned for its fine, soft, fabric, light weight and warmth. Pashmina fibres are normally 12 to 17 micron thin. Human hair, in comparison, is usually around 65 to 75 micron. It is often called “Diamond Fibre” or “Soft Gold of High Asia”. The most common use of pashmina is in shawls and pullovers. Nepali pashmina and silk products include, but are not limited to, shawls, stoles, scarves, mufflers, blankets and pullovers. Sometimes the items are embroidered, shaded, beaded, printed, and painted further enhancing the value of the product.

Box 3. Background Information – Pashmina

Pashmina refers to the very short inner coat of the Himalayan goat - “Chyangra” (Capra Hircus). It grows as a separate layer under the outer thick and course hairs of the Chyangra. The Chyangra goat lives in desolate places with little vegetation and can endure extremely cold conditions at above 2000 mt altitudes. Every year about 90 grams of pashmina can be extracted from each “Chyangra”, either by combing or by cutting, during January and February.

Traditionally the mountain dwellers used course wool and pashmina of Chyangra to make natural colour jackets, sweaters, shawls, carpets, and saddles. The weaving of pashmina shawls in woollen warps has only been common since last century in mountain regions. As it gained popularity among the Nepali elites the fashion gradually spread in the Kathmandu valley. It is only since early nineties that the weaving of pashmina shawls began in silk warps.

Source: National consultants.

The climatic and geophysical conditions in Nepal are very favourable for the production of quality silk and pashmina. Nepal has a huge “Chyangra” goat population. Presently the goat population stands at around 7 million8. Further commercial Chyangra farms can be developed in high mountains, which accounts for 35.2% of Nepal’s area. Silkworm can be raised in hill areas that constitute about 42% of total land of the country.

The quality of pashmina and silk in Nepal is high and on an upward trend. Pashmina products are usually a 70/30, a 60/40 or a 50/50 blend of Pashmina yarn and silk yarn respectively. 100% pashmina products are also available. Generally silk is mixed not only to make the product more economical but also to enhance the look of the product, and increase the quality, strengthen of the fabric. The higher the pashmina content, the more expensive the final product is. Quality is also affected by the dying process as well as the finish. Often the product can be further enhanced by adding detailed designs. Entrepreneurs as well as technical experts have gained adequate experience expertise for future quality improvements. In the year 2000, the government issued a directive forcing the pashmina shawl making industries to use 97.5% pure pashmina of minimum 17.5 micron in pashmina yarn. This is designed to ensure the quality of pashimas exported to overseas markets. Regarding silk, the quality of Nepalese Bi-voltine and multi-voltine cocoons is considered very high in the international markets.

The pashmina industry has grown with increasing demand from the world market. The high-profile given to the pashmina shawl by the British Queen Elizabeth II as well as its popularity among movie stars, and other big celebrities abroad created awareness of the

7 In 2005/2006, their market shares are as follows: India (33%), USA (14%) UK (13%). 8 Ministry of Agriculture and Cooperative, Statistical Information on Nepalese Agriculture 2004/05

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product and increased demand for it. Extended coverage by the global media and international fashion magazines with favourable reviews highlighting its quality and superiority served to further boost demand-causing export to skyrocket in a span of less than five years. Unfortunately the export market declined sharply from the mid-2001 and has remained stable since then.

The number of production units has significantly declined since 1999. A recent study suggested that there were a total of 1500 units9 registered in the Department of Cottage and Small Industries and a further 6 joint venture units registered at the Department of Industry. After the downturn in 2001 most of these closed down. Only 474 of them remained in operation in 2002.

Numerous companies export silk and pashmina products in Nepal and some contributed to the destruction of Nepal's image as a reliable high quality pashmina exporter. According to the Handicraft Association of Nepal (HAN) there were about 218 firms exported pashmina products in 2006. Most of the pashmina units are registered as cottage or small industry and were set up on rented land in buildings requiring few formalities. The level of investment, in terms of looms and accessories, is very low with costs ranging from about USD 400 for small scale production with 4 looms to about USD 40,000 for large scale production with modern techniques and equipment and around 100 looms. Today there are 86 active members of Nepal pashmina Industries Association (NPIA) who are directly involved in the export of pashmina and silk products from Nepal. According to NPIA about 80% of the members have got looms and manufacturing facilities whereas the rest do not manufacture and are involved in exporting only. However, new-mushroomed entrants, who had little understanding on overseas export marketing techniques and standards, have destroyed Nepal's reputation as a high quality, reliable pashmina exporter. The Handicraft Association of Nepal (HAN) counted 482 firms in 2006. Some Nepalese entrepreneurs are confused about the quality of imported raw materials. Whether knowingly or unknowingly, they tended to use low quality raw materials often with a fake Chinese quality certification.

Traditional processes of production are gradually being modernized. Power-looms as well as handlooms are now used to weave shawls or fabrics. Spinning, warping, drumming, drafting, weaving, washing, drying, fringe making, value adding with embroidery, beading and other finishing activities, however, remain difficult to mechanise and are therefore still highly labour intensive.

Competitiveness relies to a large extent on the availability and quality of raw materials. This is demonstrated by the fact that the average cost components of standard shawl comprised of raw materials 50%, labour 16%, dying 11 %, finishing and overhead 7% and interest and profit 16%.

Domestic supporting industries, especially yarn supply, are particularly weak. Due to the very poor production base, less than 2% of the pashmina and silk yarns requirements of export industries are met by domestic silk supply with the remainder being imported from China, Mongolia, and India. Dying materials and other accessories are also imported. Higher quality cocoons and silk yarns are domestically produced and exported mainly to India. Handloom or power loom silk fabrics were made out of the silk yarns imported from China or Mongolia and exported to India particularly for shawl making and further trading purposes. According to the Sericulture Development Centre, Khopasi farmers in 4210 districts are involved in sericulture. Presently farmers in 22 districts have commercial production of cocoons. The country produces a mere 35 tons of silk cocoons.

The area dedicated to mulberry plantations, the leave of which serves as the only food source for silk-worms, has been increasing over the last couple of years. That has enabled the production of cocoons, and with that silk, to increase. It is estimated that total land area covered by mulberry farming in Nepal in the year 2001/02 was 80 ha. The targeted areas that at the end of Tenth Plan period (2006/7) is 1000 ha (Table 15). One

9 Department of Cottage and Small Industries, Ministry of Industries, Commerce and Supplies. 10 There are 75 districts in Nepal.

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of the sectoral objectives of Tenth Plan is to increase agriculture production and productivity and it aims to double the annual production of silk cocoons by 2007. The Plan's strategy includes the gradual extension of mulberry farming to intensify income-generating activity through sericulture development. It is envisaged to benefit around 10,000 additional farmer's families in rural areas, as well as producing more silkworm eggs by extending the mulberry farms areas and improving their management system. One of the broad goals spelt out in the Sustainable Development Agenda for Nepal (SDAN), (2004-17) includes the use micro-climates of hills and mountains to produce high-value-low volume agricultural products, like silk. The Long Term Sericulture Development Plan (LTSP) (1998) of the Ministry of Agriculture and Cooperatives has envisaged quality upgrading and productivity enhancement by increasing the coverage of sericulture area up to 8000 hectare of land and production of 453 Mt. raw silk every year. The Silk Association of Nepal (SAN) has 26 entrepreneur members in Kathmandu and a few hundred sericulture farmer members. The main objective of the SAN is to contribute to the overall development of silk production and export in Nepal by cooperating with stakeholders including the government of Nepal in promoting sericulture farming, cocoon processing, yarn and fabric making in different parts of the country.

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

Fiscal Year Actual

Mulberry Area (in ha)

Target Mulberry Area

(in ha , 10th Plan)

Production of Cocoon in

Tons

Production of silk (kg)

Production of Egg Boxes -

20,000 eggs/Box 1996/97 217 .. 24.5 400 1703 1997/98 105 .. 17.9 428 1050 1998/99 225 .. 20.3 1223 2015 1999/00 214 .. 25.7 955 2110 2000/01 245 .. 31.4 1376 6220 2001/02 80 .. 34.2 1446 6440 2002/03 100 600 (45) .. 3000 2003/04 100 700 (64) .. 4000 2004/05 100 800 (90) .. 5000 2005/06 100 900 (120) .. 6000 2006/07 100 1000 (132) .. 6000

Source: Sericulture Development Branch, Khopasi, Kavre. Figures in parenthesis are targeted production figures.

However, government subsidies to sericulture farming have so far failed to develop it as a viable commercial business. The public as well as private sector institutions in Nepal have failed to launch successful product and marketing strategies aimed at retaining the pashminas reputation in the global markets. The stakeholders have a low opinion of the measures taken so far and suggest that heavy government intervention might be one of the reasons for the continued low productivity and lack of commercialization of silk products. Recently, the entrepreneurs have sought to encourage a shift to a new system of silk development to ensure becoming economically viable and competitive.

The country’s capacity is currently heavily underutilized. According to the Nepal Pashmina Industry Association (NPIA) currently 86 formal units associated with NPIA are in operation. About 80% of these units have production facilities with approximately 2000 looms and 5000 weavers. Their total production capacity is approximately 2 million standard sized pashmina shawls, though on average only about 50% of capacity is utilized. Apart from this it is estimated that about 20,000 households in and around Kathmandu valley have one loom each and are capable of weaving pashmina shawls. If world demand were to increase Nepal could easily mobilize the required manpower and utilize the available looms in the country.

The business environment is not satisfactory. Instability in the country and over activeness of labour unions have discouraged further investment in the sector by successful entrepreneurs. In addition, while the government has not-committed towards product development and market promotion efforts it has instead further damaged the pashmina industries by introducing VAT and, further, converting these industries from

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cottage industry to small or medium industry status under the Industrial Enterprises and Technology Transfer Act.

World markets World demand for silk and pashmina product is not dynamic. The world market for the major Nepalese exports grow at a rate of 1.5% per year (in value) over the period 2000-2004, which is far below the growth in total world trade (5%).

However, demand for Shawls, scarves of wool or fine animal hair, not knitted (621420) has been particularly dynamic. While China emerged as a major dynamic supplier, Nepal’s exports, in contrast, declined. Over 2001-2005, global imports for shawls of wool or fine-animal hair grew by 8% rising from USD 323 million in 2001 to USD 392 million in 2005. Some markets have been highly dynamic over the same period such as Italy, Ireland, Taiwan and Turkey. They showed a much higher annual average growth rate of over 20%. While demand has revived in the US (representing a fifth of world imports) and Europe (representing two fifths), in Japan (representing a quarter of total world imports) it has remained stagnant. Japanese imports from Nepal have declined by an alarming rate of 35% per year on average over 2001-5. At the same time, imports from China have only increased slightly.

Nepal faces unhealthy competition from neighbouring and other countries, which have been using very low quality pashmina, non-pashmina or fake materials to manufacture and export items similar to Nepalese pashmina. In order to compete with foreign countries Nepalese entrepreneurs were forced to use inferior quality materials imported from China, Mongolia or India. Some countries, such as South Korea, even used viscose, poly yarn, and acrylic materials to give pashmina like effects and exported them at very cheap prices to overseas markets distorting the global markets for genuine, high-quality pashminas.

Changes in fashion in the global market are also a reason for decrease in the demand for pashmina shawls. There has been a lack of practical market research into the tastes of the consumers and a failure to adapt the products and items in terms of colours, patterns and designs to suit their changing requirements.

Besides for the demand for pashmina products, the international markets also serve as an outlet for Nepalese silk products. In this area there is high, and growing, demand. World imports grew at a rate of 12% between 2001 and 2005. India stands out as an interesting market: though a net exporter, it imported more than 20,000 tons in 2005.

Market access conditions for Nepalese exports of pashmina are favourable especially in the EU and Japanese markets. Nepal’s exporters have open access to the major markets of Europe and Japan, benefiting from GSP or LDC status although a Certificate of Origin is required. Other major markets apply generally low tariffs: Hong Kong’s duty, for instance, is simply 0%. The United States applies an MFN rate of 6.7%, Taiwan applies 12% and Gulf Countries apply 5%.

The world market prospects are favourable.

− Some OECD, Hong Kong, and Turkey are the most attractive markets for Nepalese silk and pashmina products. Nepalese silk and pashmina products are highly underrepresented in markets in Japan, EU and Hong Kong. Particularly the Japanese market seems promising. Most of these markets are highly dynamic, with particularly Hungary showing a very strong growth in demand.

− Overall Nepal’s market access conditions, especially in market openness, are very favourable. Owing to preferential tariff programs, Nepal has duty-free access to all markets while Nepal has significant tariff advantages to only four markets, namely New Zealand, Italy, Japan, and Korea as opposed to its top 5 competitors (Table 16).

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Table 16. Pashmina and Silk Products: Most attractive markets by product Product (HS 6-digit code)

Export Value (USD 1,000)

Markets* World share

(%, 2004)

Import growth(% p.a.

from 2001-05)

Tariff applied

to Nepal (%)

Nepal’s tariff advantage (+)

or dis-advantage (-)

(%)1. Japan 28.5 -16 0 3.72. Hong Kong 3.7 -7 0 0.03. Czech Republic 0.7 17 0 3.34. New Zealand 0.1 5 0 19.05. Belgium 1.5 3 0 2.5

Shawls, scarves, veils & the like, of wool or fine animal hair, not knitted (621420)

13,267

58. India 0.1 -26 0 15.01. Italy 8.7 13 0 6.82. Japan 16.3 -2 0 10.93. KOREA 1.4 15 0 13.04. HONG KONG 11.6 -1 0 0.0

Pullovers, cardigans & similar article of wool or fine animal hair, knitted (611010)

4,499

5. HUNGARY 1.3 104 0 0.01. Spain 6.0 11 0 2.82. France 11.7 0 0 3.53. Japan 9.1 -4 0 4.14. TURKEY 0.8 34 0 2.85. GREECE 0.9 18 0 1.7

Shawls, scarves, veils and the like, of silk or silk waste, not knitted (621410)

3,931

29. India 0.1 1 0 0.0* Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact This sector is labour intensive, yet the sector currently requires a much smaller number of labours than tea sector. The full-time employment equivalent (FTEE) is low for this sector (Table 13). More than 112 small and medium pashmina and silk production and exporting units are actively operating in Nepal. Apart from these, many units operate informally, at cottage level, without registration. It is estimated that these units employ, at a conservative estimate, 5000 people. If the favourable conditions prevail and external market demand is revived, the present production could easily be doubled, thereby creating employment for an additional 5000 people.

The contribution of pashmina and silk shawls to the total export earnings of Nepal remained relatively high compared to other analysed sectors. It represented 3 to 3.5% during the past five years. These figures are very low, especially compared to its contributions during the peak export periods of 11% in 1999/2000 and 10% in 2000/2001.

Collection of wool and sericulture is important for rural livelihoods whereas the manufacturing side of this sector offers little rural development. Pashmina production activities are mainly located in and near the Kathmandu valley. Productions of pashmina and silk products are currently confined to the Kathmandu, Lalitpur, Bhaktapur, Kavre Palanchowk, Makwanpur, and Chitwan districts of Nepal. As they are a high value, low bulk fashion product, they are mostly shipped by air from Kathmandu International Airport.

This sector is favourable to efforts to empower women. As silkworm rearing is an indoor activity, women are responsible for a major part of sericulture work and by increasing the direct cash earning of women, it has the potential to increase their purchasing power, reducing women’s hardship.

The successful practice of sericulture and Chyangra farming provides an opportunity to create a sustainable livelihood for the rural farmers as well as landless labourers. Both activities provide employment to rural women and men almost throughout the year. Landless labourers may also be able to rear silkworms, plant mulberry and raise Chyangra by acquiring forestland on lease from the District Development Committees.

Finally, the pashmina industry can be considered environment friendly, except for the possible effect of the chemical dying material on the environment, as the major

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components are imported raw materials and labour. Most of the industries claim to use eco-friendly dying agents, which have a negligible adverse effect on the environment. They also claim to have arrange effluent treatment systems11. The development of new Chyangra farms as well as the cultivation of mulberry plants and silk products associated with improvements in the pashmina and silk industries will help to control soil erosion and desertification.

Pashmina and silk products

Department of Customs, Trade Statistics with India.

Handicraft Association of Nepal, Export Trade Statistics, Various Issues.

Handicraft Association of Nepal, Membership Directory 2005.

Handicraft Association of Nepal, Study on the Status of Pashmina Industries, prepared by National Productivity and Economic Development Centre, Kathmandu, April 2002.

Industrial Entomology Development Directorate, DOA, Annual Progress Booklet (FY 2061/62).

Nepal Chamber of Commerce, Chember Patrika 39 issue 2, (Aswin 2063) 2006. Low quality inputs lead to a Deadlock in Pashmina Industry, Shankar P. Pandeya, President, Nepal Pashmina Industries Association (NPIA).

Trade Promotion Centre, Nepal Overseas Trade Statistics, Various Issues.

Trade Promotion Centre, Pashmina Products – Current Status – A Study Report (in Nepali) prepared by B.N.Adhikary, 2059/1/10 (2003).

Trade Promotion Centre, Profile of Nepalese Pashmina Products, 2005.

Persons contacted

− Mr. Shankar Prasad Pandeya, President, Nepal Pashmina Industries Association (NPIA) and Nepal Silk Association (NSA), Managing Director, Sagarmatha Silk Pvt. Ltd.

− Mr. Pushpa Man Shrestha, Vice President, Nepal Pashmina Industries Association, and Managing Director, Nepal Pashmina Industry Ltd.

− Mr. Shiva Kumar Shrestha, Managing Director, Dhawalagiri Pashmina Ugyog Pvt. Ltd.

− Mr. Kamal Raj Bista, Nature Knit.

− Mr. Bharat Adhikary, Nature Knit.

− Ms. Lily Eren Tuladhar, Managing Director, Fine Weaves, Lotus Holdings. Kathmandu.

− Mr. Mandu Babu Adhikary, Executive Officer, Nepal Pashmina Industries Association.

− Mr. Biswa Karki, Officer, Nepal Silk Industries Association, Kathmandu.

− Mr. Nathuni Shahu, Chief/Senior Officer, Khopasi Silk Development Centre, Panauti, Kavre.

− Mr. Narahari Ghimire, Officer, Khopasi Silk Development Centre, Panauti, Kavre.

− Mr. Jagdish Bhakta Shrestha, Entomologist, Industrial Entomology Development Directoriate.

11 Handicraft Association of Nepal, Study on The Status of Pashmina Industries prepared by National Productivity and Economic Development Centre, Kathmandu, Nepal 2002.

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2. Cardamom Export potential High


The export potential is high. The recent export trend of Nepalese Large cardamom to India and overseas 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 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.

Priority actions − Production: Develop national standards for quality and grading, upgrade drying

technology, eradicate crop diseases and explore avenues of product diversification – catering spice industry, essential oil, cardamom paper, incense, colour extraction.

− World markets: Increase awareness about large cardamom in markets, which traditionally purchase small cardamom.

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SWOT Analysis for Cardamom Strengths Weaknesses Resources: Geo-climatic advantages of Nepal to produce cardamom. Higher storability than other crops. High price for farmers. Low investment and low requirement of labour days to

obtain a reliable inflow of cash make the crop accessible for poor farmers.

World markets Top producer of large Cardamom in the world.

Production: Lack of knowledge / sincere adoption of best practices of

cultivation system, quality improvement and post harvest handling.

Lack of information and interests of farmers to adopt improved drying technology.

Business environment: Lack of credit, especially for the poor farmers. No quality incentives. Lack of collection centres at farmers’ level. Lack of storage facility at farmers’ and traders’ level has

decreased the bargaining power of the respective actors and resulted in low quality product.

Farmers are not organized for trading and farming of cardamom.

Lack of conducive policy environment for export trading.

Opportunities Threats Resources: Scope for expansion of production area, productivity and

quality. Production Shift from bhatti to improved bhatti drying system. World markets: International demand for large cardamom is increasing. Market development for Large cardamom in markets

where Small cardamom is prevalent. Essential oil extracting utilizing new technologies like

CO2 extraction.

Production Chirke and Furke disease widespread. Farmers risk to move away from cardamom because of

disease and lowering prices. Business Environment Multiple taxation. World Markets Dominance by a single market and its players – India.

Source: Adopted from: SNV/Nepal study.

Current export performance The recent export trend of Nepalese large cardamom to India and overseas markets has been very encouraging. While it has doubled in terms of quantity measured in terms of value it has increased by 78% over the last four years. The total export of large cardamom from Nepal increased to 7,058 Mt. (valued at Rs. 801 million) in 2004/2005 from 3,915 Mt. (valued at Rs. 568 million) in 2002/2003 (Figure 2). Such export growth is higher than the overall world import growth. The share of Nepal in the total world export marker for large cardamom is almost 50%12.

India is the major export market of Nepalese large cardamom. Nepal’s export of large cardamom is very much dependent on India and more specifically the Siliguri market alone. It is estimated that more than 90% of Nepal’s export of large cardamom to India goes to the Siliguri market. The majority of the value adding activities, such as tail cutting, grading by size, cleaning and dispatch to higher priced markets like Delhi and Mumbai, is then done in Siliguri. Traders reported that almost all the exported quantity of large cardamom from Nepal to India is re-exported to Pakistan, UAE and other countries by the Indian traders from Delhi and Mumbai.

Pakistan, Singapore and UAE are the other main and stable export markets for Nepal. During the past three years Afghanistan has also emerged as an important buyer of Nepali large cardamom.

12 It must be noted that Nepal also imports a large quantity of cardamom (over 600 tons in 2004). This is for meeting domestic demand for Green Cardamom and in addition some accusations have been made by Indian traders that Nepalese traders channelled large quantities of Guatemalan cardamom to India to flood the market. The accusations were made in 2003, at which point there was a surge in imports of cardamom from Guatemala in 2003 (1,143 Mt).

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

0

100

200

300

400

500

600

700

800

900

2001/02 2002/03 2003/04 2004/05 2005/06

Mill

ions

Other countries

India

Note: Other countries include Pakistan, Singapore, UAE, Hong Kong, Afghanistan, Bangladesh, and USA. Source: Nepal Overseas Trade Statistics/TPC and Department of Custom for India.

World markets Global production of large cardamom is around 17,100 Mt. with major contributions coming from India, Nepal, Bhutan and Indonesia. Nepal is, however, the leading large cardamom producing country13. Nepal’s share on total world trade of large cardamom is almost 50%. The growth rate of Nepal’s export is higher than that of other countries. The major competitor to Nepalese exports in Pakistan, UAE, Afghanistan markets is India. Myanmar produces some large cardamom but does not compete in international market with Nepalese large cardamom. Similarly, Indonesia also produces some large cardamom but has not penetrated into the markets where Nepali large cardamom is exported. Guatemala, however, is a major exporter of small and green cardamom (Elettaria cardamomum), which competes successfully with Nepali in exports of large cardamom (Amomum sublatum Roxb) in the world market. While Guatemala is the world leader in cardamom, exporting 100% of its produce and collecting highest prices, many argue that the two cannot be considered competitors because of market segmentation between the demand for these two types of cardamom. However, there does appear to be some substitution between the two varieties.

Demand for large cardamom is regionally limited to South Asia. Though some consumption of large cardamom occurs in the Middle East and Europe – mainly by South Asian ethnic groups - large-scale market development activities would be required to increase awareness of this variety before any noticeable demand would exist outside South Asia.

The key market for Large cardamom within South Asia is Pakistan (1,257 Mt in 2004). Although specific data on large cardamom imports is not available for a long enough period to calculate a growth trend, imports in 2004 were 10% higher than in 2003. In 2004 Nepal had a 64% market share in Pakistan’s large cardamom imports recorded as directly imported from Nepal. India’s share was 26%, an important portion of this is likely to have originated from Nepal. Since cardamom is on the list of tradeable products between Pakistan and India, it is unlikely that there is significant unofficial border trade in this product. According to Karki and Chapgain, the only smuggling that occurs relates to produce consigned by train to Afghanistan, which is then diverted to Pakistan at the Lahore dry port. By diverting the produce in this way, the importers avoid paying the

13 Santosh Khatiwada, Local Efforts of Taplejung Chamber of Commerce and Industry to Improve the Marketing of Large Cardamom (In Nepali), presented at an interactive meeting on “Nepal Cardamom Production and Market Promotion” FNCCI/Kathmandu, Nepal, January 16, 2007.

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import duty. In their study they mention that one trader reported that up to 50% of Pakistan imports are using this method. (Karki, Chapgain, 2004)

So far Nepal has not come across any market access problem in exporting Large cardamom to the overseas markets. The exporters need to submit Certificate of Origin and Quarantine Certificate. There is no import duty on large cardamom entering India from Nepal. Sri Lankan large cardamom also benefits from a 0% duty, while all other countries are taxed at 70%. In Pakistan, the custom tariff has been reduced to a 5% ad-valorem tax and Nepal enjoys a further reduction to 3.5% under SAPTA. However, a number of additional taxes increase the cost of Nepalese exports of large cardamom to Pakistan: a 15% sales tax, 5% educational tax, 25 income tax, 1% Flood relief fund and Rs 11 per quintal Octori.14

Tariff barriers are generally low or non-existent for cardamom in the US, EU, Japan, and most of the Middle East with the exception of Jordan and Turkey, which have a 30% tariff. Thailand, does not produce cardamom, but curiously applies a 27%15 tariff to cardamom imports.

The world market prospects are very promising if Nepal could reduce its dependency on Siliguri market.

− The most attractive markets for Nepal are Syria, Singapore, Qatar, Canada, and Bangladesh. At the regional level, India is marked as a potential market. Nepal is underrepresented in Syrian and Singapore markets, while Nepal is highly overrepresented in other markets. All markets except for Singapore have much higher than average growth and therefore are highly dynamic markets.

− Nepal’s market access conditions to all markets are overall favourable, particularly for Indian market, which provides a big tariff advantage to Nepal as opposed to its top competitors (Table 17).

Table 17. Cardamom: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied to

Nepal (%)

Nepal’s tariff advantage (+) or dis-

advantage (-)

(%) 1. SYRIA 6.3 17 15.0 0.0 2. Singapore 5.2 -10 0.0 0.0 3. QATAR 1.0 9 0.0 0.0 4. CANADA 0.8 10 0.0 0.0 5. BANGLADESH 2.1 19 27.6 4.6 6. India 9.5 3 0.0 70.0

Cardamom (090830) 11,694

40. Pakistan 5.9 -5 3.5 1.5 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Domestic supply conditions Nepal produces large cardamom, which is used as a spice and in several ayurvedic preparations (Box 4). It is a high value crop and is grown with traditional methods in more than 22 hill and mountain districts. The total area under its cultivation was 11,347 Ha. in the year 2004/05 (Table 18).

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

Large Cardamom contains 2 to 3% of essential oils and possesses medicinal properties like carminative, stomachic, diuretic, cardiac stimulant, antiemetic etc. In India, consumption by household sector (food preparation where whole Large cardamom along with husk is preferred and in sweet preparation for which medium grain is preferred) is estimated at 47% of the total domestic consumption. The industrial sector uses the remaining 53%. The industrial uses are: Blended spice masala (29%) which are ingredients in

14 Eknath Khatiwada, Cardamom Sub Sector Market Development, presentation materials. 15 Note: this is 27% or B3.75 /KG whichever higher.

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meat and vegetables curries; Tobacco mixtures (7%) like Panmasala, panparaga and gutka; Confectionary items like Bread cakes, pastries, patties, chocolate pudding, ice cream, etc.; Incense stick making (varieties of incenses using the capsules covers and tails along with the broken seeds); and Indian Sweet chain manufacturer (11%) like Haldiram, Bikaner, and Bengali Sweet.16


The production is highly concentrated in Illam, Panchthar and Taplejung districts of Eastern Nepal. The 7 districts of Eastern Nepal17 alone accounts for more than 90% of total large cardamom production of the country.

The quality of Nepalese Large cardamom is high although there is currently no quality standard in Nepal. Informed opinion suggests that the Nepali large cardamom is preferred over the Indian Large cardamom in Pakistan and other markets due to its quality. Thus, there is great market diversification potential for Nepal. However, there is currently no government or private agency enforcing grading standard of large cardamom. Neither has any standard guideline for grading structures been commonly accepted in Nepal. Grading is therefore still done on the unscientific basis of size, colour, drying method applied and tail cut. Grading is done at the terminal market level only.

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

Year Area(Ha.)

Production(Mt.)

Yield (Mt./Ha.)

1994/95 8782 3010 0.34

1995/96 9252 3622 0.39

1996/97 9553 4456 0.47

1997/08 9725 5146 0.53

1998/99 9770 4335 0.44

1999/00 10627 6530 0.61

2000/01 10668 6080 0.57

2001/02 10840 6179 0.57

2002./03 11095 5880 0.53

2003/04 11220 5983 0.53

2004/05 11347 6086 0.54

Source: Statistical Information on Nepalese Agriculture, HMG/MOAC Agri-Business Promotion and Statistics Division.

Nepal is one of the world major producer of large cardamom. From 2004/05 it produced about 6,086 Mt. of large cardamom. In that year it accounted for almost 50 % of world production. Total production has recently been increasing and has doubled over the last ten years. It is estimated that less than 10% of the total production is consumed domestically, with the remaining 90% produced for export.

The average process technology of drying used in Nepal is still archaic. The most important stage is the drying of the large cardamom. The quality of the produce depends on this process. Cardamom in Nepal is dried in ‘bhatti’ with firewood. Sun drying practice also takes place, but is very rare. There are two systems of large cardamom processing adopted in Nepal: Drying in traditional ‘bhatti’18 and improved ‘bhatti’. These processes determine the final grade of the cardamom. The large cardamom dried in the improved ‘bhatti’ is of better quality and consequently fetches a higher price. Less than 10% of the total production, however, is dried in improved ‘bhatti’. Efforts are going on to introduce improved “bhatti”, but have still not been widely adopted. In a period of two years period, TCCI helped install only 43 improved ‘bhatti’ to dry only about 50 Mt. of large cardamom.

16 Suhrid Prasad Chapagain, Experience Sharing Of Lotus Opportunities involvement in Cardamom Marketing Linkages, presentation materials. 17 Ilam, Panchthar, Taplejung, Sankhuwasabha, Bhojpur, Dhankuta and Tehrathu districts. 18 The traditional bhatti has 2 feet thick stone wall structure on three sides and a wide opening in the front for burning large wood logs. Fresh cardamom capsules are spread in a 10-12 inch thick bed on the mesh structure placed on the stone walls. Nearby trees are cut into logs and these wet logs are then burnt inside the bhatti structure below the cardamom bed. Thus the cardamom bed is exposed to the thick smoke generated during burning of wet wood. It takes about 30-50 hours to dry the cardamom

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The major problem at this level is the non-uniform quality of dried large cardamom. This is the result of the many small farmers involved in the drying process, who have no standardised approach. The differences in quality of the large cardamom can be seen in the differences in the size, color, moisture contents, broken grain and non-uniformity in drying.

Over the past fifteen years, the large cardamom crop has been greatly affected by Chirke and Furke (viral disease) diseases in Ilam district. This has considerably reduced the yield there. Traces of Furke have been found in Panchthar and Taplejung district but not at an alarming level. Because of the disease, some farmers have shifted from large cardamom to tea and ginger crops as alternative sources of cash income. Despite efforts to control the outbreak by uprooting infected plants, the infestation of disease appears to be increasing.

Forward or backward linkages in the supply chain are non-existent. Farmers themselves dry their large cardamom and transport it to the market to sell, or sell to the collector/middlemen at the farm after drying. The role of input supplier is minimized as most of the inputs are farm based. Farmers rarely use chemical fertilizer and insecticides or other such inputs. The transporters – porters, mule owners and trucker –are very important in delivering the product from the farm to the road-head markets, onward to district level markets, such as Ilam and Fikkel, and further to the regional markets like Birtamod and Biratnagar. From there the large cardamom is exported to India and further overseas. Jute or polythen bags are used to package large cardamom and often they are recycled from other uses – such grain packaging, or fertilizer or sugar bags. Involvement of other infrastructure services is negligible.

The business environment could be improved. Nepal levies an export fee of 0.5% at the custom points. Furthermore, hand traders complained that they have to pay a kind of Octori fee at many places inside Nepal while transporting large cardamom from the production areas to terminal markets like Birtamod and Biratnagar and while exporting to India.

Competitiveness prospects are very promising. First, there is vast room for expanding production by area expansion. Large cardamom can be grown in the whole of the mid and high hills areas. There is still a large tract of land (even outside of the 22 districts which already cultivate the crop), which is suitable for growing large cardamom. There are no other crops suitable for planting in this areas, TCCI has estimated that as much as 10,000 Ha. of additional land could be brought under large cardamom in the Taplejung district alone.

Second, there is huge potential for expanding production by improving production techniques. Large cardamom cultivation in Nepal is mostly cultivated with traditional methods. There has not been much improvement in the production technology. Thus, changing the farm practices, especially by using better cultural practices and fertilizer use, could increase total production. Improvements in harvesting/picking and drying could help increase the quantity, as well as the quality, of large cardamom. While the average productivity of large cardamom for Nepal is 540 kg per Ha., through proper management, such as better shading and manuring practices, the productivity level could easily be increased to about 600 kg/Ha. It may even be possible to increase it to levels as high as 800 kg/Ha.

Third, product diversification avenues have not been sufficiently explored. Product diversification could be adopted to cater for spice industries both for domestic consumption and export. Some other possible product diversifications are: Essential Oils from Large cardamom; Paper produced from large cardamom, table mats and the production of cardamom based incense. Another ancillary use is the extraction of colour from the cardamom flower known locally as THUNGA. Presently this part of the plant is usually thrown away while collecting the green capsules for processing. The flower, however, produces a dark pink brown color, which can be used as dye or as a natural

47

food colouring. It can be distilled by a simple extraction processes. While promising, additionally research into the properties of the flower still needs to be carried out.

Table 19. Service Providers to Large Cardamom Development in Nepal Services Service Providers

Market Access CCI: Chamber of Commerce and Industries AYC: Ayam Youth Club FNCSI: Federation of Nepalese Cottage and Small Industries NRB: Nepal Rastra Bank Unique Overseas Trade Promotion Center IEDI: Industrial Enterprise Development Institute ANSAB: Asia Network for Sustainable Agriculture Bioresources Lotus Intellect Kanchenjenga Tea State FTG: Fair Trade Group – mahaguth ichaudhary Biosys Dabur Nepal

Group Formation/ Strengthening NCDC : Namsaling Community Development Center ICC: Ilam Cooperation Council Sungava MJS: Mahila Jagaran Sangh NBS MSS DADO LDF: Local Development Fund TG JUNTARA CLUB ECPF NMUS AYBS HUCODEC: Human and Community Development Center DUDIMBA GK IEDI

Provision for Pre/ post harvest technology

CDC: Cardamom Development Center DADO: District Agriculture Development Office NCDC : Namsaling Community Development Center TMI IOE-CS KCAP: Kanchenjunga Conservation Area Program RECAST ITDG CRT AEPC

Knowledge on improved farm practices

CDC: Cardamom Development Center DADO: District Agriculture Development Office TMI Private Nurseries (Harkate) NARC: National Agriculture Research Council KCAP

Alternative Financing ADB/N: Agriculture Development Bank/Nepal RBB: Rastra Banijya Bank NBL: Nepal Bank Limited LDF: Local Development Fund SAABDI SETIDEVI- MJS KUMARI BANK

Provision of Irrigation IRRIGATION DIV. DADO: District Agriculture Development Office DDC: District Development Committee VDC: Village Development Committee

Source: SNV/Nepal (Netherlands Development Organisation/Nepal). Eknath Khatiwada, Cardamom Sub Sector and Production Level Constraints, presented at an interactive meeting on “Nepal Cardamom Production and Market Promotion” FNCCI/Kathmandu, Nepal, January 16, 2007.

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Box 5. Role of the Government in cardamom

Realizing the importance of large cardamom in the farming system of Eastern Nepal, HMG/N has recognized large cardamom as one of the high value crops and has also taken some positive steps for its development. The government has established a Cardamom Development Centre (CDC) near Fikkel in Ilam. It provides training designed to improve large cardamom cultivation practices, supplies quality seedlings propagated from seed and suckers and provide consultation services to the farmers. The CDC carries out research on cultural practices, improved varieties, control and preventive measure on diseases and insect pest. It also transfers appropriate technologies and skills to farmers through demonstration and trainings. It has undertaken experiments to use gasified drying system which has not been yet been extended to the farmers. The District Agriculture Development Office, supervised by the Department of Agriculture, provides awareness training and counselling to large cardamom farmers on how to improve the cultivation of large cardamom. It also keeps records on the success of its schemes as well as, maintaining records related to large cardamom production, including the number of households involved, and total area under cardamom cultivation. This is designed to enable the government to keep abreast of developments in the sector.

Source: National consultant.

Current socio-economic Impact 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), resulting in low current socio-economic impact. (Table 13). The large cardamom is harvested by hand by the farmers. According to one estimate more than 25,000 farm households are involved in its farming in the Ilam, Panchthar and Taplejung districts alone. As many as 67,000 households across Nepal derive their livelihood from cardamom production. The sector generates a minimum employment of 80-100 days per hectare (about one million labour days in total/yr.). As large cardamom farming and processing is still very traditional and has not been mechanised, at the farm level labour intensity is high. In addition, a significant number of people find employment in industries related to the transporting (include the mules, truckers and tractor), cleaning, packaging, and loading and unloading of large cardamom. Increased exports of cardamom would therefore have a knock on effect, generating even larger employment opportunities.

Large cardamom is a very important export commodity for Nepal. The annual earnings from its export are approaching one billion Rs. The earnings from its export constituted about 2% of the total export earnings in 2004/05 (Total export earnings of Rs. 43.31 billion).

Large cardamom farming contributes strongly towards rural development. It brings drying units (improved bhatti) into the rural area generating income and employment for rural people. Its planting ensures ecological stability to fragile mountain slopes by requiring farmers to maintain a good forest cover of nitrogen fixing alder trees. It has been ecologically adapted to farming on sloping lands and forestry system and the plants maintain permanent green cover on forest floor. It is a very high value, low volume cash crop. Apart from providing much needed cash, the income is also often invested into farm improvements leading to better production and even higher returns. It is estimated that, in Taplejung district alone, as much as 70% of the cash income of a farm household comes from large cardamom.

Although the farming of large cardamom ensures ecological stability, the firewood required for the drying process generates negative environmental impact in terms of large firewood consumption. In order to produce 7,058 Mt. (quantity exported in the year 2004/05) of dry large cardamom, it is estimated, that in a traditional bhatti you would need 84,000 Mt. (12 kg wood per kg of dry Large cardamom) of fire-wood.19 This could add into the deforestation in the large cardamom growing areas. Therefore, both in order to improve the quality of the produce, as well as to ensure that the environmental damage is limited it is a high priority, to spread the use of the improved bhatti. It is estimated that the adoption of the improved bhatti could have helped save more than 26,000 Mt. of firewood in 2004/05 (saving of 28% of wood, i.e. nearly 3.8 kg wood saving per kg of dry large cardamom production).

19 Eknath Khatiwada, Cardamom Sub Sector Market Development, presentation materials.

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The production of large cardamom has a direct impact on the economy of the rural people. Its development contributes significantly to alleviating poverty among the people of the mid-hill areas as these areas (between 700-2300m amsl) are well suited to the variety of the large cardamom grown in Nepal. It provides cash income to small scale farmers on marginal farm land. As large cardamom is cultivated on marginal and degraded slopes and therefore it does not compete with other food crops for land. As the production cost is small its cultivation is easily accessible even to small farmers. At the same time, the return from a ropani of large cardamom is substantial. One estimate suggests that the cost of production lies between Rs. 3,200-3,500/Ropani (~55% of which is labour cost alone). Each ropani of land produces around 25 kg of dried Large cardamom. The cost of production to the farmer therefore is between Rs. 128 to 140 per kg of dry large cardamom. The farmer can currently expect around Rs. 150 to 200 for a kg of dry large cardamom. The net profit per ropani of land, therefore, lies between Rs. 550-1500.

In terms of regional development, the sector is an important contributor to economic development in Eastern Nepal.

Cardamom

Bijaya, Taplejung Chamber of Commerce and Industry, Present Situation of Large Cardamom and Our Efforts (In Nepali), presentation materials.

Dr. Dev Bhakta Shakya, Strategic Needs for Nepal Cardamom Sub-sectoral Development and Promotion, presented at an interactive meeting on “Nepal Cardamom Production and Market Promotion” FNCCI/Kathmandu, Nepal, January 16, 2007.

Eknath Khatiwada, Cardamom Sub Sector and Production Level Constraints, presented at an interactive meeting on “Nepal Cardamom Production and Market Promotion” FNCCI/Kathmandu, Nepal, January 16, 2007.

Eknath Khatiwada, Cardamom Sub Sector Market Development, presentation materials.

Ramesh Munankami, Marketing of Large Cardamom in Ilam, Nepal (In Nepali) Department of Food and Agriculture Marketing Services, Ministry of Agriculture, 1975.

Ramesh Munankami, Report on International Market of Large Cardamom, (in Nepali) MOA, DFAMS, Ministry of Commerce of HMG of Nepal, Trade Promotion Center, Kathmandu, Nepal, August 1988 (unpublished).

Sanjay Karki and Suhrid Chapagain, Large Cardamom and Its Significance, Perspective of North East India and Its Assessment, Analysis for the Benefits of Nepali Small Holders, Market Assessment and Competitors Assessment, Lotus Intellect and SNV/Nepal.

Santosh Khatiwada, Local Efforts of Taplejung Chamber of Commerce and Industry to Improve the Marketing of Large Cardamom (In Nepali), presented at an interactive meeting on “Nepal Cardamom Production and Market Promotion” FNCCI/Kathmandu, Nepal, January 16, 2007.

SNV/Nepal, Sub-sector Analysis Report on Cardamom, Eastern Nepal, Ilam, Panchthar, Taplejung.

Suhrid Prasad Chapagain, Experience Sharing Of Lotus Opportunities involvement in Cardamom Marketing Linkages, presentation materials.

Persons contacted

− Mr. Pradip Agrawal, Proprietor, No company's name Location Fikkal.

− Mr. Bhabar Lal Podar, Proprietor, No company's name Location Fikkal.

− Mr. Mohan Mittal, Proprietor, Neel Kantha Trader, Birtamod.

− Mr. Gopal Agrawal, Proprietor, Gopal & Govind Store, Birtamod.

− Mr. Ram Praksah Shah, Chief Officer, Cardamom Development Centre, Fikkal.

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3. Pulses Export potential High


The export potential is high. 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.

Priority actions Business environment:

− Improve transportation infrastructure.

− Address low price received by farmers.

− Provide marketing support.

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SWOT Analysis for Pulses Strengths Weaknesses Resources Existence of climatic diversity so that many high value

pulses can be successfully grown. Small and marginal farmers can be included in the groups

for farming. High source of protein for people of hilly regions. Legumes can be grown profitably in residual rice fallows

with the existing soil moisture thus saving on additional fertilizer, irrigation and tillage.

Resources Lack of suitable varieties and poor seed availability. Majority of the roads to the farm remain poor. Production Inadequate knowledge of fertilizer use among farmers

constrains production of pulses. Scattered nature of cultivation that results in large number

of intermediaries.

Opportunities Threats Marketing Expanded market centres and marketing technologies. Entrepreneurship Development of entrepreneurship thinking of farmers.

Business Environment Instability in the country has adversely affected the

production as migration to city areas have left many lands barren.

Product Winter pulses are more affected by drought in the

absence of irrigation facilities. Legumes are susceptible to pests and disease.


Current export performance Nepalese pulses consist mainly of lentils, which represent 90% of total exports. They are exported mostly to India. Other markets are Bangladesh, Korea, USA and U.K20 (Table 20). Nepal’s exports appear to be mainly driven by Indian demand. This, in turn, appears to have been caused by a reduction in the supply of domestic pulses in India. The surge in exports in 2001/02, for example, was most probably the result of an Indian supply shortage.

Table 20. Export of Pulses to India & Overseas (Value in ‘000 Rs.) 2000/01 2001/02 2002/03 2003/04 2004/05

India 713,500 1,005,700 880,400 579,100 660,200 Other countries 510,461 216,402 210,465 294,554 103,939 Total 1,223,961 1,216,165 1,090,865 873,654 764,139

Source: Trade Promotion Center, Nepal.

Domestic supply conditions The diverse climatic and environmental conditions of the country allow cultivation of at least one dozen species of pulses. The most common varieties are blackgram, broadbean, chickpea, cowpea, fieldpea, grasspea, horsegram, lentil, mungbean, phaseolus bean, pigeonpea, ricebean, and soybean.

Nepalese lentils are good quality and are said to be well regarded in India. In comparison with Indian lentils, the Nepalese lentil is smaller in size but considered tastier. Nepal has set national standards for pulses including the fixing of pesticide residue limits, which is an important element for enhancing the export potential of food products.

Over the past few years, the area, production and yield of lentils has been increasing Nepal’s Ninth Five-year Plan included an express aim to increase pulses productivity from 0.72 mt per hectare to 0.90 mt. The final results of the attempt were almost on target. There is not much variation in yield amongst the various crops. (Table 21). While it does not cover all types of pulses and is from a different source, Table 18 does indicate that the production of lentils has increased by almost 60% over the last 10 years. The increased production appears to be the result of both an increase in production area and yield.

20 It can be expected that exports to India are in reality higher than these figures indicate due to casual undeclared trade with Indian towns and villages bordering Nepal.

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

Area (HA) Production

(MT) Yield (kg/HA)

2003/04 2004/05 2003/04 2004/05 2003/04 2004/05

Lentil 187,380 188,895 158,671 160,716 847 851

Chick Pea 9,560 11,770 8,114 10,439 849 887

Pigeon Pea 22,459 19,337 19,468 17,841 867 923

Black Gram 32,152 32,433 25,501 28,028 793 864

Grass Pea 6,734 5,863 5,001 4,464 743 761

Horse Gram 7,720 7,836 5,514 5,680 714 725

Soybean 22,073 22,559 19,363 19,820 877 879

Others 27,932 28,113 23,728 24,324 849 865

Total 316,010 316,806 265,360 271,312 840 856

Source: Ministry of Agriculture, Nepal.

Table 22. Trend of Pulses Production in Nepal 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Lentils - Production ('000 Mt) 99.8 117.7 124.4 113.5 132.3 137.3 143.1 148.4 150.0 158.7

Lentils - Yield 0.68 0.75 0.79 0.7 0.76 0.76 0.8 0.82 0.82 0.85

Lentils - Area (Ha) 147 157 158 162 175 181 179 180 183 187

Chickpeas - Production ('000Mt) 16.06 13.64 14.03 13.51 12.8 12.15 12.15 11.03 7.65 8.11

Other Pulses - Production ('000Mt) 48.77 48.91 49.33 45.38 42 46.04 43.7 62 65 64

Source: FAOSTAT

While the majority of pulses grown by farmers in the mountainous regions are for consumption the pulse cultivation in the lower plains (Terai region) is intended as a cash-crop both for the domestic market and export. Mungbean, chickpea, lentil, lathyrus and pigeonpea dominate the pulses of the Terai and inner Terai region while soybean, blackgram, horsegram, and rice bean are predominant in the midhills. In the hills and higher hills, pulses do not compete for space with other crops, as they are generally planted in areas unsuitable for other food crops.

Pulses are susceptible to pests and disease. In Nepal, disease and pests are major causes of reduction in yield and can sometimes cause complete crop failure. The extent of damage from disease ranges from a minimum of 10% for the horse gram to a maximum of 25% for soybean. Damage from insects, notably hairy caterpillars and pod borers, occurs more in summer than in winter crops.

The expansion of pulses production is also limited by low returns compared to other crops. Under current technology constraints, grain legumes give smaller returns than other cash crops such as sugar-cane, tobacco and jute. This means that farmers often allocate less attractive areas to their cultivation. Taking net return per hectare as an indicator of profitability, coarse grains, including pulses are less profitable than paddy, wheat and maize, this is reflected in resource allocation discrimination.

Pulses, as all agricultural produce, require a large number of intermediaries between the producers and the consumers. A three-tier marketing structure exists.

− At the primary level there are producers, village merchants (baniyas) and nomadic traders known as fidiyaivallas. Merchants purchase the produce from the smallholder villagers who are themselves not able to take their grain to the nearby markets. Essentially they operate by keeping themselves informed of price fluctuations in the market and by offering producers a lower price which leaves them with a profitable margin after deducting incidental charges. They bag, stitch and transport the produce to gallawallas, the term used for the owners of a gaddi (assembly place), which is an important grain collection centre. The gaddi has facilities for weighing, cleaning, bagging and storing grain and is often owned and managed jointly by several people.

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− Gallawallas are the main functionaries in the secondary market. They sell their pulses exclusively to the Millers. Post-purchase operations include cleaning, processing, weighing, bagging and storage. Millers and gallawallas mostly sell the final products to wholesalers or retailers who in turn sell to consumers across Nepal. Pulse export is carried out either by millers or by other export license holders.

− Birgunj situated on the Indo-Nepal border has the most mills for pulses. These mills sell their pulses locally and in Kathmandu, eastern parts of Nepal and also export it to India and other countries. Millers enjoy adequate transport facilities and have easy access to communication networks, which ensures greater availability of information.

Competitiveness prospects are average. Production can be expected to increase in the future provided the yield and area under cultivation continues to grow.

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

The National Grain Legumes Research Program, under the Nepal Agriculture Research Council (NARC), has officially recommended adopting a new variety of soybean. The PK-416 variety, called Puja, can be grown singly or with standing corn plants in the rain- fed condition common in the Terai, Inner Terai andMid-Mountains regions as well as on paddy bunds.

The Soybean matures 125 days earlier than the traditional variety, and the average productivity of soybean grain as well as the potential yields, 1.66 kilogram per hectare and up to 3,062 kg per hectare respectively, are much higher than other recommended varieties. According to NARC the Puja variety produced an 11 per cent higher yield than the rival Cobb variety. The grain also looks healthier. It is, shinier, oval shaped and creamy white. It is also more nutritious with higher protein content, has a popular taste, can be sold at a higher price and matures one to two weeks earlier than the Cobb variety. The grain is resistant to bacterial pustules as well as the yellow mosaic virus. It can be cultivated successfully under dry and moist soils of all types as well as in low fertility condition.

The grain oil contains less linolic acid, which means it helps to minimize cholesterol and blood pressure reducing the danger of heart attack by 20 per cent.


World markets Amongst the pulses the most traded products are dried peas and kidney beans followed by lentils and chickpeas. Lentils represent approximately one eighth of the total world trade in pulses. World imports of pulses (excluding soya beans) are worth over USD 3 billion or 850 million Mt. The major buyers, in descending order, are India, Spain, United States and Pakistan.

It is promising to note that Nepal already has a foothold in Bangladesh, which was the world’s largest buyer of lentils in 2004 Sri Lanka, Pakistan and India are also important buyers. Overall, demand for pulses remains high, imports from 2001-05 showed an upward trend, increasing by 7% in quantity and 10% in value. Prices however have remained roughly stable over this period and did not change at all in 2006. (Public Ledger).

World supply is dominated by Canada and Australia who also have a strong, but not dominating, presence in South Asian markets.

Tariffs for lentils around the world are almost negligible. This also applies to South Asian markets. Pakistan and Sri Lanka apply tariffs of 3.5% and 2.5 respectively, whilst Bangladesh applies a slightly higher rate of 6%. Due to a trade treaty with India, there are no tariffs applied on pulses. Apart from the requirement of a quarantine certificate, which according to traders can be acquired without much difficulty, exporting to India is relatively easy. There is no control or quota for Nepalese pulses in India.

World markets prospects are very promising.

− Compared to other sectors, South Asian countries are the most attractive markets. US, Spain, Netherlands, Israel are also considered interesting potential markets. Most markets show much higher growth than the world average, and therefore they are highly dynamic markets. Nepal’s market access conditions to all markets,

54

especially in market openness, are very favourable. India, however, is the only market for which Nepal possesses a high tariff advantage.

− In the long-run, the soya bean market may be of interest to Nepal. This is a product for which there is immense global demand, driven primarily by massive consumption in China. Considering the large volumes consumed in China, it is likely to be difficult to enter the market as a small supplier.

Table 23. Pulses: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied

to Nepal (%)

Nepal’s tariff

advantage (+) or dis-

advantage (-)

(%) 1. SPAIN 4.7 2 0.0 0.0 2. PAKISTAN 2.4 13 3.5 1.5 3. UNITED STATES 2.1 19 0.0 0.1 4. COLOMBIA 5.3 1 10.0 0.0 5. SRI LANKA 6.1 -4 8.8 2.2 12. India 2.5 8 0.0 30.0

Lentils dried, shelled, whether or not skinned, or split (071340)

11,342

38. Bangladesh 12.0 29 7.5 0.0 1. BANGLADESH 3.9 47 7.5 0.0 2. India 49.4 38 0.0 29.8 3. NETHERLANDS 1.1 47 0.0 0.0 4. ISRAEL 0.3 173 0.0 0.0 5. PAKISTAN 6.7 4 5.0 0.0

Leguminous vegetables dried, shelled, whether or not skinned or split, nes (071390)

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67. MALDIVES 0.1 4 15.0 0.0 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact Estimate of the total number of farmers directly involved in pulse cultivation are 12,500 people as a full-time employment equivalent (FTEE), which is low for the sector (Table 13). 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.

Pulses are an important food crop in Nepal. Aggregated, pulses rank fourth in terms of acreage and fifth in production after rice, maize, wheat and millet. In addition to being a major source of dietary protein, they play an important role in improving soil fertility and making farming systems more sustainable. Per capita consumption of pulses is rather low in Nepal. The availability of pulses is influenced not only by the level of production, but also by the amount exported mainly through unregulated trade. Pulses can benefit both the agriculture sector and small farmers to boost farm outputs. They also enrich the soils with nitrogen.

However, pulses are considered traditional crops of secondary importance, farmers therefore have been reluctant to invest in development more efficient production methods such as field preparation, seeding, weeding, harvesting and storage. At the same time, little priority has been given to research, extension, and infrastructure development such as price policies and investment.

Pulses

“Preparation of Nepal’s Trade-Related Round Table within the Integrated Framework ( IT), (with highlights on donor assisted programs on Nepalese high value agriculture crops for the export market.)“.

Hill Agricultural Research in Nepal. HADP Kathmandu 1990.

Agricultural Technology and Adoption -.Tenth Summer Crop Workshop. RAS. NMDP Chitwan, 1999.

Lumle Report on Winter Cereals and Legumes. Ninth Winter Workshop (1980/81). NWDP. Bhairawa, 1999.

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Chapagain, Devendra P. and Hari Phunyal. (2002). Field Visit Report under TCP/NEP/0165 on Implementation of Various Agricultural Policies and Laws. FAO Kathmandu, December 2002.

Economic Survey. Government of Nepal Ministry of Finance 2005/2006

FAO Agricultural Community Projections to 2010. FAO Commodities and Trade Division, Rome, 2003.

Thierry Noyelle, ITC Senior Consultant/Bindu Adhikary ITC National Consultant, Mission Report, August 2000.

Plant Quarantine Development: Ministry of Agriculture 2006.

Rachie, K.O. and M.P. Bharati A Consultancy Report on Pulse Improvement in Nepal. 'CP. DOA. Kathmandu, 1995.

TPC (various issues) Nepal Overseas Trade Statistics. Trade Promotion Centre. Kathmandu.

Persons contacted

− Mr. Parmeshor Lal Chachhan, Proprietor, Sree Adhunik Dal Udhyog, Birgunj.

− Mr. Rajesh Khandelwal, General Manager, Tribeni Dal & Oil Industry, Chhatapipra, Birgunj.

− Mr. Nanda Lal Agrawal, Managing Director, Nandani Khadya Udhyog, Nepalgunj.

− Mr. L.K. Nevatia, General Manager, TM Dugar Group, Dugar Niwas, Biratnagar.

− Mr. Ajay Parajuli, Office Secretary, Association of Nepalese Rice, Oil & Pulses Industry, Tripureshor, Kathmandu.

− Mr. Yogendra Karki, Under Secretary, Planning Division, Ministery of Agriculture & Co-operative, Shinga Durbar, Kathmandu.

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4. Gems and jewellery Export potential Medium


The export potential is medium. 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 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 more than 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.

Priority actions Production

− Set up a testing and certifying institution for gems, stones, and precious metals.

− Support the development of new and refined methods of production by developing R & D facilities and providing technical advice and assistance to processors and manufacturers. Encourage the development of ancillary industries to, further, enhance Nepal’s export capability.

− 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 with the aim of simplifying the bureaucratic procedures and encouraging the mining, processing, manufacturing, exporting, importing, re-exporting of precious metals, gems, stones and jewellery.

− Ensure the easy, duty free, supply of tools and modern equipment required for the processing and manufacturing of gems and jewellery.

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− Develop a number of new incentives designed to provide technical and financial support to encourage private investment in gems, stones and jewellery.

− Encourage the private sector to arrange training and other processing facilities in rural areas by building up-stream stone cutting, processing and jewellery making facilities

− Provide financial support to trained persons planning to invest in tools and equipment

− Extend adequate security for the sector.

World markets

− Help promote the reputation of Nepalese jewellery on the world market by organizing special exhibitions and by supporting 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.

− Support small exporters to strengthen their export marketing capabilities

SWOT Analysis for Gems and Jewellery Strengths Weaknesses Resources Unique craftwork and designs Quality recognized by buyers Web-sites are effective. Support from foreign designers. Quality gems and stones processing facilities. Skilled craftsmen. Product and export management expertise. Marketing Good exposure to markets. Excellent relationships with the buying agents and buyers. Special items as per market requirements. Logo registered in Nepal and markets.

Business Environment Imported raw materials at high cost. Expensive packaging and air freight. Non-availability of appropriate tools and equipment to

improve productivity and efficiency. High import duty for tools and equipment. Technical and R&D support inadequate. Lack of capital resources to keep a large varieties of

stocks of gemstones and jewellery. Production Non-availability of required quality and quantity gems and

stones on time. Marketing Single buyer to some of the exporters.

Opportunities Threats Product India is promoting its products under “Nepalese Designs”. Production Trainable labour adequately available. Arts and handwork need to be retained and promoted. World Markets Expanding market and good demand – not able to meet

fully especially for crafted items. Increased market access through GSP and other

preferential arrangements. Markets have recently recognized the possibility of

importing quality gems and stones from Nepal. Marketing High value additions.

Competition Competition from and design imitation by India,

Indonesia, Thailand, China and Mexico. Business Environment Political instability for expansion and investment. Lack of security and assurance with encouragement and

incentives. Frequent changes and non-transparent regulatory status.


Current export performance Over the past 15 years, exports have been growing at an annual average rate of 13 per cent (Figure 3). Exports increased rapidly after the Government and Central Bank introduced new policy measures to arrange sterling silver imports and distribution to exporters and manufacturers at duty free. The annual export of silver jewellery in the past four years has amounted to between Rs. 300 to 345 million. However, recently, a

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decreasing trend has been noticed. Export values decreased by 13.4% to Rs.300 million in 2005/06 compared to Rs.345 million in the preceding year.

The major markets for Nepalese silver jewellery are the U.S.A., Canada, Italy Japan, U.K., and Germany. These six markets together import 86 per cent total exports from Nepal.

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

0

50

100

150

200

250

300

350

400

1991

/2

1992

/3

1993

/4

1994

/5

1995

/6

1996

/7

1997

/8

1998

/9

1999

/0

2000

/1

2001

/2

2002

/3

2003

/4

2004

/5

2005

/6

Sources: Trade Promotion Centre for overseas exports and Handicrafts Association of Nepal for India exports. Notes: Nepal’s fiscal year runs from Mid-July to Mid-July, Approximate current exchange rate is Rs.72 = USD 1.

Nepal also exports imitation jewellery. Domestic production figures are not available. Official statistical records show that annual export fluctuated from Rs.2 to 10 million.

Domestic supply conditions The Nepalese craftsmen of the Shakya and Sunwar families have a long cultural tradition of producing exquisite pieces of gold and silver jewellery. There are a great number of artisans throughout Nepal who continue the traditionally jewellery manufacturing (Box 7).

Box 7. History of gems and jewellery in Nepal

In Nepalese traditions, gems and jewellery serve to protect people from evil spirits and bring good fortunes. Expensive jewellery of special design, have been popular in Nepal among the Royalties, Ranas, and elite groups for over three centuries. Traditionally the gold and silver jewellery were studded with gems, and precious and semi-precious stones, many of which were sourced from the Himalayan Mountains. The Great Earthquake of 1934 exposed a number of mineral stones and colourful gems in the Middle Eastern and Western mountain belts. Currently, a number of already known mines are being explored and commercialized.

Historically, the jewellery has been exported to neighbouring countries like China, India and Bhutan. Its designs and motifs have been influenced by the two major religions of the sub-continent: Hinduism and Buddhism. The choice of metals and gemstones have symbolic meanings. It is believed that turquoise represents the sky, coral the redness of fire, and amber the earth. Gold and diamond are believed to bring good luck. Many craftsmen throughout the country can make rings, earrings, brooches, nose-rings, bracelets, pendants, chains and necklaces for domestic as well as foreign markets. Most traded items21 include silver jewellery studded with semi-precious stones and gems such as Ruby, Sapphire, Emerald, Aquamarines, Tourmalines, Topaz, Crystal, Quartz, Garnets, Kyanites, etc.

In the past, craftsmanship passed from one generation to another. Grandfathers and fathers taught the arts and techniques of making jewellery to their grandsons and sons. Recently, private manufacturers have begun to introduce their own training and the skills and knowledge, as a result, is no longer confined only to Shakya and Sunwar families.


Nepal is well known for the artistic quality of jewellery. Consumers have developed a liking for the unique design of Nepalese products. Rival producers have attempted to replicate the designs by using cheaper sources, such as, manufacturers in Thailand,

21 The volume of trade is low in highly precious items like Diamond and Gold.

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Indonesia, India and Mexico but have not been able to reproduce the intricate designs and craftsmanship of Nepalese products.

According to the Nepal Gold and Silver Entrepreneur Association there are 50,000 craftsmen in the country, and 40 per cent of them are in Kathmandu where more than 10,000 craftsmen are engaged in producing silver jewellery Most of the Association’s 2,500 members are involved in importing, wholesaling, and retailing gold and silver. The remainder are involved in manufacturing gold and silver jewellery and other products.

The craftsmen use traditional designs, as well as traditional skills and techniques in cutting, moulding, embossing, buffing, polishing and stone setting in the jewellery making process. Most of the tools are produced at home, with the exception of the semi-mechanized processes used for buffing and polishing. Some of the larger exporting manufacturers have also started using more sophisticated tools and equipment imported from advanced countries to enhance production efficiency and quality.

According to the Handicraft Association of Nepal (HAN), about 238 firms exported silver jewellery and silver products in 2006. The Trade Promotion Centre has recorded 59 active jewellery exporters.

There are about a dozen gems processing units that supply gems to local manufacturers. Reliable data on the use of domestic gemstones is not available. However, domestic supply can meet less than 5 per cent of the total requirement. Most large and organized units source their inputs directly from exporters in Hong Kong, Thailand, India, etc. Agents and specialized importers in the private sector supply these materials to small entrepreneurs.

The production and trading activities are mainly located in or near the Kathmandu valley. In view of its high value as a fashionable product, exporters mostly consign them by air from Kathmandu International Airport. According to the Federation of Handicraft Association of Nepal (FHAN) about 238 firms and companies were involved in jewellery exports in 2006 but TEPC trade directory has listed 59 regular exporters of jewellery. Gems and jewellery entrepreneurs in Nepal are private and domestically owned.

The domestic supply of raw materials is not enough for export purposes. Therefore sterling silver, gems, semi-precious stones and other inputs required in making jewellery for export purposes are imported by specialized importers from India, Brazil, Thailand, Pakistan and Sri Lanka. Exporters and jewellery manufacturers procure such materials from local distributors. Some of the gems and semi-precious stones are imported and sold in Kathmandu by Indian traders from Jaipur and Mumbai.Most of the trade in gems and semi-precious stones is unrecorded. According to Department of Mines and Geology, 200 varieties of gems quality and semi-precious stones are available in various districts of Nepal (Table 24).

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Table 24. Important gemstones in Nepal Gemstones Available Districts Features of stones

Aquamarine Sankhuwasabha and Jajarkot It has light sky blue colour. Rocks bearing pegmatite are sericitic schist, calc-schist, dolomitic marble and gneisses belonging to the higher Himalayan Crystalline rocks group.

Beryl Kathmandu, Mustang Sankhuwasabha, Jajarkot, Taplejung, Sindhupalchowk

It exists in the gneissic rock environment with pegmatite intrusion. It is the principal source of beryllium, useful in making alloys hard.

Kyanite Sankhuwasabha and Jajarkot The transparent crystal exists in rock types like schist and gneiss. It is a high grade metamorphic rock used in manufacturing spark plugs and refractory porcelain.

Quartz Taplejung, Nuwakot and Dailekh It is used as semi-precious stone. Quartz of specific quality is useful as peizo-electric and idol craft material.

Ruby & Sapphire

Dhading, Rasuwa and Taplejung Presence of Corundum was reported only in samples from the banks of Budi Gandaki with the possibility of finding leuco-sapphire and ruby. Only transparent and flaw less varieties are used as gems and other are abrasive.

Tourmaline Taplejung, Illam, Manang, Jajarkot, and Sankhuwasabha

It is available in green, yellow-green, olive green, pink, orange, yellow brown and multi-coloured.

Garnets and others

Sankhuwasabha, Gorkha, Lamjung, Illam, Taplejung, and Sindhupalchowk

Source: Department of Mines and Geology, Mineral Resources of Nepal.

There is an absence of export-friendly, transparent legislation and simplified procedures to facilitate mining, processing, manufacturing, exporting, importing, re-exporting of precious metals, gems, stones, and jewellery. Entrepreneurs are further inconvenienced by frequent changes in government regulations. Favourable and business-friendly legal structures do not exist. The Department of Mines and Zoology only issues licences for mining and trading of Crystal and Quartz22. The non-issuance of licenses to other items, as well as the cumbersome and unpractical procedures for licensing, are the main reasons for continued unauthorized exploration and mining of rough stones in India. In addition, the government applies 22% duty on the import of small machines such as cutting, polishing, drilling, calibrating and vibrating machines. Certifying institutions for gems, stones, precious metals and jewellery are lacking. Finally, this business requires high working capital as exporters have to stock fully paid raw materials to assure guaranteed supply for regular production. Commercial banks fail to recognize designs, inventory, export management capability, experience as collateral and are only willing to extend credit on the basis of land, building and supplies of precious metal.

Appropriate regulations and processing base/facilities are lacking to encourage the use of quality raw stones available in Nepal.

World markets The global market conditions for silver jewellery look favourable. World imports totalled USD 2.9 bn in 2005, showing average growth of 17% per year between 2001-5.

The market is concentrated around three main importers the United States, Japan and Hong Kong import 35%, 10% and 10% of the worlds imports respectively. Germany and the United Kingdom are also important buyers.

The market for jewellery clad (or coated) with precious metals is of smaller value. Imports of this kind of jewellery totalled USD 191 million in 2005. As is the case for silver jewellery, demand is on the increase, global imports grew by 7% annually between 2001 and 2005. This is the preferred form of jewellery in a number of different countries - Singapore, France and Taiwan were the main importers in 2005.

Taste and style preferences differ significantly around the world. The US market prefers big sized traditional designs adapted to modern colour and style while European

22 Available gems stones and minerals in Nepal include Ruby, Sapphire, Emerald, Aquamarines, Tourmalines, Topaz, Crystal, Quartz, Garments, Corundum, etc.

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consumers still look for traditional design and styles but prefer small sizes. The Japanese market demands a mix in terms of design and product range.

Nepal benefits from favourable market access conditions especially to the EU, USA, Japan and India (Table 25).

Table 25. Market Access Conditions in the Target Markets Markets Tariff Barriers Non-tariff Barriers

EU

Nepal enjoys the special scheme, “Everything but Arms” that provides duty free access to silver jewellery and gems.

Quality Checks on authenticity of materials –Vienna Convention Common Control Mark (CCM) on fineness of precious metals. EU Directives on Safety Standards and assurance that metals are free from nickel.

USA

Nepal enjoys preferential tariffs on silver jewellery imports.

Four standards and regulations of direct concern to jewelry manufacturers and suppliers: The National Gold and Silver Stamping Act; Country of Origin Marks; Federal Trade Commission Jewelry Guides; and Consumer Product Safety Commission restrictions on lead in children's metal jewelry and paint.

Japan Nepal enjoys preferential tariffs under the GSP Scheme of Japan

No special safety standards.

India

Nepal’s small industries enjoy preferential tariffs on imports based on the submission of certification of origin fulfilling origin criteria as spelt out in the bilateral trade treaty.

Certification scheme for Hallmarking of Gold and Silver is voluntary in nature under Bureau of Indian Standards (BIS) Act, 1986.

Source: Information compiled from MacMap and government agencies.

Nepal is also facing tough competition from other suppliers like India, Thailand, Sri Lanka, Mexico, and Indonesia. There are threats from immediate competitors in term of difficulties to patent the original designs developed by small exporters. Most of the new designs are being developed in Nepal and copied and produced mechanically in competing countries, which have the advantage of mass production and quality adjustments with excellent finishing technologies.

The world market prospects are very favourable.

− The most attractive markets are some EU countries, US, Hong Kong, and India for Nepalese Gems and Jewellery. Nepal is highly underrepresented mainly in markets in Hong Kong, UK, Germany, and the US. Most of the markets identified in this sector have higher growth than the world average and are therefore highly dynamic. Nepal’s market access conditions to all markets, especially in market openness, are very favourable. Nepal currently has duty-free access to these markets and, in addition, has a high tariff advantage in the Indian market.

− The most important selling points for Nepalese jewellery are the fact that it is completely handmade by traditional processes, the value of the art works, traditional designs and religious motifs. Nepal has no chance of remaining competitive if it start to compete with countries such as Thailand, India and Mexico by mechanizing and attempting to emulate their production process Wholesale buyers, as well as exporters, have jointly made an effort to adapt the traditional design to suit market requirements in terms of sizes, colours, stones and gems as well as any other parts.

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Table 26. Gems and Jewellery: Most attractive markets Product (HS 6-digit code)

Export Value

(USD 1,000)


(%, 2004)


from 2001-05)

Tariff applied

to Nepal

(%)


advantage (-)

(%) 1. HONG KONG 7.3 27 0.0 0.0 2. United Kingdom 6.4 24 0.0 0.0 3. Germany 8.5 16 0.0 0.0 4. Spain 1.8 32 0.0 0.6

Articles of jewellery & pts thereof of silver w/n plated/clad w/o prec met (711311)

5,811

5. INDIA 0.1 28 0.0 15.0 1. INDIA 0.0 47 0.0 15.0 2. United States 18.9 11 0.0 3.3 3. AUSTRIA 3.4 23 0.0 0.0 4. GREECE 0.7 50 0.0 1.7

Imitation jewellery nes of base metal whether o not plated w prec metal (711719)

618

5. PORTUGAL 0.6 35 0.0 0.0 1. United Kingdom 9.5 17 0.0 2.7 2. HONG KONG 5.7 13 0.0 0.0 3. United States 33.0 11 0.0 2.5 4. INDIA 0.2 48 0.0 15.0

Imitation jewellery nes (711790) 338

5. GREECE 1.4 61 0.0 0.0 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact It is estimated that there are currently around 10,000 households, which are directly dependent on the silver jewellery and gems business in Nepal. The full-time employment equivalent (FTEE) is low for this sector (Table 13).

This sector currently contributes only marginally to Nepal’s exports. The contribution of silver jewellery to Nepal’s total export earnings, over the past five years, has been roughly between 0.5 per cent and 0.7 per cent. There is great potential to increase its importance as a source of export earnings. Foreign exchange earnings can also be reduced if current input imports can be replaced with domestically processed materials.

Yet, the further development of the mining and processing of gemstones will directly generate additional employment to rural population, as well as encouraging the acquisition of skills for many workers in jewellery manufacture. At the moment, these jobs are heavily concentrated in and around Kathmandu. In addition, if the use of domestically mined and processed gems is liberalized, ancillary facilities will be setup in rural areas working on up-stream stone cutting, processing and jewellery making. This will lead to the development of important skills in these areas.

Gems and jewellery

Department of Mines and Geology, Mineral Resources of Nepal, August 2004.


Handicraft Association of Nepal, Membership Directory 2006, unpublished.


Trade Promotion Centre, Profile of Nepalese Gold and Silver Jewellery, 2005.

Trade Promotion Centre, The Market for Silver Jewellery in the European Community and the USA, prepared by Murari P. Gautam, (1990).

Persons Contacted

− Mr. Pancha Ratna Shakya, President, Handicraft Association of Nepal, and Managing Director, Marketing International, Kathmandu.

− Mr. Swoyambhu Ratna Tuladhar, Managing Director, Yak and Yeti Enterprises Pvt. Ltd.

− Mr. Upendra S. Rana, Managing Director, Nepal Traditional Crafts Pvt. Ltd.

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− Mr. Hari Bhakta Upadhyaya, Principal, Gemstones Research and Processing and Training Centre, Godavari, Lalitpur.

− Mr. Amar Lal Shrestha, Managing Director, Superior Arts and Handicrafts.

− Mr. Machhe Narayan Manandhar, Proprietor, Himalayan Gems and Minerals, Kathmandu.

− Mr. Yagya Narayan Gupta, Executive Director, Amrita Crafts (P) Ltd. Kathmandu.

− Mr. Pravin Chitrakar, Patan Handicraft Centre Pvt. Ltd., Lalitpur.

− Mr. Sanjaya Chitrakar, Patan Handicraft Centre Pvt. Ltd. Lalitpur.

− Mr. Suman Ratna Dhakhwa, Proprietor, Valhalla Enterprises, Lalitpur.

− Mr. Sher Bahadur K.C. Managing Director, Himalayan Crystal World (P) Ltd.

− Mr. Ganga Ram Subedi, Gems and Stones Dealers, Surkhet, Western Nepal .

− Mr. Tej Ratna Shakya, President, Nepal Gold and Silver Entrepreneurs Association.

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5. Leather Export potential Medium


The export potential is medium. 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.

Priority actions The following recommendations by the interviewees outline an increase in the growth of the tannery industry in Nepal:

Production

− Improve the quality of hides and skins.

− Support in technology development, productivity and workmanship, and high level training for leather processing.


− Develop better physical infrastructure and services.

− Create incentives to attract foreign investment. Not effectively function on duty-draw-back scheme on import of raw materials. Support for duty-exemption on imported raw materials.

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− Help in securing working capital or low-cost capital. Due to high interest rates, manufactures do not borrow from the bank and need soft loans or funds to import machines.

− Solve the problem regarding irregularity in power supply.

− Implement effective environmental controls. High cost of maintaining the waste treatment plant.

− Develop programs for market promotion, share marketing information, expertise and control.

− Set up Common Facility Centre

SWOT Analysis for Nepal’s Hides and Skin Strengths Weaknesses Resources Large raw material base. Availability of highly skilled and cheap manpower. Capability to assimilate new technologies and handle

large projects.

Resources Lack of advanced technology and machineries for

processing finished leather. Production Tanneries are not capable of processing full-finished

leather. Business Environment Lack of government incentives that competitors in

neighbouring countries receive incentives from their respective governments.

Absence of R&D and promotional program. Marketing Contact with foreign buyers minimum.

Opportunities Threats World Markets Demand for leather goods on rise in the international

market and neighbouring countries. Ban on export of wet-blue in neighbouring countries has

created high demand for wet-blue leather. Marketing Use of e-commerce in direct marketing. With capital, technology and marketing inputs, leather has

the potential to be the number one export item of Nepal.

Resources Environmental degradation. Business Environment Instability in the country. Competition from other countries with higher quality

products.


Current export performance The current export performance is just average compared to other sectors. According to the mirror data, Nepal’s exports amounted to USD 5.7 million in 2004 with a yearly average growth rate of 24% over the period 2000-2004.

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. In the hope that the industry will add more value to its exports, the government has banned the export of raw hides, but allows exporters to export 70% wet blue and enforces that 30% must be in crust or finished form.

The major destinations for hides and skin are Asian countries (India, Hong Kong, China and Thailand) and Italy (Table 27).

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Table 27. Export of hides and skins to India & Overseas (‘000 Rs) 2001/02 2002/03 2003/04 2004/05

India 157,800 248,500 332,300 337,300

Hong Kong 19,476 21,126 32,518 70,846

Italy 297,902 111,325 36,753 49,587

China P.R. 16,457 3,413 103,199 37,382

Thailand 5,716 46,553 67,847 24,195

Other Countries 111,246 57,436 45,800 43,410

Total 608,597 488,353 618,417 562,720

Source: Trade Promotion Center, Nepal.

Nepal has also been manufacturing and exporting varieties of leather goods like jackets, handbags, belts, purses, shoes and boots, gloves, wallets, vests, skirts, trousers, travel bags, camera bags, and more. The major export market for Nepalese leather goods are Canada, Japan, USA, Italy, U.K., Israel and France. Leather export through Birgunj comprises over 90% of the total leather export of the country.

Domestic supply conditions Nepal has a sizeable livestock population to support the leather industry (Table 28).

Table 28. Livestock Population of Nepal (F.Y.) Livestock 2000/01 2001/02 2002/03 2003/04 2004/05

Cattle 6,982,660 69,78,690 69,53,584 69,66,436 69,94,463

Buffalo 3,624,020 37,00,864 38,40,013 39,52,654 40,81,463

Sheep 850,170 8,40,141 8,28,286 8,24,187 8,16,727

Goat 6,478,380 66,06,858 67,91,861 69,79,875 71,53,527

Total 17,935,230 18,126,553 18,413,744 18,723,152 19,046,180

Source: Ministry of Agriculture and Cooperatives, Nepal

There are two slaughterhouses in the country, but their number of kills is miniscule. This has to do with the fact that cows are left to die a natural death and although buffalo meat is eaten, they tend to be old animals slaughtered at the end of their productive life.

Nepal has about 12 tanneries processing goat, buffalo and cow skins which are generally outdated, use outdated technology and depend excessively on traditional skills. They are located in Hetauda, Bhairahawa, Birgunj and Biratnager. This means that their productivity is well below the norm for tanneries in other neighbouring economies. The technology they use is outdated and is only suitable for manufacturing wet blue leather. They are unable to bear the cost of new machines with which they could diversify their products such as producing finished leather. Most manufacturers do not borrow from the bank due to high interest rates. They need soft loans or matching funds for importing machines.

As for marketing, international buyers are barely contacted mainly due to the fact that the international buyers want more than just wet blue leather, which is beyond the competence of local tanneries. Tanneries also complain about the high cost of maintaining the waste treatment plant and seek government/donor support in this area. They have received help from DANIDA but need more support for better control pollution from the plants.

According to some tannery owners, it is very difficult to get raw materials such as goat and buffalo skin due to the high consumption rate 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 for the past few decades. It is rumored finished leather from India enters Nepal for duty as low as Rs.4 per sq feet. This is very low and hence Nepali entrepreneurs cannot compete with the Indians on the 30% of the finished leather the

67

government has enforced them to make. More than 70% of finished good made in Nepal are said to be made from leather that is bought from India (official and unofficial channels). The exact volume of border trade is difficult to estimate.

There are no quality standards set in the country for this sector. Grading and selection based on size, thickness and absence of damage are practiced according to what is understood as a buyer requirement. The leather manufacturers have not, however, publicly come out with any grading standard to be followed.

According to manufacturers, local industry is subjected to export duty and income tax, while major leather exporting countries like Pakistan, India and Bangladesh with which Nepal needs to compete provides various incentives to their industries.

According to the interviewees, the government has not taken any initiative to enhance the leather industry. The existing FDI regulations and duty draw-back scheme on import of raw materials have not been effectively implemented. Manufacturers stress on the need for an exemption of duty on imported raw materials rather than going on with the duty draw back scheme.

Competitiveness prospects are below average.

− The great potential of the Nepal’s leather sector remains largely unexploited and the country’s leather industry has not kept pace with the substantial growth of leather and leather goods in other developing regions.

− To be competitive, the supply value chain needs to be better organized. Each stage of the supply chain, from recovering hides and skins and converting them into leather in tanneries, to marketing leather products must be integrated to enhance the performance of the sector. An important pre-condition for the development of the leather industry is to improve the country’s tanning technology. A joint venture with an Italian company is taking steps to modernize tanneries in Nepal.

World markets Although the total world demand for wet-blue hides has shown some decline over 2001-2005, numerous markets like India, China, Romania and South Africa are showing strong demand to support their industry’s intake. Furthermore, demand is also driven by the shear size of the international market for wet-blue hides. Total imports in the world exceed USD 2 billion. Italy and China alone import more than USD 1 billion worth.

A similar situation applies to goatskin in wet state. There is much more demand for goatskin in crust and finished state: world imports are in the order USD 700 million and significant growth has taken place in recent years primarily driven by very rapid growth of imports in China, as well other leather goods (footwear) producers like Romania, Vietnam and Brazil.

The global market for hides in crust and finished is enormous and performing very strongly, in the order of over USD 8 billion and showing growth of 21% in value over 2001-05 in value and 5% in quantity with upward pressure on prices.

International market access conditions are favourable around the world for Nepal’s leather sector. For wet-blue hides and skins the tariff is generally either zero such as in Europe and Japan, or very low. Duty applied by China is 7%. Tariffs for crust and finished leather are also low. According to the interviewees, import regulations in international markets for hides and skins are limited to a health certificate that can be acquired from the Ministry of Agriculture in Nepal.

World market prospects are above average.

Some EU countries, East Asian countries (Japan, Singapore, Hong Kong), Pakistan, India, and South Africa are the most attractive markets for Nepalese leather products. All markets have higher growth rates than the world average and therefore are highly dynamic markets. Nepalese leather products are highly underrepresented in

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Romania, Italian, Spanish, Hong Kong markets. The market access conditions to all markets, particularly in terms of market openness, are very favourable, yet only Japanese and Indian markets give tariff advantages to Nepal.

Table 29. Leather: Most attractive markets Product (HS 6-digit code)

Export Value

(USD 1,000)


(%, 2004)


from 2001-05)

Tariff applied to

Nepal (%)



(%)1. ROMANIA 4.9 71 5.0 -5.02. Italy 41.0 -4 0.0 0.33. POLAND 2.6 54 0.0 0.04. SOUTH AFRICA 1.9 31 6.0 0.05. GERMANY 1.0 6 0.0 0.4

Bovine leather, otherwise pre-tanned, nes (410422)

3,699

7. India 0.8 98 0.0 6.01. SPAIN 7.7 28 1.0 -0.12. Italy 50.7 7 1.0 0.03. PAKISTAN 1.9 113 4.3 0.84. SINGAPORE 1.1 80 0.0 0.0

Goat or kid skin leather, otherwise pre-tanned (410612)

1,048

5. India 9.8 1490 0.0 7.51. Italy 18.4 212 0.0 0.02. HONG KONG 17.0 176 0.0 0.03. SPAIN 4.8 150 0.0 0.04. ROMANIA 4.4 45 5.0 -4.45. JAPAN 0.4 187 0.0 7.726. PAKISTAN 0.2 22 4.3 0.8

Bovine and equine leather, tanned or retanned, nes (410429)

458

27. India 3.8 -3 0.0 5.9* Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact The sector requires around 6,300 people who have engaged in tannery activities or intermediaries such as hides and skin collectors. The full-time employment equivalent (FTEE) is currently low for this sector (Table 13). According to United Tanneries in Nepal, there are 12 tanneries located in Biratnagar, Birgunj, and Hetauda in Nepal. Normally 25-100 workers are involved in various tanneries. In addition, there are many people with different functions indirectly involved in each tannery.

In its current sub-optimal performing state, the sector already contributes to 1.3% of national export earnings. By increasing its exports, the leather sector will bring a range of both economic and social benefits to the country.

Moreover, successful development of the leather industry will contribute to poverty reduction in rural areas as well. Since leather is a by-product of the meat industry, the starting point of the supply chain is linked to animal husbandry and to rural economies.

At the same time, leather industry generates negative environmental impact especially water degradation. Failure to appreciate the environmental impact and to enforce appropriate regulations for waste treatment and management in the leather manufacturing industries has led to land and water degradation. Since most tanneries are located in Birgunj, the site was chosen for installing an industrial-sized demonstration wastewater treatment plant, chrome recovery unit and laboratory. It is regularly used by tanneries in reducing the amount of chrome discharged and offsetting the cost of its establishment through savings in the amount of chrome needed. The establishment of these plants is unique, as the country had no legislation dealing with environmental protection. Through such development, the leather risk on working conditions in the processing stages would be reduced significantly. The other local industries would also be adopting similar technique shortly.

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Leather

Economic Survey. Government of Nepal Ministry of Finance 2005/2006.

The Rising Nepal: Nepal’s Leather Exports 2005.


UNIDO. Nepal: Establishment of Tannery Affluent Treatment Facitities.

VLTA. Fair Trade Organization.

Companies/Persons Contacted

− Birat Shoe Company Limited, National Leather Industry, United Tanners Standard Tanning.

− Narayani Manufacturing Industry.

− Mr. Fahruk Jamal, Managing Director, Marium Leather Industry, Birgunj .

− Mr. Birmani Bajracharya, Treasurer, Leather Goods & Footwear Association, Nepal, Bagbazar, Kathmandu.

− Mr. Bipin Bajracharya, Proprieter, Humanware Leather Garments and Leather Goods, Chhetrapati Kathmandu.

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6. Tea Export potential High

Current socio-economic impact (employment) High

The export potential is high. 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 sector experienced significant growth, following its liberalization over a decade ago. From an average of 80Mt exports grew to over 4,000Mt last year. The tea industry has been expanding in recent years along with an expansion of its plantation areas from 3,5000 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.

Priority actions − Establish testing and certifying agencies under joint public- private partnership.

− Set-up R&D facilities for further quality improvement and productivity growth

− Set-up facilities to improve the tea auctioning process in Nepal in order to improve transparency in marketing, quality and prices

− Implement policies that encourage stakeholders to invest more and maintain business ethics such as announcing incentive scheme packages similar to those in use in India for - plantation, tea machinery and irrigation equipment, loan new tea unit, reclamation subsidy, rejuvenation, pruning and consolidation scheme.

− Prioritize the construction of access roads to tea plantation pockets identified as high priority

− Implement friendly Labour Act and Regulations

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SWOT Analysis for Tea Strengths Weaknesses Resources Extremely favourable natural conditions for tea growing. High quality tea. Low labour cost. Strong private sector and donor participation.

Business Environment Lack of access to sufficient credit. Scarcity of labours with technical skills. Inaccessibility of Nepalese tea in auction markets.

Opportunities Threats Resources Current area under tea plantation only fraction of total

potential area. Development of new plantation areas with optimum

natural conditions for tea plantation. Production Possibility to further enhance the quality of tea. World Markets High demand for organic green tea in International

market. Possibility for inter-cropping.

World Markets Falling price of tea in international market. Competition Competition from already branded Darjeeling tea. Business Environment Lack of peace and instability in the country.


Current export performance Nepal’s current export performance is strong compared to other sectors. In 2002/03, Nepal’s tea exports experienced a major uplift, from an average annual export of around 80 tons, exports grew exponentially to 984 Mt in 2003/04 and 4,316 Mt in 2004/05 (Table 30). Nepal has become increasingly self-reliant on tea and the import of Cut, Tear, and Curl (CTC) tea has decreased substantially. This massive change took place largely as a result of liberalization carried out ten years earlier.

Table 30. Nepal’s Exports and Imports

Exports(MT)

Exports(Rs. 'm)

Imports (Rs. 'm)

1994/95 72.2 13.6 65.2

1995/96 72.7 15.5 52.2

1996/97 81.4 22.6 87.0

1997/98 35.0 11.7 60.2

1998/99 83.8 30.1 27.8

1999/00 81.6 25.7 73.3

2000/01 69.5 23.1 98.0

2001/02 79.6 27.8 8.8

2002/03 193.0 53.9 0.5

2003/04 984.2 104.8 1.0

2004/05 4316.0 438.8 0.4

Source: National Tea and Coffee Development Board Website

The major export market of Nepalese tea are Germany, Japan, France, Italy, Hong Kong, India, Pakistan, U.K., Switzerland, Australia, Netherlands and U.S.A.

Table 31. Tea Export to India, Pakistan and other countries 2002/03 2003/04 2004/05 Countries

Quantity Value Quantity Value Quantity Value India 2827.87 2.307 2273.62 1.936 2868.60 2.667 Pakistan 106.50 10.583 908.97 79.378 340.00 32.650 Overseas 86.643 43.325 93.195 27.518 367.295 62.958

Value: million rupees. Quantity: 1 ‘000 kg. Source: Trade Promotion Centre, Nepal.

Despite the solid growth that is taking place, Nepal for the time being remains a small producer with less than 0.2% of the world’s total tea export.

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Domestic supply conditions Nepalese tea comes in two main categories: orthodox/green (leaf) tea and black tea/CTC tea. The former is produced in the hills for export and is available only in limited quantities, while the CTC tea produced in the Terai region is mostly used for domestic consumption but some is exported to India.

The last decade or so has seen a tremendous growth in the Nepali tea industry with the plantation area expanding from 3,500 hectares in 1996 to 15,000 hectares in 2004. This, nearly five-fold, increase in the plantation area has been matched by an increase in the output of tea (11,651 thousand kg in 2004 against 2,905 thousand kg in 1996). Most plantations are still young and yet to start yielding harvest, which suggests that production is set to increase even further. According to the government statistics, the area under tea cultivation in 2004/05 was 15901 hectares of land and the production in the same year was 12606 metric tons (Table 32). In 2003/04, 1.55 million kg of orthodox tea and 10.06 million kg of CTC tea were produced. Currently, the incremental ratio of tea production in Nepal is 20 percent per annum. The government aims to produce 36,000 Mt of CTC tea by the year 2010-11, from which 600 to 650 Mt will be available as surplus for export. Similarly, the target fixed for orthodox tea production within the year 2010-11 is set at above 16,000 Mt.

Table 32. Area and Production for tea in Nepal

Year Area(Hectares)

Production (Metric Tons)

2001/02 12,346 7,518

2002/03 12,643 8,198

2003/04 15,012 11,651

2004/05 15,901 12,606

Source: National Tea & Coffee Development Board

At present, tea cultivation has been extended in different districts from Jhapa in the Terai region to Ilam, Paanchthar, Dhankuta, Terhathum, Sankhuwasabha, Bhojpur, Dolkha, Ramechhap, Solukhumbu, Sindhupalchowk, Nuwakot, and Kaski in western Nepal.

Despite all these favourable conditions the tea sector is unlikely to meet its production targets.

The first, and major, constraint identified by owners of tea estates is Nepal’s continued political instability. The situation in Nepal remains precarious and unpredictable. This has had an adverse impact on the day-to-day business of the tea factory owners, farmers and marketers.

Secondly, production is concentrated in a number of fragmented areas such as gardens, factories. Consequently marketing efforts are also disjointed. For instance, Nepal's tea factory is supplied by over 7,000 small Green Leaf farmers spread around the agricultural areas in the hilly region. In tea production, it is a well-known fact that 35 per cent of the quality of tea is determined by the quality of the green leaves. The methods, in which small farmers are engaged, are, therefore, crucial for the quality of the final output. Even if one farmer, out of the total 7,000, uses a harmful pesticide then the whole production can be rendered worthless. There is, therefore, a clear need for tea producers to implement a code of conduct to be enforced at all levels of the value chain of tea production process.

Thirdly, the lack of a quarantine laboratory is another issue for Nepal. Nepalese tea has to be sent to Kolkota for food testing standards, which is costly in terms of time, money and management. Definite progress is required on the long-standing proposal to develop a joint quarantine laboratory or to create a mutual recognition agreement between India and Nepal.

Lastly, the lack of auction system is an issue. A market research study, facilitated by the German aid agency GTZ in Germany revealed a number of interesting facts about how

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Nepali Orthodox tea is perceived in Europe's single largest market, Germany. The results suggested that German buyers were not interested in tea sourced from a variety of individual gardens. In India the issue of scale is solved by organized large-scale auctioning of tea in Calcutta. During this process, producers provide various grades of tea for sampling. Based on the quality of the tea international brokers offer their prices on behalf of the international buyers. This process is clearly missing in Nepal, where international buyers are not able to negotiate with different buyers based on the grades of tea.

The Himalayan Tea Marketing Cooperative (HIMCOOP) has been formed to provide a one-stop agency for tea sales. Presently, their day-to-day operations are funded by a SNV while the marketing strategy has been structured with the assistance of GTZ and WINROCK International. The cooperative is actively participating in the tea world exhibitions from America to Europe, and agencies such as GTZ and WINROCK International along with the government are co-operating to promote the brand image. HIMCOOP has appointed Mr. Reinhold Messner, the famous mountaineer, as a Brand Ambassador of Nepali tea in Europe. HIMCOOP is branding Nepal tea in the international market as “Quality from the Himalayas”. A distinctive logo has been designed for Nepali tea and was unfurled at the Tea and Coffee World Cup organized in Hamburg in September 2005.

The government has been actively supporting the industry. The Government of Nepal introduced the National Tea Policy in 2000 with the goal of increasing the production of tea through the increased participation of the private sector in the tea cultivation23. The government grants a number of incentives to the tea industry24.

Competitiveness prospects are favourable.

− There is large potential in terms of expanding the area under cultivation.

− There is a need to improve transparency in marketing, quality, costs and prices by the implementation of an auction system. This is reflected in the number of stakeholders who, during interviews, stressed the value of a tea auction facility in Nepal. One advantage of an auction facility is that it can redistribute a higher share of the final price of tea to farmers. At present, the farmers' share is estimated to be about 45% of the price of manufactured tea and about 29% of the export price. Tea growers, and some manufacturers, stress that they ought to get higher shares of the final prices. A competitive and transparent auction system and better infrastructure for small holders will help to increase the shares.

− Competitive markets, quality products and agreements made through the WTO are major challenges to the Nepalese tea stakeholders. If these challenges were properly addressed and were responded to with policy initiatives, in line with improving world markets, the future of tea industry in Nepal would be very favourable.

World markets Over the last decade, key features of the tea market have been low prices, oversupply and in turn, fierce competition. The fall in prices was mainly caused by high world production due to the expansion of the area under cultivation and exports. Major tea producers such as Bangladesh, Kenya, Malawi and Tanzania expanded their tea production area by more than 130,000 hectares in the first half of the 1990s. Prices were also depressed because of the presence of low quality tea on the market as well as

23 Some of the major incentives of the National Tea Policy 2000 included: Priority lending, principle repayment and interest payment facilitation, Rebate on the land registration tax, Up to 50 year's lease prospect of Government land Creation of tea development fund Introduction of ceases (service fee) to manufacturers and traders (importer/ exporters) Establishment of Research and Training centres in collaboration private sector, Incentives to ancillary industries and Some export promotion activity supports. 24 The list includes: exemption of land ceiling; exemption of 75% of land registration fee and land revenue; leasing of public land for tea cultivation, low interest rates for land consolidation, free technical service to small and cooperative tea farming and capital grants for irrigation.

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competition from other drinks. Tea experts are calling for strict quality control standards to reduce the effect of low quality teas on the market. To counter the trend of tea loosing ground to soft drinks, the tea industry is actively trying to promote consumption in the EU and the US by emphasising the health benefits of drinking tea compared to coffee. The promotion of ready-to-drink tea is also being explored as it can compete with soft drinks.

After some signs of recovery in 2004, the FAO composite price for tea declined by 1.2% to an average of USD 1.64 a kg in 2005.25 Some improvement in demand eased supply pressure on prices at the start of 2006 when the composite price peaked at USD 1.92 a kg in February. After some corrections during the middle of the year, prices strengthened due to weather induced reductions in supplies in Kenya. (Public Ledger Dec 18, 2006.)

China, Sri Lanka, Kenya, India and Turkey are the largest producers. India and China are at the same time very large consumers. Sri Lanka is the world’s largest tea exporter with a 21 percent global export market share. Kenya, which produces mainly cut, tear, and curl (CTC) tea—used primarily in tea bags—has a similar market share. About 44% of world production is CTC tea and 31% Orthodox tea, with green tea making up the balance.

On the demand side Russia is the major market followed by the United Kingdom, Pakistan, the United States, Japan and Germany. Tastes vary significantly around the globe. Russian tea drinkers have a distinct preference for black tea. While the Russian market was initially dominated by Orthodox tea, the Orthodox tea is shifted to CTC on prices considerations. Recently, the trend has changed again with CTC demand steadily falling and Orthodox tea re-emerging as the preferred variety. The price paid for tea also varies greatly. Germany and Japan prefer First Flush Darjeeling, at more than USD 30 per kg, while consumers in the UK appear reluctant to pay even USD 2.50 for top quality Kenyan tea. Consumer tastes differ not only with regard to quality and origin: continental Europe buys leafy orthodox teas, while the UK prefers CTC’s more suitable for tea bags. Average CIF import prices vary significantly between countries, from USD per 3/kg in Russia (for black tea in packages of less than 3kgs) to USD 12/kg in Norway and 13/kg in Finland, demonstrating that there is significant scope for value addition.

Orthodox teas can be sold at a better price, especially when marketed well, as has been done by India with its Darjeeling teas. However, it is difficult to determine exactly where the markets for orthodox tea are and how they are performing.

Organic certification and other teas focussing on high quality are further differentiating factors.

Nepal’s market access conditions to all markets, especially in market openness, are very favourable, but Nepal does not have any tariff advantages. Nepal enjoys free access in the major markets, with the exception of Russia that imposes a very high conditional tariff of 20%, with a minimum payment of 0.8 Euros per kilogram.

Major OECD countries, Russia, and Syria are the most attractive markets for Nepalese orthodox tea. Nepalese tea is highly underrepresented in most of the attractive markets. Syria, US, and UK show much higher growth than the world growth, implying highly dynamic markets.

At the regional level, India is a very attractive market for Nepalese tea, especially, owing to high tariff advantages as opposed to its competitors.

25 The FAO composite price for tea provides an indicator for the world market,

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Table 33. Tea: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied to

Nepal (%)



(%) 1. RUSSIA 8.7 4 5.0 0.0 2. UNITED STATES 6.3 0 0.0 0.0 3. Japan 6.0 -4 0.0 2.5 4. UNITED KINGDOM 14.7 -3 0.0 0.0 5. SYRIA 2.0 50 7.0 0.0 6. India 1.4 37 0.0 59.1 35. SRI LANKA 0.7 16 28.0 0.0

Black tea (fermented) & partly fermented tea in packages exceeding 3 kg (090240)

2,548

72. Pakistan 11.3 -1 10.0 -4.3 1. UNITED STATES 5.7 20 0.0 0.0 2. AUSTRALIA 5.6 10 0.0 0.0 3. FRANCE 6.3 7 0.0 0.0 4. UNITED KINGDOM 2.5 25 0.0 0.0 5. CANADA 6.9 6 0.0 0.0

Black tea (fermented)&partly fermented tea in packages not exceeding 3 kg (090230)

2,317

13. India 0.5 26 0.0 5.5 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact The job creation impact of this sector is very high compared to other sectors. Although figures vary, one estimates that around 105,000 people are employed in this sector. The full-time employment equivalent (FTEE) is high for this sector (Table 13).

This sector seems a strong engine for farmer’s income generation and poverty reduction, as orthodox Tea gives competitive returns compared to other crops (Table 34). Small farmers have been attracted to growing tea as the demand and prices for orthodox tea bring higher returns than traditional crops. It seems that they are willing to forego production of other crops in favour of tea. Significant growth in land use and production are both due to the increased participation of small farmers in producing tea. HOTPA is currently implementing, in cooperation with various donor agencies, a code that will bring the sector up to international standards. This includes the introduction of environmentally friendly and social accountable practices. This will have a very positive influence on the prices that small farmers get for their produce and on labour conditions in plantations and factories.

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

Crop Yield(ton/ha)

Rice(Rs./kg)

Value (Rs. ‘000/ha)

Maize 2.4 13 31.2

Ginger 11 16 176.0

Cardamom .23 322 74.1

Firewood 1.75 .25 5.2

Broom grass 1.5 15 22.5

Tea: Orthodox 3.24 36 116.6

Tea: Organic 2.73 22 60.1

Tea: Hills general 4.22 28.2 119.0

Cabbage 7.0 3.5 245.0

Source: Nepal Tea & Coffee Development Board

Finally, tea is emerging as a potential export commodity with significant potential to contribute to national income growth, employment creation and environmental protection. The growth of the industry should be encouraged from a gender perspective since women play an important role in the tea industry, mainly in leaf plucking. However, leaf plucking is not a high level job and workers are often underpaid.

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Tea

AEC .2002. Tea Event: Proceedings of Agro Business Interface 2001. Kathmandu, Nepal 25-27 April 2001.

DEVA. 2001. Poverty Reduction through Development of the Tea Sector in Nepal. Report presented for GTZ in co-operation with ICON, Germany. Kathmandu.


NARC 2001. Identification of Tea Problems/ Constraints and its Future Research Strategy 15-16 August 2001.

Sharma, M N. 2002. Nepal's Export of Green Leaf Tea to Indian Markets. NTCDB. Kathmandu.


Companies contacted

− Kanchanjangha Tea Estate (P) Ltd: Dilli Baskota.

− Pathibhara Tea Estate: Sagun S Lawati.

− Gorkha Tea Estate (P) Ltd: Uday Chapagaion.

− Illam Tea Producers (P) Ltd: Rabindra Saran.

− Himal Tea (P) Ltd: R. K. Rathi.

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7. Ginger Export potential Medium


The export potential is medium. 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.

Priority actions − Diversify into processing ginger extracts (oleoresin).

− Introduce higher yielding and better quality varieties of ginger.

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SWOT Analysis for ginger Strengths Weaknesses Resources: Many potential microclimatic pockets suitable for quality

ginger production and linked with roads. The hill climate is very suitable to produce ginger with

excellent aroma and other valuable chemical contents. Rural communities attracted by prospect of ginger farming

and marketing. World Markets: Nepalese ginger preferred by consumers in domestic and

export markets. Nepalese ginger well suited for preparing Chutney - a

favorite food in northern India. Majority of ginger farmers are educated and aware of

market prices. Marketing: Farmers have established cooperative societies to better

market their crop Production: Ginger storing practices adapted by farmers in the pit is

easy, suitable and affordable

Production: Lack of farmer knowledge and techniques in production,

grading, packaging and post harvest handling. Rhizome rot disease (up to 30 % loss in field and during

storage). Traditionally processed Sutho26, below quality

requirement of Dabur Nepal27, which has potential to absorb a sizeable quantity.

Ginger processing technology unknown by most farmers. Business Environment: Insufficient infrastructure – roads, irrigation, inputs, credit,

quality seeds. Porter transport cost from farm to road head high due to

labor shortage. Insufficient ginger marketing awareness and knowledge.

Opportunities Threats Production: Production area can be increased World Markets: Large scale demand for Nepal produced ginger in

Northern India – scope to further enhance supply Attractive price in India Business Environment: Government has defined ginger as a high value crop and

policies are supportive. DFTQC28 has technical capacity to provide technical

support on ginger processing. The Department of Agriculture has set up a Ginger and

Spice Development Program that is technically equipped to be capable of providing services to the farmers.

NGO's providing farmer support. Department of Agriculture is providing marketing

information services to the producers/traders.

Business Environment: Costly power sources and imported equipment for

processing World Markets: India has listed ginger as a restricted item. No action

taken by Nepal to address this. More efficient and enhanced production expected from

the hilly areas of India. More efficient and enhanced production expected from

Tibet.


Current export performance The value of ginger exports has been increasing over the years and doubled from 1994 to 2003 (Table 35). According to the Government’s trade statistics, around 34 million Rs worth of ginger was exported to India in 2003/04. Taking into account unofficial border trade, the actual value of ginger exports is estimated to be at least 33% higher. More than 75% (115 thousand Mt. in 2004/05) of the total quantity of ginger produced in Nepal is exported.

26 Whole dried ginger root traditionally a remedy for morning sickness during pregnancy 27 Darbur Nepal is the Nepalese subsidiary of Darbur India Ltd., an Indian Multinational 28 Department of Food Technology and Quality Control

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

Year Ginger Dried Ginger Total Proportion of Dried in Total

1993/94 73,800 23,100 96,900 24

1994/95 90,900 76,900 167,800 46

1995/96 137,300 47,200 184,500 26

1996/97 140,700 46,500 187,200 25

1997/98 167,200 41,500 208,700 20

1998/99 151,700 41,100 192,800 21

1999/00 161,500 59,500 221,000 27

2000/01 161,800 61,000 222,800 27

2001/02 207,900 80,500 288,400 28

2002/03 283,400 96,600 380,000 25

2003/04 263,500 73,000 336,500 22

Source: Statistical Information on Nepalese Agriculture, HMG/MOAC, Agri Business Promotion and statistics Division.

Almost all exports of ginger are to India, particularly to the northern Indian markets of Gorakhpur, Varanasi, Lucknow, Kanpur, Patna, Jaipur and Delhi. India is a vast and dynamic market for Nepali ginger. A number of the long established markets for Nepali ginger in India are under threat from increased domestic production, especially from the town of Cochin in the south of India and Bangalore in the east of India. However, due to its closer proximity to the crucial northern markets, Nepal enjoys a comparative advantage over these regions. There is evidence that traders in Nepal are unable to meet the demand from growing markets in India. The market for Nepali dried ginger in India, traditionally a niche market, is also expanding. A number of traders reported that, despite an increase of the quantity of domestically produced ginger, the market share of Nepali imports has remained constant, as the market has expanded. There are also a number of smaller markets on the Nepali border, to which a large quantity of Nepali ginger is exported. Nepal is therefore not dependent on a single market within India for its exports. While Nepal’s share in the Southern Indian market has been declining, this represents less than 5% of their total exports to India. Other suppliers competing with Nepal, for the Indian market, include China, Nigeria, Myanmar and Ethiopia. It is interesting to note that India is starting to import more from Nigeria as well, which may develop into a competitor.

Nepal is an important exporter of Ginger and is certainly among the largest 15 exporters worldwide. Nepal’s share of the total world trade in ginger in 2004 was almost 2%. This statistic does not take into account any of the unofficial border trade with India, which is believed to be significant. The proportion of unofficial trade varies greatly every year. It is therefore very difficult to incorporate estimates of it in the measures of the total exports. Outside of India, Nepal also exports a very small amount of ginger to Pakistan and Bangladesh. Further, it must be mentioned that a large proportion of exports to India are re-exported to Pakistan.

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Domestic supply conditions The total area of land under ginger cultivation has almost doubled in 10 years. In 2004/05 the total land area under ginger cultivation reached almost 12,000 ha, up from some 5,300 ha in 1994/95. (Table 36).

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

Year Area (Ha)

Production(Mt)

Yield (Mt./ha)

National Average Retail Price

(Rs./kg)

1994/95 5,321 52,730 9.91 29.02

1995/96 6,238 63,292 10.15 30.63

1996/97 7,051 66,950 9.50 24.61

1997/98 8,821 81,601 9.25 21.95

1998/99 8,841 81,799 9.25 28.24

1999/00 8,314 74,994 9.02 41.25

2000/01 8,956 84,366 9.42 NA

2001/02 9,189 87,909 9.57 31.37

2002/03 11,480 140,056 12.20 25.21

2003/04 11,830 150,593 12.73 28.54

2004/05 11,930 152,704 12.80 56.75

Source: Statistical Information on Nepalese Agriculture, HMG/MOAC, Agri Business Promotion and Statistics Division.

Estimates of the volume of total ginger production in Nepal vary significantly. According to the FAO, Nepal produced 90 thousand Mt. of fresh ginger in 2004, which is equivalent to 5% of the FAO’s figure for total world production. Estimates from the Ministry of Agriculture suggest a much higher production figure of 152 thousand Mt. of fresh ginger in 2004/05. The total volume of production has been increasing steadily.

Ginger in Nepal is traded in three forms – fresh, dry and processed. More than 75% of ginger is traded as fresh and just under 25% in dried form. Only a negligible quantity is traded in processed form. Only a small quantity of ginger is processed within Nepal, and there are very few industrial units available for oleoresin. Nevertheless, claims that there is great potential for value adding by product processing can frequently be heard. Collaboration with foreign companies or investors is actively being sought in this area.

Fresh Nepali ginger is considered lower quality than the ginger from India, Jamaica and a number of other countries, which produce more elite varieties. This is thought to be because of the high fiber content and dirty look of Nepali ginger (Box 8).

Box 8. Ginger varieties in Nepal

Nepalese farmers cultivate two different varieties of ginger, the Nase rhizome species, which is rich in fibers, and the Bose rhizome, which has very few fibers. The yield, as well as quality, of the Bose variety is considered better than Nase and, as a result, also fetches a higher price. The Bose variety is particularly considered superior fresh. The Nase variety, however, is preferred by the spice industry for making ginger powder, which is often used for medicinal purposes, as well as an ingredient in mixed spices. The Nase variety, therefore, has a well-established market. However, owing to the higher prices for Bose ginger, there is potential to improve the mix of products by concentrating on the cultivation of this variety. Most of the produce at present is of the Nase variety (industrial use). There are, however, limits to how much of this can be cultivated. This is because the fiber content is determined by the soil and climatic conditions. Thus a Bose plant in one location, when planted in a different environment increases the number of fibers and becomes Nase. The Government Ginger Research Farm has released a new and improved variety suitable for the Nepalese soil and climate that could maintain the low fiber content of the Bose variety in all environments. This seed provides a very good opportunity to improve the overall quality of Nepalese ginger. At the same time, an even greater opportunity is available by processing the ginger within in the country, such as creating drying plants, and, thus, adding value to the final exports. This sector has remained un-exploited so far.


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The harvested ginger is brought to collection centres located along the roadhead where collectors, wholesalers and exporters all meet. Individual exporters account for less than 10% of the total volume sold in each market. Wholesalers and collectors, however, account for the vast majority of purchases having close to a ‘monopsony’ at each collection centre. A large number of farmers bring small consignments. As a result, there is a growing tendency towards farmers grouping together in the form of cooperatives and similar other organizations. Government intervention in the ginger trading is limited to launching programmes encouraging the establishment of such collection centres and involving small farmers in their management.

Each of the players in the supply chain is a family owned small business. The concept of an overarching ‘company’ has not yet developed in the ginger trade. However, there are a small number of micro-enterprises which process ginger, normally producing dried and powder ginger, spices or candy, registered as companies or cooperatives with the Department of Small and Cottage Industry. They, however, account for only a very insignificant amount of ginger. Farmers mostly sell fresh ginger, with a small amount of ginger being dried at the farm level. It is either sun-dried (in the mid-western districts) or smoked dried (in the western district) and each has its own specific market in India. With the exception of such, location specific, processing systems, the trading as well as the production of ginger is scattered all over mid-hills region of Nepal.

Forward or backward linkages in the supply chain are non-existent. There is only a very limited role for other inputs into the cultivation process, as very few farmers use chemical fertilizer and insecticides. The most important stage, outside of cultivation, is the transportation of the good – by porters or trucks –as it is a bulky product. Jute or polythene bags are used for packaging ginger. Often these bags are being re-used and were originally used for grain packaging, or as bags of fertilizers or sugar. The infrastructure is very basic and almost all ginger is transported by road.

The competitiveness prospects are satisfactory:

− There is still a large tract of land that could be brought under ginger cultivation. The area under cultivation, at the micro level, is very price sensitive with slight increases in the price of ginger increasing the amount of land under-cultivation. Due to the simple cultivation process, as well as the practice of inter-cropping with staple crops like maize and cash crop like coffee and fresh vegetables, ginger production is environment friendly and sustainable. It can be grown in all the districts of Nepal (except in the high hill districts). Salyan, Palpa, Tanahu, Syangja, Kaski, Nawalparasi, Bhojpur and Illam, however, are the main ginger producing districts in the country as they are relatively easily accessible by road. However, there are, as yet, no farms which rely solely on the cultivation of ginger. There are two basic reasons why farmers are reluctant to concentrate exclusively on ginger cultivation. Firstly, ginger requires large amounts of inputs, such as seeds, compost and mulching materials, which are currently supplied by other farming activities. Secondly there is no guaranteed market for ginger. The Ministry of Agriculture is launching credit programmes and assisting farmers groups market their produce to ease these constraints.

− Improving production techniques could significantly increase production. One of the respondent companies suggested that, under current cultivation techniques, the output of ginger could easily be doubled within two crop cycles if the farmers were given market assurance. Ginger production in Nepal has a long history and today is still, mostly, cultivated by traditional methods. There has not been much improvement in the cultivation techniques. Improved and high quality seed varieties are also not available. Total production could be increased by introducing a new crop variety (like the Kapurkot Aduwa 1 variety which was released by Government Ginger Research Farm), by concentrating on varieties of fiber-less seeds and improving farm practices. Improving the uniformity of the yield rate could also increase production. Currently there are large variances in the yield among the different districts – ranging from

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about 20 Mt./ha in Tanahu (which is comparable to other countries) to less than 10 Mt./ha in Nawalparasi district.

− Traders claim that there is high potential to diversifying the Nepali ginger trade by concentrating on processed products. As dried ginger currently fetches higher prices in the Indian markets than fresh ginger, traders want to increase its export to India. The proportion of dried ginger in the total ginger export to India has in the past, normally, been less then 30 percent, apart from in 1994/95 when it reached to 45% (Table 35). While there is, thus, a market for dried ginger, the market is less secure as the lighter weight of dried ginger makes it less sensitive to transportation costs, and creates a threat from international competition, particularly from countries such as China and Nigeria. Besides dried ginger, other possible forms of processed ginger include ginger oil and oleoresin, ginger powder and mixed spices, ginger candy and slices. In Nepal the potential for producing ginger oil is limited. The quality of the Nase variety is low because of its high fiber content, as well as the inadequate farming methods. The result of this is that the final ginger oil has an unpopular “earthy aroma”. Production of oleoresin, on the other hand, is less sensitive to the quality of the produce and, thus, may present a better opportunity. Ginger oleoresin has widespread uses as a flavoring agent in foods, beverages, and medicines. Ginger Oleoresin is preferred in these industries over natural ginger, because of the advantages that oleoresins hold over the spices themselves. These advantages include increased economy in use, more uniform flavor and concentration, and lack of microbial contamination.

World markets Ginger world market is dynamic. Total world imports in 2005 are estimated at just over USD 300 million, showing a respectable growth rate of 21% per year over 2001-2005. In terms of quantity ginger exports increased at an annual rate of five percent. This suggests the presence of upward pressure on world prices.

China, India, Indonesia, Nigeria and Nepal are currently the main producers of ginger. Together these five countries produce more than 80% of the world’s total supply. The Food and Agricultural Organization (FAO) estimates that the total world production of ginger was just over a million tons in 2004. In that year, China accounted for 274,000 tons of total production, while India accounted for slightly less, at 230,000 tons. A large proportion of China’s production is exported. Most production in India is for domestic consumption.

Japan is the world’s largest market for Ginger, followed by the USA, Pakistan, the UK and Malaysia. In 2005 Japanese consumers bought around 90,000 tons of ginger, which accounted for over 30% of the worlds imports Japanese ginger imports are predominantly supplied by China (73% in 2005) and are mainly either in dried or in fresh whole form. The Japanese market for ginger is essentially for, high quality, non-fibrous ginger. While Japan, is therefore, an attractive market in terms of size, in the short and medium term it is inaccessible to Nepal as they cannot produce large enough quantities of, high quality, non-fibrous ginger.

Nepal enjoys free access to India’s markets but faces restrictive non-tariff measures. A range of different fees are levied on Nepali ginger. The total cost of these amounts to Rs. 170/Mt., which is less than 1% of the total marketing cost of ginger exported to Gorakhapur in India. India has recently imposed two tough non-tariff barriers on ginger imports from Nepal. First, Nepali exporters can only sell their produce to licensed Indian traders. This limits Nepali exporters in their choice of traders, as many Indian traders do not have PAN29. The second measure relates to the sanitary and phyto-sanitary barriers. Despite the fact that the authorities in Nepal, concerned by the possible spread of diseases, require consignments of ginger to be issued with a phyto-sanitary certificate, all ginger entering into India from Nepal has to undergo a further pesticide residue test at

29 PAN is a registration of traders under Indian Act. Important license is not required for trading between Nepal-India.

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border points. A number of other, non-tariff, barriers have created technical difficulties for Nepalese exporters to India. First, Nepali trucks are not permitted to enter India, which means that the consignment has to be re-loaded on to Indian trucks at the Indian custom points. (Nepal permits all Indian trucks to travel anywhere into Nepal’s territory for 72 hours for a nominal fee and the traders are demanding reciprocity from India). Second, the samples taken for pesticide residue examination are not tested at the border point, but are sent to specific locations often in each states capitals, which have been allotted by the Indian government. It takes about three days for the result to return, during which time the truck has to wait at the Indian custom point. All these obstacles add costs to the exporters. At the same time, in the absence of institutional arrangements for money transfer, almost all export transaction takes place in cash. This creates an extra risk for traders.

World market prospects are not encouraging.

− The most attractive markets for Nepal are Pakistan, Netherlands, Malaysia, US, and Singapore. All these markets, and particularly Malaysia and Singapore, are highly dynamic as their growth rates are higher than the world growth. Compared to Nepal’s neighbouring countries, Nepali ginger exports are highly underrepresented in Pakistan, which is also considered a highly dynamic market. Nepal’s market access conditions to all markets, especially in terms of market openness, are favourable. Nepal, for instance, has duty-free access to all markets except for Pakistan. There is not much difference between Nepal and its top 5 competitors in terms of their tariff advantages.

− However, China’s exports are gaining market share at an alarming rate, and reached three quarters of total world exports in 2005. Other important exporting countries are Thailand and Brazil, with the Netherlands being an important re-export market.

− The US market is not likely to be an attractive option for Nepali exports owing to the high costs of transporting a bulky commodity like ginger. Nepal may be competitive if it can export a higher value product, such as organic ginger.

− Pakistan is a more attractive market in terms of distance. Indeed, it seems likely that much of what Nepal currently exports to India is re-exported to Pakistan. Transaction costs, caused by crossing two borders, are too high to enable Pakistani importers to import directly from Nepal. As a consequence, the trade flow between these two countries does not appear in the trade statistics. At the same time, India’s exports to Pakistan (which include Nepali ginger) are only a small proportion of Pakistan’s total imports estimated at around 5%. Pakistan buys the majority of its ginger from China (70%) and Thailand (20%). Unofficial border trade between India and Pakistan, of course, needs to be taken into consideration too but, even at its highest estimates, this would not bring India’s share in the Pakistani market to a considerable level.

− There are a number of other promising Asian markets, such as Bangladesh and Malaysia, but these are dominated by Chinese exporters. Bangladesh also imports ginger (10,000 tons in 2005). China, however, already dominates this market, supplying 90% of official Bangladeshi ginger imports in 2005. This is likely to make it very difficult for Nepalese ginger exporters to enter this market. Malaysia could be considered a feasible market, but again, China has a 93% share of this market. Nepal, therefore, appears to have little choice apart from sticking to the Indian market and seeking ways to expand its exports and different processed products.

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Table 37. Ginger: Most attractive markets Product (HS 6-digit code)



(%, 2004)

Import growth

(% p.a. from 2001-05)

Tariff applied to

Nepal (%)

Nepal’s tariff


advantage (-)

(%) 1. PAKISTAN 5.9 37 13.5 1.5 2. NETHERLANDS 5.2 23 0.0 0.0 3. MALAYSIA 3.4 32 0.0 0.0 4. UNITED STATES 11.4 17 0.0 0.0 5. SINGAPORE 3.3 26 0.0 0.0 42. SRI LANKA 0.1 61 25.2 2.8 45. India 2.1 13 0.0 30.0

Ginger (091010) 2,518

60. BANGLADESH 0.8 14 22.5 0.0 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact 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). FTEE is currently low for this sector (Table 13). Because, traditionally, ginger farming and drying occurs at the farm level, the sector is very labour intensive. It is estimated that more than 80 labour/day are needed to cultivate 1Ha of ginger, which produces around a 1 Mt of ginger. Similarly, it is estimated that about 2 million labour-days (75% of marketed surplus transported by 60kg/labor) are need to transport the produce from the farm to the roadhead. In addition, a significant number of people find employment in other areas the total supply chain, mostly in further transporting (include the truckers and tractor), cleaning, packaging, and loading and unloading the ginger. Very few workers, however, are involved in the processing of the produce. By promoting the export of processed products, as well as the infrastructure necessary for processing, this sector could generate large opportunities for employment.

In addition this sector is favourable to efforts to create employment for women. Women actively participate in ginger marketing and other ginger related household decisions.

Ginger is Nepal’s most important spice export commodity. It is an important agricultural source of foreign currency earnings. The earnings from ginger (fresh and dried) exports constituted about 1% of total export earnings (Rs. 43.31 billion) in 2003/04. These foreign currency earnings are very important, as the country’s debt has been increasing and reached Rs. 307.19 in 2004/05.

Besides the employment created by this sector in rural areas, ginger farming is one of the main sources of cash income for the farmers of the mid-hills. It is grown across the whole east-west length along the Siwalik and mid hill ranges, and as high as altitudes of 1500 meters due its climatic suitability. It can also be grown in the uplands of Terai. Apart from helping them to meet their cash requirements, the income is also invested into farm improvements by the farmers. As it is being produced in the whole of mid-hill areas this crop is very important for the development of this region. Ginger cultivation, by providing income and new opportunities in this area, serves as an important counterforce to rural-urban migration.

The poverty reduction impact is high as most of the farmers producing ginger are small farmers, for whom it is their main source of cash income, while the rest of the supply chain creates income for poor agricultural laborers. The increase in production also indicates that this sector is supporting poverty reduction. It was reported that many educated people are entering the ginger trade in Nepal because of the high returns. It is expected that many people will migrate back into rural areas, particularly in order to take advantage of new positions managing the collection centres.

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Finally, net income to the farmers from the ginger cultivation is significantly higher than that from competing crops such as paddy, maize, and wheat. A study shows that it is almost double that of fresh vegetables and more than 15 times that of grain crops (Table 38). Despite the fact that the farmers investment per unit of land under ginger cultivation is higher than for other crops, the high rates of return (estimated at more than 65%) continue to make it an attractive investment the return on investment to the farmer is more than 65%. Reasons for the higher cost of producing ginger include the need for large numbers of rhizomes seeds, the use of plant protection materials such as mulch, the high doses of compost required and the generally labour intensive cultivation process. Ginger is less perishable than competing crops and has a long storage life. The rhizome can be easily stored by leaving it in the plant without harvesting, which is not possible for any other crop.

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

Pocket area Crop Production(kg / Rop

Production Cost(Rs./Rop)

Production Cost

(Rs./Kg)

Gross Income

(Rs./Rop).

Net Income(Rs./Rop).

Ginger 940 6,207 6.6 13,160 6,953

Paddy 260 2,183 8.39 2,612 429

Maize 126 1,554 12.33 1,893 299

Wheat 116 1,435 12.37 1,667 132

Potato 740 5,063 6.84 8,880 3,817

Tomato 500 4,053 8.10 7,500 3,447

Putalibazar

Cauliflower 562 3,376 6.00 7,093 3,717

Ginger 838 5,892 7.03 10,056 4,164

Paddy 226 2,080 9.20 2,191 111

Maize 112 1,319 11.77 1,668 249

Wheat 90 1238 13.75 1,270 32

Tomato 500 4,053 8.106 7,500 3,447

Cauliflower 512 3,573 6.97 6,275 2,702

Jagatbhanjyang

Cabbage 1180 3,061 2.59 7,862 4,801

Source: - Field survey, 2005 by ABTRACO.

The net environmental impact of this sector is positive as it, notably, contributes towards reducing soil erosion in the mid-hills. The intensive, continuous farming of this crop on the same plot of land results in the degradation of soil fertility. Farmers, however, are adopting crop rotation and using compost manure to avoid this negative impact. There have been reports that the crop has contributed towards reducing soil erosion in the mid-hills. Another environmental impact from farming this crop is related to the use of ‘mulching’ materials, which usually comes from the forest. Farmers argue that they are not destroying the forest as most of the mulching materials are ‘collected’ and not ‘harvested’ from the forest. The rest of the plant materials necessary for ginger cultivation are by-products grown on their own field.

Ginger

ABTRACO, Trade Competitiveness of Off-Season vegetables and Ginger, AEC/FNCCI, September 2006.

Anne Plotto, Post-Production Management for Improved Market Access for Herbs and Spices – Ginger, FAO.

Ginger Processing and Promotion Programme, (In Nepali) REDA.

Ginger Promotion Programme, REDA, 2005.

Icon Groupo International Inc., The World Market for Unsweetened Ginger: A 2005 Global Trade Perspective, February 24, 2004.

Jitendra Jaisawal, Improving Ginger Marketing Systems: Experience of Local Initiatives Support Programme in Palpa District.

Lila B. Karki, Rural Economic Development Association (REDA), Palpa, Annual Review Workshop 2005.

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Lila Bahadur Karki, Present Situstion, Problems and Potentials of Ginger Cultivation, Processing, Internal marketing and Export in Nepal, (in Nepali), REDA, 2005.

Ramesh Munankami, A Brief Report on Ginger Market (In Nepali), Department of Food and Agricultural Marketing Services, Ministry of Agirculture, 1987.

Ramesh Munankami, Ginger Market Profile for Rapti Nepal, Prepared for VFC program under Rapti Development Project of USAID/Nepal, No-Frills Consultants, May 1992.

Ramesh Munankami, Inter-District Trade of Ginger: Some Observations, No-Frills Consultants, Kathmandu, Nepal, April 1989.

Persons contacted

− Mr. Ambika Prasad Barnawal , Proprietor, Ambika Prasad & Co., Butwal.

− Mr. Krishna Chandra Jayasawal, Proprietor, Sagar Exterprises, Butwal.

− Mr. Jeevan Kunwar, Business Expert, RBDA (Rural Economic Development Association), Tansen.

− Mr. Chura Bahadur Godar, Proprietor, No Campany's name, Location Tansen.

− Mr. Ram Prasad Pokharel , Proprietor, Chandra Kirana Store, Tansen.

− Mr. Krishna GC, President, Ginger Producer Cooperative Association Limited, Tansen.

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8. Medicinal plants and essential oils Export potential Medium

Current socio-economic impact (employment) High

The export potential is medium. 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 65 billion. 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.

Priority actions − 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.

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SWOT Analysis for medical plants and essential oils Strengths Weaknesses Resources: Excellent natural conditions for herbs and essential oils. High value, low volume.

Over 700 species of natural and aromatic plants30. Established value chain. High quality packaging and promotion material starting to

be used.

Product: Internationally uncompetitive quality. Business Environment: Poor laboratory support services. Lack of accredited certifying agency in the country. Production: Cultivation of MAPs still very limited. High capital investment and lack of venture capital. World Markets: Difficulty entering established markets as buyers tend to

have specific product requirements and are reluctant to change suppliers.

Opportunities Threats Resources: Government and donors serious about promoting this sub

sector. World Markets: Changing consumer preferences towards the use of

natural and organically cultivated products over synthetic products.

Growth of pharmaceutical, cosmetic and nutrition industries globally.

Product: Shift from exporting raw material to processed product. Extend range of products exported.

Business Environment: Cultivation on private land discouraged with the tendency

to levy revenue. Low level of private investment. World Markets: Acceptance of novel essential oils by the world market

takes a longer period (at least 2-3 years) than other conventional items.

Competition: Western multi-nationals are getting Intellectual Property

Rights on species found naturally in Nepal. Chinese and Indian supply to international markets at low

cost with much more capital and infrastructure backing.

Synthetic replacements – mainly of essential oils.


Current export performance Every year in Nepal's Himalayan highlands, villagers gather around 20,000 tons of medicinal plants, with a combined value of about USD 20 million from the wild. They pack and dry them and then try to sell them to traders for export.

The bulk of the Medicinal and Aromatic Plants (MAPs) are exported to the Indian markets (Table 39). It is estimated that about 95% of MAPs collected from the wild go into export, of which about 90% are sold to the Indian market.31 The remainder finds its way to China and Singapore, with small shipments starting to find their way into Europe. The official figures, however, seem to capture only a small part of the total trade. A USAID sponsored supply chain case study (FRAME report 2004) quotes a figure suggesting that non-timber forest products (NTPFs) generated Rs.2.5bn of trade for Nepal. Even if this includes domestic sales and the classification is taken in a broader sense, it is still noticeably higher than the official figures. Hence, its appears that a very significant quantity of plants enter India via unofficial channels.

30 Adhikary, 1989. 31 A report published by the Ministry of Forests and Soil conservation has listed Amala, Atis, Chiraito, Dalchini, Gucchi, Jatamansi, Jhyau, Kutki, Pipla, Ritha, Sugandhawal, and Timur as the main MAPs products traded to India.

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

World India Other countries Value

(Rs. million) Quantity

(MT) Value

(Rs. million) 2000/01 7.2 2.7 71.5 25.9 2001/02 4.2 4.0 84.1 25.4 2002/03 8.0 3.3 111.9 33.3 2003/04 22.9 6.2 91.5 48.3 2004/05 15.4 12.8 132.4 54.7

Source: Trade Promotion Center

Domestic supply conditions Medicinal herbs from the mountainous districts of Nepal are becoming increasingly important in local and international markets. Medicinal herbs and essential oils are well known export items from Nepal. They are found widely in the forests and Himalayan ranges. These districts boast more than 700 medicinal plants found in large quantity. In the Dolpa district alone there are more than 400 species of medicinal plants of which more than half have commercial value. In addition, most of the plants are found to possess more than one aromatic or medicinal property.

Medicinal plants are found all over Nepal, from the low-lying tropical zones up to a height of 5,000 m, in the Himalayas. The most valuable plants are found in the Himalayan region. The NTFP Network Coordination Committee32 has taken upon itself the task of creating a manageable system to prioritize products as the industry had difficulty focusing their interests due to the large variety of species. The committee established a set of 17 criteria to help select the top most commercial species in each of the country’s three climatic zones33. The following species are now high priority for research and promotion.

Table 40. Top priority species according to NTFP Network Coordination Committee Tarai Amala Chamomile Pipla Bel Sugandhakokila Lemongrass Nim/Mentha Kurilo Bojho Tagetes Gurjo Sarpagandha

Mid-hills Timure Tejpat Ritha Chiraito Lauthsalla Pakhanbed Dhassingre Bhyakur Majitho Okhar Jhyau

Himal Sugandhawal Padamchal Jatamansi Atis Bisjara Guchhichyau Yarsagumba Kutki Panchaule Laghupatra

Source: NTFP Network Coordination Committee.

The Herbs and NTFP Coordination Committee has identified the top 5 non-timber forest products (NTFP) in trade and in terms of income generation, and the Committee ranked development regions in terms of the contribution of each NTFP.

32 An NTFP Network was setup in 2005 to bring together community, business, donors, environmental and government representatives to work together toward promoting the sustainable use and management of NTFP resources. The Nepal NTFP Network has an active coordination committee with representation from the Ministry of Forests & Soil Conservation, Department of Forests, Department of Plant Resources, Department of National Parks & Wildlife Conservation, Department of Soil & Watershed Conservation, Forest Research & Survey Centre, Community Forest Division, Institute of Forestry, Nepal Foresters Association, Herbs Production & Processing Co. Ltd., Humla Conservation and Development Association, and ANSAB. The network has reinforced the importance of NTFPs in community resource management and provided the various government agencies with a neutral venue in which to discuss conservation and development issues. 33 The criteria include:1. Market value/price, 2. Annual export quantity, 3. Average annual export to ITC, Tanakpur, 4. Annual industrial demand in KTM, 5. Ease of cultivation, domestication, 6. Royalty, 7. Parts of use on land, 8. Bulkiness, 9. Social acceptance for further processing, 10. Quality improvement, 11. Range of distribution, 12. Threat category, 13. Legal protection, 14. Availability of local processing techniques, 15. Regeneration/rotation period, 16. Ethno-botanic importance, and 17. Potentiality of further processing.

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

Rittha (Sapindus mukorossi) 1.71

Timur (Zanthozylum armatum) 1.14

Lichen (Parmeila sps.) 1.00

Pawan ko Bokra (Persea sps.) 0.90

Chiraito (Swertia chirayita) 0.35

Source: Department of Forestry

Micro-scale cultivation practices in the forest and the cultivation of MAPs on a commercial scale do not yet exist. The Ministry of Agriculture is actively trying to promote this, but are having difficulties as many small farmers in the remote highland areas, where conditions are optimal for MAP cultivation, still prefer to produce food crops like rice (which produce very low yields in such areas) because they are concerned about market assurance.

Immense value added is being lost because of the lack of facilities to process the plants into semi-finished or finished products. In essence, the processing of MAPs is currently limited to the small-scale distillation of essential oils. Distillation units exist in two forms: privately owned and managed by CFUGs (Box 9). These two types differ only in terms of their ownership structure. In terms of production capacity as well as the number of employees, there is no difference between the private and cooperative distillers. The distillation units can benefit from improvements in temperature control during the distillation process, which is a key determinant of product quality. Proper testing and segregation of different quality batches are an important, but not always practiced, step in the processing system. For some oils harvest timing is also important, as it can affect the oil yield and color. Further training is required in this regard. Higher levels of processing of the raw plants, which would need to take place at a central place further downstream, can include powdering, packing, boiling, cooking and making aqueous solutions. Currently, there is no such processing in Nepal. Improved training in these techniques can make a big difference. This is an accepted fact, and various donor-funded programmes are active in this area.

Value is also being lost because of poor post-harvest handling at the collector level. Significant improvements can be realized simply through better washing, drying, storing and quality grading of the produce.

The supply chain is long, involving many middlemen, which leaves a low price for the plant harvested. The harvested/collected MAPs are generally sold to collectors that sell their unprocessed products to local traders who sell the products on to road head traders. The road-head traders then sell the products to regional traders and, finally, to Indian traders.

In the case of aromatic plant products, collectors sell to processors (either directly or through traders) who extract the essential oils and then sell the oil and its by products to traders and manufacturers in Nepal, India, and overseas.

Once the products reach the border, they are generally sold in Indian markets for use primarily in manufacturing medicines and consumer products. Some of these products are exported from India to foreign markets, but a large portion is consumed in India.

Box 9. Community Forest User Group (CFUG)

Nepal’s forest management strategy is based on the principle of people’s participation, which is known as community forestry. This approach was formally introduced in 1978 to encourage the active participation of local people in forest management activities as a means to improve their livelihoods. Under the community forestry structure, local people make their own decisions regarding forest management, as well as the utilization and distribution of benefits created by the forest. They are organized as a Community Forest User Group. Presently about 1.2 million hectares of forest is under the control of, about 14,000, Community Forest User Groups. It has received highest priority within the forestry sector and is one of the most successful development initiatives in Nepal. The community forestry program has significantly contributed to empowering the local people and ensuring the sustainable utilization and management of locally occurring natural resources. According to USAID/FRAME, Community Forest User Group (CFUG) programmes has been instrumental in improving resource management, instituting sustainable harvesting,

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and organizing harvesting communities but only where assisted by NGOs. In these cases, they have allowed the communities to gain more benefits from the product value chains There are, however, still many CFUGs that lack effective operational plans and more needs to be done to assist CFUGs to understand the value chains for natural products.


The government has demonstrated a flexibility and interest in its dealings with MAPs and NTFPs. It has promoted them by introducing policy frameworks to encourage public-private partnership and by providing opportunities to investors for the management and sustainable utilization of such resources. Some of the policies and initiatives are highlighted in table below (Table 42).

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

Master Plan for the Forestry Sector, 1989

Provides a 25 years policy and planning framework for the forestry sector including NTFPs as one of the primary program.

Tenth Plan of the Forestry Sector Encourages private investors by simplifying the taxation systems, sale and distribution. Creates a role for the government’s as facilitator, catalysts and regulator in the process of overall NTFPs development. Assists entrepreneurs in acquiring loan from commercial banks.

Industrial Enterprises Act, 1992 Encourages the overall economic development of the country by supporting industrial enterprises in a competitive manner.

Herbs and Non-Timber Forest Products Development Policy, 2004

Aims to make the kingdom of Nepal well known in the global market as the ‘Treasure of Herbs and NTFPs’ by 2020 by supporting the production, processing, marketing and other development related activities of NTFPs by encouraging conservation and sustainable management.

MFSC Activities Organises an annual ‘Herb Trade fair’ for Nepalese herbs. Formed a national level Herbs and NTFPs coordination committee.

Source: Collected from various sources

World markets MAPs are important inputs for the pharmaceutical, cosmetic as well as nutraceutical industries. World imports, in 2005, of MAPs in raw form were already a staggering USD 1.36 billion. However, most of the value is added to the plants before they reach the end consumer. GTZ estimates that the global market for herbal products, including medicines, health supplements, beauty and toiletry products is around USD 65 billion and growing.

Medicinal plants are used both in the herbal medicine industry and in the conventional pharmaceutical industry. Ayurveda, traditional Chinese cures and Homeopathic medicines extensively use medicinal plants in their treatments. In addition, medicinal plants are being used in pharmaceutical research to develop new drug components. Scientists, researchers and multinational pharmaceutical companies are looking for active substances in the plants to develop cures for various diseases, for which modern synthetic medicines are proving to be ineffective. This research into new plants, known as bio-prospecting, can have two potential effects. It can have a positive effect on the sector by creating new markets for a particular plant among multinationals, but can also have a negative impact if multinationals are able to patent the results of their research, blocking Nepal from producing and selling the new medicine.

The cosmetics industry is increasingly looking for natural ingredients to use in beauty and personal care products, hair care products and perfume and fragrance products. This development is being led by consumers, who are increasingly seeking entirely natural cosmetics. The success of Body Shop is a classic example of this trend. While the global cosmetic market has been stagnant in recent years, it is still a gigantic market. The CBI market survey on the demand for natural ingredients based cosmetics cites evidence that the market is worth around 117 billion euros. As a result, cosmetics, fragrances and dye are becoming more important sources of demand for MAPs. This has led to increased demand for Nepalese MAPs in the global market place. Various plant based essential

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oils, produced and exported from Nepal, include Citronella oil, Palmerosa oil, Sugandha Kokila, Lemon grass oil, Wintergreen oil, Jatamansi oil and lichen extract.

The nutraceutical industry, which is rapidly gaining momentum globally, embraces a wide variety of ingredients designed to improve our daily lives. This includes traditional supplements, such as vitamins and minerals, as well as non-traditional supplements, such as plant extracts, animal extracts, and other blended ingredients with proven or potential health benefit. The market for plant extract supplements is an important market for MAPs. The United Sates, which has been responsible for the emergence of this industry, continues to be the driving force behind it and is the largest market, followed closely by Japan and Europe. The structure of the global nutrition industry is changing rapidly, with consumers increasingly seeking preventive and supportive healthcare in a quest towards longer and healthier lives.

The use of natural products all over the world, but especially in Europe, is rapidly gaining momentum. Consumers have developed a strong preference for natural healthier foods, natural healthcare products and natural cosmetics. Awareness of the ethical issues affecting food, drinks, personal care and healthcare products has been increasing over the last decade, and is now having a real impact on these industries.

There are, therefore, a wide array of industries with increasing demand for MAPs. There also appears to be massive scope for Nepal to add more value through developing its own processing industry. The development of this industry, however, will require large amounts of investment in technology, support facilities and human resources.

Box 10. Examples of Common Nepalese plants for different uses

1. Pharmaceutical Industry & Research

− Use of plant products in dried form in the formulation of Ayurvedic medicines.

− Use of plant products in the form of extracts, alkaloids, glycosides in modern medicines.

− Phytochemical screening of plants for the isolation of new drugs for various diseases.

− Examples of new drugs isolated from such screenings include Taxol from Taxus baccta, Valepotriates from Valeriana Spp, Vincristin from Vinca rosea.

2. Health Care

− Ayurveda, Siddha & Unani medicines are based mainly on plants, widely used in India, Bangladesh, Nepal, Pakistan & Srilanka.

− Ayurveda alone has 8000 different medicines based on plants.

− 80% of medicines used in Chinese traditional medicines are from high altitude medicinal and aromatic plants.

− 25% of allopathic prescriptions are filled with plant and plant derived products.

3. Consumer Market

− Natural & health food shops such as herbal teas, medicated drinks, tonics, etc.

− Cosmetics and perfumery industries- essential oils such as Jatamansi and Sugan oils are used in this purpose.

− Health care products such as tooth paste, hair oils and soaps: Amala,, Bhringaraj, Lemongrass, Citronella and Zanthoxyllum.

− Aromatherapy: Essential Oils such as Aretemisia, Jatamansi, Sunpati, Sugandhwal, Juniper and Zanthoxyllum etc.

− Cooking and flavoring: Mint, Rosemary, Lemongrass, Thyme, Basil, etc.

− Food additives: Juniper berry oil for blending alcoholic beverage, Chiraita for bitter taste in beverages, etc.

− Natural Dyes: such as Berberis and Manjitho.

− Insecticide: such as Titepati and Neem.


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The different sources of demand, despite the low levels of production, for processed output suggests that there is scope for further market diversification beyond India. The largest buyer of medicinal plants, in their most basic processed form, is the United States, closely followed by Germany and Japan. These three markets account for 15%, 10% and 8% of world imports respectively. While Germany sources many of its supplies from Eastern Europe, the United States and Japan source mainly from China and India. Outside of Germany, France, the United Kingdom, Italy and Switzerland are other important European buyers. Germany is essentially a market for herbal medicine (buying 40% of EU imports) while France is much more focused on cosmetics, with companies like L’Oreal and Sanofi playing a very important role. In the United States, 40% of the USD 165 million worth of medicinal plants (excluding liquorice and ginseng) imported annual are for cosmetic purposes. Approximately 20% are imported for medical purposes with the remainder being mainly for edible consumption.

A number of EU countries, as well as Switzerland, Japan, and Malaysia are the most attractive markets for Nepalese medical plants and essential oils. Nepal’s market access conditions to all markets, especially in terms of market openness, are very favourable. For Japan, the United States and the EU tariffs are not negligible and mostly zero.

However, there are strict phyto-sanitary regulations operating in most international markets, these include the requirement of microbiological tests, as well as restrictions on the use of pesticides and heavy metal. On top of this, there are extensive food safety and medical regulations designed to ensure that the products are not harmful to consumers. If a herb or extract is new on the market it will have to be rigorously tested, by both the Food and Drug Administration and the European Medicines Agency, before being allowed to enter the market. Moreover, strict laws on packaging and the labelling of products also apply. If the MAPs belong to a protected species under CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora) additional regulations will also apply.

Besides legislative requirements, as consumers have been increasing their awareness and concerns about ethical issues, social, environmental and quality related market requirements are becoming increasingly important in international trade, resulting in the need for more advanced labels, codes of conduct and management systems.

The European Union has recently made it mandatory for all agro-based imports to obtain a HACCP (Hazard Analysis and Critical Control Point) certification. A GTZ study recommended that Nepal’s MAPs sub sector should obtain it. Such certification provides assurance about the quality, safety and reliability of the product. The study also recommends the establishment of laboratory business service with an established strategy to fulfil demand of the medicinal and aromatic plants sub sector to facilitate up selling, market access and competitiveness.

Despite the very challenging non-tariff barriers outlined above, it should be added that requirements are generally less strict for cosmetic and neutraceutical products than they are for pharmaceuticals products. The same distinction applies for raw materials and extracts versus final products.

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Table 43. Medical Plants and Essential Oils: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied to

Nepal (%)

Nepal’s tariff


advantage (-)

(%) 1. Germany 10.3 8 0.0 0.1 2. NETHERLANDS 2.5 127 0.0 0.0 3. UNITED STATES 13.5 5 0.0 0.1 4. JAPAN 8.6 4 1.0 0.2 5. UNITED KINGDOM 4.1 6 0.0 0.0 8. India (8/109) 1.4 30 0.0 29.7 62. BANGLADESH 0.1 17 20.8 0.0 63. SRI LANKA 0.1 10 6.0 -0.7

Plants &pts of plants (incl sed & fruit) usd in pharm, perf, insect etc. nes (121190)

1,568

69. Pakistan 0.2 6 4.5 0.3 1. SWITZERLAND 7.1 10 0.0 0.0 2. UNITED KINGDOM 8.2 6 0.0 0.2 3. France 15.2 8 0.0 0.0 4. JAPAN 4.7 5 0.0 1.7 5. MALAYSIA 0.8 27 0.0 0.0

Essential oils, nes (330129) 214

24. India 1.5 11 0.0 27.2 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact According to a USAID sponsored case study (FRAME report, 2006), there are 40,000 people involved in aromatic plant harvesting, trade and processing who derive their income solely from essential oils. If the number of people involved in collection and trading of medicinal plants is added to this, the total figure will be a lot higher. Many of those involved in collection are women. The full-time employment equivalent (FTEE) is high for this sector (Table 13).

The MAPs sub-sector has great potential to improve the socio-economic status of the collectors and also toward contributing to the national income and employment. The NTFPs sub-sector contributes about 5% to the national GDP. However, about 90% of the herbs and essential oils collected from the wild are exported, in raw form, to India in raw form and yields a minimum return to primary collectors and farmers. It is still an important source of local rural livelihood compromising of up to 50% of family income in certain communities. Organizations like ANSAB and FNCCI have started to provide price information to facilitate the marketing of NTFPs and also to help collectors get a reasonable price for their work. However, such information is at present limited to a few products and only a few collectors.

The most frequent actors in the value chain are poor, marginalized groups of people in rural villages. The proper development of this sector could make a difference to the welfare of a large group of people living mainly in sparsely populated areas, which are characterized by acute poverty, isolation and a lack of economic opportunities. Favourable policy intervention and support, improving information access and technological inputs could substantially improve their situation, particularly by correcting for weaknesses within the traditional system of NTFP trade, which is controlled by few terai- based traders.

From a conservationist's point of view, NTFPs are a potentially promising source of sustainable income for local villagers, creating an incentive for them to conserve their forests. Often, however, the villagers sell their goods to medicinal herb traders, who pay low prices encouraging them to over-harvest destroying the balance in the eco-system. Once a plant supply has been decimated, the medicinal traders move on to the next source. The villagers have, by this point, often done irrevocable damage to only source of livelihood. Despite the high commercial value of these plants and growing demand for Himalayan medicinal herbs, many plants are on the verge of extinction. Demographic

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pressure, deforestation, the destruction of their habitat and over-harvesting are the primary reasons for their collapse.

The cooperative societies formed by the FUGs (people living in or near the forest) have to some extent ensured that forest resources have been managed sustainably and that the rewards have been distributed equitably. Investing in herb harvesting training for the herb gatherers is a means of ensuring that the on-going damage to both these valuable plants, and ecosystem, is limited. If this country is to continue exporting herbs in future, the relevant authorities should take concrete steps towards protecting the natural habitats of the medicinal plants from further destruction. Likewise, reforestation programs should be launched, particularly in areas where valuable medicinal plants are common.

In order to address the issue of sustainable management of MAPs, an alliance of corporations, government and non-profit sectors was formed with the objective of minimizing the scale of biodiversity loss in Nepal (Box 10).

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

ANSAB (Asia Network for Sustainable Agriculture and Bio resources) coordinated the alliance and assumed the lead role in developing the sustainable collection of MAPs and other (NTFPs) from the forest, as well as improving their marketing. ANSAB in coordination with the alliance selected the forest stewardship council (FSC) certification that supports the environmentally appropriate, socially beneficial and economically viable management of the world's forests. After the necessary criteria had been fulfilled, Rainforest Alliance/SmartWood awarded the Forest Stewardship Council (FSC) certification to the Federation of Community Forestry Users Nepal (FECOFUN), on the provision that its members supply medicinal plants and NTFP ingredients to the international herbal and medicinal products industry. Nepal is the first country in Asia, and fifth in the world, to obtain FSC certification for the collection of medicinal plants and non-timber forest. Moreover, this certification is the first in the world for handmade paper and the most comprehensive with regard to the variety and quality of medicinal plants and non-timber forest products included. There are over 14,000 forest user groups across Nepal. They account for almost a third of Nepal’s population and cover 25% of Nepal’s biodiversity rich forests. For most of these communities, medicinal plants and NTFP trade is the only livelihood besides subsistence agriculture. Receiving this certification is a groundbreaking achievement for Nepal and hopefully will encourage the rest of the world to adopt the same model.


Medical plants and essential oils

Hill Agricultural Research in Nepal. HADP. Kathmandu, 1990.

Agricultural Technology and Adoption. Tenth Summer Crop Workshop. RAS. NMDP. Chitwan, 1999.

CBI Market Surveys – Natural Ingredients for Cosmetics, Natural Ingredients for Pharamceuticals, Essential Oils.


FAO.2003. FAO Agricultural Community Projections to 2010. FAO Commodities and Trade Division, Rome.

Herb Farming in Nepal: THT 2006.


Synthesis of Seminar Presentations and Discussions on Herbs, Herbal Products and Spices, November 2005.


Companies Contacted

− Himalayan Bio Trade (P) Ltd: Parbat Gurung.

− Dhorpatan Traders: Nanda P Gautam.

− Classical Herbal Group Nepal: Binodh Adhikary.

− Bluebell Herbal Products: Riddhi Amatya.

− Herbo Nepal Processing Industry: Mishak Sheakh.

− Bahubali Herbal Essence and & Extracts Pvt. Ltd , Sanjay Jain.

− Himalayan Herbal Processors ,Mohmmad Ishaq.

− JAWBUN, Pushkar Kharel.

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9. Hand-made paper Export potential Medium

Current socio-economic impact (employment) Medium

The export potential is medium. 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.

Priority actions − Introduce good environmental practices to save Lokta resources and conduct

research for replacements

− Introduce standards for the sector

− Upgrade technology of Lokta paper making

SWOT Analysis for handmade paper Strengths Weaknesses Resources: Lokta fiber unique - basically only available in Nepal Export oriented product with geographically diverse

markets Product differentiation Almost all raw materials and skills are local Production: Low capital investment required

Production: Crude technology of Lokta paper making resulting in low

quality High cost of production due to long supply chain Business Environment: Non-existence of standardization and poor quality

products Lack of qualified technical and design expertise able to

meet quality.

Opportunities Threats Product: Great prospect for diversification of the raw material base World Markets: Niche market opportunity due to unique qualities Unlimited market potential

Resources: Dwindling resource base of Lokta in accessible areas may

threaten the supply of raw materials Competition: Competitively priced paper products from other countries Unhealthy competition resulting in lower quality and price

war


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Current export performance According to HANDPASS, the annual export market of handmade paper and products is currently worth about USD 4 million.

The Bulk of Nepalese paper and paper products are exported to the US, EU countries and Japan. In 2004/2005, the major markets were the US (23%), France (18%), Germany (13), UK (8%), and Japan (5%)34. According to the Handicraft Association of Nepal’s report, Nepal was among the top 5 suppliers to the EU market, with an average annual growth rate of 66%. However, exports declined by 20% between 2003-04 and 2004-05, primarily due to growing competition in international markets as well as the impact the insurgency had on the productive capacity of Nepali industry.

Nepali entrepreneurs believe that Nepal has a respectable market share of the high-end market in the US and EU which Nepal is targeting with its unique and high quality products.

Domestic supply conditions Built on traditional skills and culture, Nepali handmade paper- making has been thriving primarily due to abundant supply of Lokta.

Nepalese handmade paper is famous for its unique quality, strength and durability, as well as its resistance to insects. Nepalese handmade paper is presently made mostly from Lokta plant fiber or a combination of Lokta and Argeli plant fiber. These plant fibers are collected from some of the highest mountains in Nepal, a process which is unique to Nepalese handmade paper and may contribute to its mystic and popularity. The high altitude plant fiber makes the Nepalese Lotka paper very strong. Another unique feature of Nepalese Lokta paper is that the production process has not been mechanized. For example, unlike in many countries where the wet paper sheets are electricity dried, Nepalese handmade paper sheets are left to dry in the sun and wind naturally. By using traditional production techniques and continuing to produce high strength paper, from high altitude fiber, Nepal has successfully created its own niche market, which its main competitors, namely China, India, Philippines, Thailand, have not been able to enter.

Box 11. Background information on Lokta Paper

There is a long tradition of handmade paper in Nepal. Earliest accounts, from the eighth century, record Nepali traders in Tibet manufacturing and selling it to Buddhist monks who used it to write their scriptures. The majority of handmade paper today is made from the bark of the Lokta, or Daphne Papyracea, a shrub that grows in the forests in the foothills of the Himalayas, under the shade of larger plants. When the bark is removed in the right manner, it reveals a self-regenerating native based fiber. Lokta grows at an altitude above 6500ft, is strong, durable and has a natural resistance to worms and insects. Paper is made from it using a centuries old process handed down from generation to generation.

Nepalese handmade paper is one of the few products in Nepal in which all the elements of supply chain are based on local resources. It utilizes local raw material, local labor and local expertise. Value addition takes place both in the urban as well as rural areas. Income is shared by both rural and urban people.


A diverse range of products are produced for export. Over the past few years, handmade paper’s uses have branched out way beyond writing paper and envelopes. The Creative Women’s Craft has made clothes from it, while Kanpou-Nepal exports it to Japan, where the fiber is used in making the Japanese currency the yen. World Friendship International uses it to make Japanese fans, which are exported to Japan. There are a number of experiments combining Lokta with cotton and silk to produce clothes.

The bulk of production is exported, either directly or indirectly via tourists. In the domestic market, the paper products are mainly sold to tourists, primarily through handicraft retail shops and stationery shops, or used for official government documents. Kathmandu, from where almost all export of handmade paper originates, also consumes over 80% of domestic sales. There are a number of international buyers who purchase large

34 Source: Trade Promotion Center Nepal

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quantities from individual companies. UNICEF, for example, purchases a large percentage of a company based in Kathmandu’s production. Handmade paper products are sold to customers abroad, mainly through specialized gift shops, fair-trade stores, variety stores, furniture and home interior stores and departmental stores. The Lokta handmade industry adopted fair trade principles in 1993, when the Fair Trade Group Nepal was formed.

The production is scattered throughout the country. The Lokta plant is found in 52 hill districts in Nepal. However, paper- production is only done in 32 districts. Until the beginning of 2003, about 313 units of handmade paper industries were registered with the cottage and small industries department. Of them, 268 were registered as a cottage industry and 45 as a small- scale industry. The five major handmade paper-producing districts are Jajarkot, Dailekh, Bajhang, Rukum and Solukhumbu35. Lokta paper is promoted by the Handicraft Association of Nepal (HAN) and its sub-group, the Nepal Handmade Paper Association (HANDPASS). In fiscal year 2003/2004 the handmade paper sector was ranked the fourth highest among exports of handicraft products.

The Lokta value chain comprises numerous actors. The main actors in the Nepali handmade paper value chain are the Lokta bark harvesters, paper sheet producers, paper products manufacturers, exporters, wholesalers and retailers. Individual households, or micro-entrepreneurs, collect the Lokta bark. The Lokta collectors sell their dried Lokta inner bark mostly to local paper producers. There are a few exceptions, where Lokta bark traders transport the bark out of their districts mostly to Kathmandu. In some parts of the country, there are household level paper producing units, where entire families are often involved in Lokta bark collection and paper making. These small units also buy Lokta bark from their neighbors, and, occasionally, employ some of them in paper making. Larger paper production units buy the paper from the other units and sell it to the Kathmandu market.

The large paper making units are, usually, run by local entrepreneurs as well as, more recently, by cooperatives or FUGs. Urban manufacturers buy paper sheets from the paper producers, and manufacture various paper products for export. They also sell some quantity to other exporters.

Competitiveness prospects are below average.

− There is a growing market demand for Nepalese handmade paper. The industry has not yet set any production targets for future growth. This is mainly due to the fact that it is not produced but collected, and that there are concerns about ensuring sustainability, as well as the fact that the export industry is still in the first stages of development.

− According to Nepal Handmade Paper Association, there are abundant lokta plant resources in Nepal. The available data on Lokta stock in Nepal, published by the government of Nepal’s Department of Forestry, shows that there is a total of 110,181 Mt of raw lokta available, and that the current utilization of lokta is about 8000-10,000 MT per year. The shrub is usually regenerates in between five and eight years’ times.

− Owing to a lack of understanding about proper collection practices, the bark is currently not removed in the proper, sustainable manner. Collection practices can be improved, and in fact one or two producers have recently received an FSC36 certification. Although there are currently plenty of Lokta plants available, which are essential as the industry is entirely dependent on them, the lack of correct collection practices could be a possible threat to the success of Nepalese Handmade paper exports.

35 The other prominent districts which produce paper are Sankhuwasawa, Baglung, Parbat, Myagdi, Ramechap, Dolkha, Sindhupalchowk, Ilam, and Taplejung. The paper produced in these districts is brought to Kathmandu valley to be processed in making different products and exported. 36 Forest Stewardship Council (www.fsc.org)

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− The Argeli plant, a close family of the Lokta plant, which grows in lower altitudes than Lokta, offers a promising alternative. It is already being farmed in some districts of Nepal, and a significant amount of paper sheets, paper stationery and other items have been successfully produced and marketed abroad by some entrepreneurs. There is also an ongoing trial production with banana plant fiber, and according to knowledgeable circles there are a dozen or so plants in Nepal that have fibers that could make good handmade paper. The government, along with HANDPASS, will need to take the initiative to determine most promising plants and develop the appropriate technology, to encourage the production of a variety of handmade papers, besides the traditional Lokta.

World markets The world import market for handmade paper rolls (HS 480210) is worth over USD 100 million and has been showing solid growth over recent years, 14% per year over 2001-05.

The international demand is mostly concentrated in two major markets: France and Japan. In 2005, they represented, respectively, 48% and 15% of world imports. Among the markets representing more than 1% of the international demand, France Ireland, Austria and United Arab Emirates are highly dynamic.

The main competitors to Nepalese Handmade paper are China, India, Philippines and Thailand

Market access conditions for this sector are very favourable. Handmade paper, both rolls as well as all paper-based stationary, items face zero tariffs in most markets. The respondents in the enterprise survey done for this study indicated that their products have not, so far, faced any non-tariff barriers.

World market prospects are above average.

− Looking at the industry from a broader perspective and including handmade paper products in their many diversified forms, the international market for Nepalese Handmade paper is exponentially larger. This takes into account, for instance, the market for stationary as well as for art items, such as envelopes, cards, artist paper, book bindings, and household items, such as lampshades.

− The most attractive markets are the EU countries, Jordan and India. Nepalese handmade paper products are very underrepresented in most of these markets. All these markets have a much faster growth rate than the world average and therefore are highly dynamic. Nepal’s market access conditions to all markets, especially in terms of market openness, are very favourable. These markets apply zero-duty rates to Nepal as well as its top five competitors. This means that there is no real tariff advantage for Nepalese handmade paper. At the regional level, Sri Lanka is considered a highly attractive market owing to its high growth rate.

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Table 44. Hand-made paper: Most attractive markets Product (HS 6-digit code)



(%, 2004)

Import growth

(% p.a. from 2001-05)

Tariff applied to

Nepal (%)

Nepal’s tariff


advantage (-)

(%)1. IRELAND 9.5 148 0.0 0.02. France 41.7 30 0.0 0.03. SPAIN 4.2 74 0.0 0.04. PORTUGAL 0.6 112 0.0 0.0

Paper, hand-made, uncoated, in rolls or sheets (480210)

649

5. India 0.5 24 0.0 15.01. CZECH REPUBLIC 6.9 29 0.0 0.02. DENMARK 7.4 18 0.0 0.03. JORDAN 11.1 125 3.0 0.04. SPAIN 3.3 40 0.0 0.05. ITALY 10.9 -8 0.0 0.07. SRI LANKA 3.7 234 21.5 0.010. India 2.3 73 0.0 14.9

Paper, sack kraft, creped or crinkled, in rolls or sheets (480820)

295

40. BANGLADESH 0.8 0 25.8 0.0* Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact The full-time employment equivalent (FTEE) is medium for this sector, estimating more than 22,000 people as FTEE, which is medium for this sector37 (Table 13). At present, the Lokta industry provides employment, of which over 70% are women and over 85% are based in mountain villages.38 These mountain villages are often extremely impoverished and lack basic health and education services. There are often very few other income generating opportunities. The employment generated from the Lokta handmade paper value chain effects both rural and urban areas as follows: The bush management and bark harvesting from the Lokta plant in the wild provides livelihood to about 15,000 villagers. Paper sheet production takes place at the household and village level and provides livelihood for 9,390 villagers, 80% of whom are women. Paper- products manufacturing is done primarily in Kathmandu (over 90%) and to a lesser extent in other cities like Janakpur, Birgunj, Pokhara, Biratnagar and Kavre. It provides employment to 4,000 urban dwellers. Research has shown that an expansion of the industry, could push employment to well over 40,000 people, and that, in terms of substantial growth, it could have a significant impact by increasing the incomes and livelihoods of many rural communities, especially women who are already involved in various aspects of value addition.

Profit margins for all market actors, from Lokta producers to exporters, are high. Unlike other natural product commodities, value is added at each stage, and by each actor, along the value chain until the raw material has been transformed into a marketable finished product, such as greeting cards or lampshades. The net margin of Lokta collectors is 40%. Other actors in the chain, who add value by further processing the raw material, make gross margins between 20% and 60% (Table 45). The distribution of benefits, indicated by the margins, is relatively fair in this industry. As compared to other natural products, where the collectors make less than daily agriculture wage rate of Rs. 80, Lokta collection provides the collectors with an average income of Rs. 130 a day.

37 The FTEE index is derived from an average of the number of employment from both ITC’s National Consultant and Nepal Handmade Paper Association. 38 Actually, we obtained two different numbers of employment to this sector: one was provided by ITC’s National Consultant, who specializes in this sector, and another one was given by the Nepal Handmade Paper Association (Annex 4). Therefore we decided to derive the FTEE indicator from an average of the number of employment from both ITC’s National Consultant and Nepal Handmade Paper Association.

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

Market Actors Selling price (Rupees per

200 sheets of 20 gram,20” X 30” paper).)

Expenses (Rupees) Gross Margin

Lokta bark producers 400 240 40%

Mico-level paper producers 1188 950 20%

Paper production companies 1240 868 30%

Paper-products manufacturers 5600 2240 60%

Exporters 5600 2800 50%

Source: Asia Network for Sustainable Agriculture and Bioresources (ANSAB).

The introduction of community forestry has helped to conserve Nepal’s forests in many ways, and have also protected the Lokta forest as well. After years of deforestation, the Nepali government made forest conservation a priority in the late 1980s and early 90s, turning over the management of nearly one-third of government owned forestlands to the Forest User Groups (FUGs). Today around a third of Nepal's total population, of about 21 million people, belongs to FUGs. Many of these have been very successful. For example FUGs in Dolakha have been able to meet the international standards of sustainability for Lokta forest in that area. Paper producers and manufacturers are aware of the necessity to maintain a sustainable supply of Lokta. Nevertheless Lokta resources are threatened, and a more sustainable solution will need to be found soon.

Hand-made paper

Bindu Adhikary, HH Fellow, “A sample study of US market for selected Nepalese craft products – major highlights of study findings“ Report submitted to Institute for International Education (IIE), Washington DC, USA , October 2006.

Hill Agricultural Research in Nepal. HADP. Kathmandu, 1990.


GTZ, Private Sector Promotion: Handmade Paper of Nepal, 2005.

HAN (various issues) Nepal Trade Statistics. Kathmandu.

Handmade Paper Value Chain of Nepal: HANDPASS 2006.


Smardashi Nepal. Lokta Issues and Updates. Kathmandu.

Smarika: Nepal Handmade Paper Association 2004.


Companies Contacted

− Makalu Paper: Mr Sunil Shrestha.

− Patan Handicrafts: Prabin Chitrakar.

− Natural Paper Crafts: Mr. Ikchya Bahadur Karki.

− Omanee Crafts: Mr Gyanendra Nakarmi.

− Nepal Handmade Paper: Gopal Shrestha.

− Western Nepal Crafts Pvt. Ltd, Manohar Upreti.

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10. Wooden handicrafts Export potential Low


The export potential is low. 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.

Priority actions − Finance and set up of seasoning plant to avoid cracking.

− Improve 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 for entrepreneurs involved in wood craft works to protect common interest and to enhance the woodcrafts activities.

− Set up a system for regular supply of high quality wood of various types and sizes to all wooden handicrafts industries and workers by setting up a wood seasoning and treatment plant in Nepal.

− A package programme for nation-side R&D, training, designs development, wood processing, carving and marketing should be launched by the concerned authority.

− Electricity should be available without any interruption.

− Customs points should remain opened for 24 hours for export consignment clearance.

− Tariffs on machinery, tools, inputs required for export manufacturing should be waived 100% and local development authority should not charge any octori or local development tax on exportable products.

− Wooden products should be encouraged by giving freight subsidies.

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SWOT Analysis for wooden handicrafts Strengths Weaknesses Resources: Traditional techniques and unique artistic works Higher quality than competing countries Design and product adaptation capabilities Availability of raw materials Capability to train new artists Entrepreneurship: Entrepreneurship and export management expertise

Production: Lack of adequate skilled labor to supply in quantity

demanded by market. Limited capacity to expand business volume Entrepreneurship: Lack of united approach of entrepreneurs involved in

wood craft works to protect common interest and to enhance the woodcrafts activities

Marketing: Lack of resource and knowledge for market penetration

Opportunities Threats Resources: Trainable carpenters and other people available to work in

woodcrafts World Markets: Demand is increasing (respondents claim Nepal can

supply only 40 to 50 % of current demand) Marketing: Value additions up to 300 to 1000 per cent to the value of

raw materials

World Competition: Countries like India, China and Indonesia have new

technology to provide consumer friendly low cost innovative designed products

Business Environment: Labor union and social problems Labor dropouts at peak production period.


Current export performance The contribution of wooden craft items to the total export earnings of Nepal remains negligible, despite a strong increase in Nepal’s exports of wooden craft items between 2001/02 and 2002/03 (Nepal Overseas Trade Statistics, TEPC).

Table 46. Nepal - Exports of Wooden Articles and Crafts in Rs.000 Product description Markets 2001/2 2002/3 2003/4 2004/5

Total 42,816 308,359 416,489 372,938 Overseas 38,005 33,690 46,810 68,720

Wood and Articles (HS 44)

India 4,811 274,669 369,679 304,218 Total 114,967 137,414 25,455 16,585

Overseas 16,124 15,945 16,907 12,928 Furniture of wood (HS 9403)

India 98,843 121,469 8,548 3,657 Total 5,667 9,422 15,110 10,228

Overseas 5,667 9,422 14,722 9,828 Buttons (HS 9606)

India 0 0 388 400 Total 163,450 455,195 457,054 399,751

Overseas 59,796 59,057 78,439 91,476 Total for wooden articles and crafts

India 103,654 396,138 378,615 308,275

Sources: Trade Promotion Centre for overseas exports and Handicrafts Association of Nepal for India exports. Notes: Nepal’s Fiscal Year runs from Mid-July to Mid-July, Approximate current exchange rate is Rs.72 = USD 1.

The major markets for Nepalese woodcrafts are India, USA, Switzerland, New Zealand, and Germany. These five markets together import more than 80 per cent of total exports from Nepal.

Domestic supply conditions Activities including production, domestic trading, and exporting of wooden crafts are mainly based in and around the Kathmandu valley. According to the Woodcrafts Association of Nepal (WCAN) exports account for around 50% of production. The Federation of Handicraft Association of Nepal (FHAN) suggests that there are 495 firms and companies involved in wooden handicraft production. According to the President of WCAN, there are about 50 wood carving industrial units and 2000 individual wooden craft

104

workers in the Kathmandu valley. In addition, there are thousands of carpenters who could be trained in wood carving techniques in order to rapidly develop the carving industries in Nepal.

Box 12. History of woodcraft in Nepal

Wooden handicrafts have always been major component of the traditional architecture in Nepal. Craftsmanship flourished in the Licchavi Period – 300 to 879 AD -- and wooden handicrafts have remained in vogue in temples, palaces, monasteries, and residential and public buildings till today. The traditional wooden architecture of Nepal is a great draw for tourists. Kasthamandap, an ancient three-story wooden pagoda, mentioned as early as the 8th century, is a prime example of this type of architecture. Even earlier evidence comes from the Chinese traveller Wang Hsuan Tsang (643 AD) who, in his travel log, praised the beauties of Nepalese wooden handicrafts, wooden sculptures and decorative items. He writes – “The people of Nepal are skilled in arts. Their houses are made of carved wood”.

Nepalese woodcarving is mainly located in the Kathmandu Valley. A number of the country’s mountain regions also still practice this traditional craftsmanship. There appears to be a long pedigree of Nepalese wooden handicraftsmen – such as the Silpakar and Kaisthakar families - creating high quality wood based art. Wood is also, as was already mentioned, traditionally one of the main construction materials in Nepal. The surface parts of these wooden structures, such as the beams, struts, pillars, entablatures, roof supports, windows, doors, brackets and lintels, were often beautifully and lavishly carved with intricate patterns and designs based on plants, humans and animals, as well as gods and goddesses.

The Newari language has a rich vocabulary to deal with wood carving terms such as the various patterns, components, as well as phrases to describe technical details, such as how to combine parts without glue and nails.

At present, the wood carving industries supply products to domestic as well as foreign markets. Currently, the most popular items are construction materials, such as frames, doors and windows, miniature statuettes, of animals and utilitarian items, such as tables and chairs.


The main production inputs, wood and labor, are available in abundance. Even today, the craftsmanship and skills needed for wood carving are passed from generation to generation. The supply of raw material (wood) and labor is not likely to be a problem in the near future.39 Moreover, there is scope to retrain many carpenters in order to rapidly increase the work force.

Production is highly labor intensive and has not been mechanised. The carvers are still using traditional artistic designs, skills and techniques in wood seasoning, cutting, polishing, carving, and finishing. Most of the tools are produced locally. Some of the larger exporting firms have started using modern tools but continue to do the carving by hand. It is estimated that about 500 to 700 per cent of total value of wooden craft items are added by labor. According to WCAN the average cost structure in the wooden handicrafts sector are (a) raw materials 15%, (b) labor 60%, (c) energy 2%, (d) equipment and tools 3%, and (e) overhead and profits 20%. At present the wood costs Rs.1200 per cu.ft.

The quality of the art is considered high but the products often develop cracks. Nepal is well known the artistic value of its wooden crafts. It attracts foreign buyers through its unique designs. However, the wooden craft sector faces a number of problems which have limited its export market. For instance, many buyers in the past have found that the wood often develops cracks. It is, therefore, necessary to develop a proper wood seasoning system before the actual carving on wood is started for export purpose. Other constraints include the following: 1/problems supplying quality, seasoned wood supplied in time and in the required sizes; 2/ a lack of adequate finance to enable producers to expand and penetrate new markets as well as in order to finance the large scale investment needed in seasoning plants; and 3/ inadequate training, research and development, design development facilities to increase the existing export capability of the craftsmen.

39 The main types of wood being used in carving are Michelia Champaca (Champ), Cedrus Deodara (Devdar), Gmelina Arborea (Gamar), Adina Cordifolia (Haldu), Terminalia Alata (Saj), Shorea Robusta (Sal/Agrakh), Dalbergia Latifllia (Satisal) and Dalbergia Sisso (Sisau).

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World markets Judging by the 2005 world import figure of over USD 1.5 billion, there is no doubt that there is a large amount of demand for wooden gifts and handicrafts around the world. This especially applies to the United States, which currently has a 38% share of world imports. EU countries, led by Germany France and United Kingdom also import a very significant amount, with a combined value of over USD 450m. In Asia, Japan and the Korean Republic are the most important markets. International supply is heavily dominated by China. China’s share of world exports in 2005, after very rapid growth from USD 273m in 2001 to USD 533m in 2005, was 40%. Its market share is especially high in the United States where 72%, of wooden handicraft imports are from China. Indonesia, Thailand and India have also become competitive in the world market for wooden handicrafts.

World imports are stable. While there have been no changes among major importers, some small importing countries, such as the Korean Republic, Chile, the Russian Federation, Turkey and Hungary, showed annual growth rates, between 2001 and 2005 of between 25% and 68%. These markets are therefore highly dynamic. Certain markets pay higher prices. In terms of average prices, Switzerland’s imports are exceptionally high. On average Swiss CIF import unit values are USD 13,700 per ton compared to the world average of USD 3,700 per ton. Swiss importers are buying exceptionally highly priced woodcrafts from Thailand, France, Italy and Morocco. A recent study by the CBI,40 on the EU market for wooden gifts and handicrafts, describes the growing focus of consumer’s on home decorations, of which wooden gifts and handicrafts and other natural products are an important element. The largest operators in the market are international retail chains, such as Ikea, Casa and Habitat, which concentrate in the furniture and home decoration businesses. This trend is likely to apply beyond the EU.

Some OECD countries and India are the most attractive markets for Nepalese wooden handcrafts. Nepal is highly underrepresented in the US market. Most markets have growth rates above the world average, and therefore are highly dynamic markets, with the US bringing down the average. Nepal’s market access conditions to all markets, especially in terms of market openness, are very favourable. In terms of tariff barriers wooden crafts are not a restricted product around the world. Tariffs are commonly at 0% or very low. Often the low rate (e.g. EU 3%) is further reduced to zero under GSP or LDC exemptions for Nepal. India is the only market to which Nepal posses a high tariff advantage.

Table 47. Wooden handicrafts: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied to

Nepal (%)



(%) 1. United States 30.2 -3 0.0 2.4 2. INDIA 0.0 53 0.0 15.0 3. GREECE 1.1 16 0.0 0.0 4. CANADA 2.2 6 0.0 3.0 5. AUSTRALIA 1.1 11 0.0 3.7

Statuettes and other ornaments of wood (442010)

285

32. MALDIVES 0.2 45 14.3 0.7 1. GERMANY 5.2 9 0.0 0.0 2. SPAIN 3.1 27 0.0 0.0 3. JAPAN 5.0 5 0.0 3.1 4. CANADA 3.1 10 0.0 3.1

Wood marquetry and inlaid wood; caskets and cases for jewellery etc (442090)

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5. SWITZERLAND 3.6 8 0.0 0.0 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

40 Centre for the Promotion of Imports from Developing Countries, Netherlands

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Current socio-economic impact The full-time employment equivalent (FTEE) estimates approximately 4,000 people directly involved in this sector, which is currently low (Table 13). Employment figures could increase rapidly if the sector were to expand. Further development of wooden craft industry in Nepal would generate additional employment and also provide work to Nepal’s rural population involved in upstream activities. Increased exports will increase in foreign exchange earnings.

Besides jobs and income generation, the most important potential contribution of the sector is in encouraging the development of new skills. Once carpenters have been trained in woodcraft the skills they have acquired add to their income.

A major concern associated with further development of this sector is its potential to contribute to the depletion of wood resources and thereby have a negative impact on the environment. In recent years there have been a number of successful community forest programs encouraging environmental sustainability. Woodcraft producers are aware of the threat, and expect wood resources to be managed carefully. Currently, Nepal still has enough forest to justify encouraging the export of wooden crafts. In the long run, even if Nepal has to import wood for crafting purpose, the value added through the carving process (up to 600% in the value of wood) will mean that it will still be profitable to continue exports from Nepal.

Wooden handicrafts

Centre for the Promotion of Imports from Developing Countries (CBI), EU Market Brief 2005, Wooden Products for Gifts and Handicrafts.


Handicraft Association of Nepal, Membership Directory 2006, unpublished.


Persons Contacted

− Mr. Pancha Ratna Shakya, President, Handicraft Association of Nepal, and Managing Director, Marketing International, Kathmandu.

− Mr. Sanu Raja Silpakar, President, Woodcrafts Association of Nepal.

− Mr. Raj Ananda Silpakar, Treasurer, Woodcrafts Association of Nepal.

− Mr. Upendra Barahi, Executive Member, Woodcrafts Association of Nepal.

− Mr. Kiran Kumar Sthapit, Director, Purna Wood Carving, Patan Industrial Estate.

− Mr. Purna B. Sthapit, MD, Purna Wood Carving, Patan Industrial Estate.

− Mr. Anil Shilpakar, Yeti Woodcraft Industry, Lalitpur.

− Ms. Anjana Shilpakar, Wood Carving Industry Pvt. Ltd. Patan Industrial Estate.

− Mr. Laxmi Sharma, MD, Laxmi Wood Crafts, Maharajgang, Kathmandu.

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11. Cut flowers Export potential High


The export potential is high. 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.

Priority actions − 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

− A strategic policy and plan with a package of incentives that include subsidies on (a) air-freight, (b) greenhouse construction and related materials, (c) irrigation, (d) supply of planting materials, (e) cooling chamber, and (f) refrigerated vehicles.

− Duty waiver facilities on import of all inputs required for the cultivation and processing of exportable floriculture products.

− Setting up of infrastructure facilities such as wholesale market centres and cooling chamber in international airport.

− Improve provisions for human resource development in the floriculture sector by setting up an institution for specialized degree programmes, training programme, R&D and extension services.

− Growers and traders of floriculture products should be treated as farmers and should not come under tax net. Floriculture entrepreneurs should receive exemption from all internal taxes to attract investment at least for 5 years to begin with.

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− Simplification of procedures applicable on imports and domestic movement of methyl bromide, sulphur, and nitrate required for soil and plant treatment.

− FAN should be supported to handle all market promotion as well as technical aspects of floriculture development in Nepal.

SWOT Analysis for cut flowers Strengths Weaknesses Resources: Experienced technicians and knowledgeable

entrepreneurs Availability of special cultivars and species Use of appropriate technology Quality products Availability of adequate land and labor Involvement of well established organizations Marketing: Stable market linkage and relationships

Resources: Lack of adequate technical manpower for hi-tech farming Inadequate financial resources at reasonable cost Restrictions and procedures on chemical input imports

are cumbersome Infrastructure insufficient (e.g. no cold chain) Marketing: High cost of overseas market promotion and research Lack of information on world markets and trading systems

Opportunities Threats Resources: Favourable geo-climatic conditions and rich bio-diversity

for further expansion of the sector World Markets: Increasing world market demand Favourable market access condition with preferential

tariffs under multilateral, regional and bilateral trading arrangement and negotiations

World Markets: Non-tariff barriers and undeveloped capacity to comply

with SPS and TBT regulations Imposition of tariff and complicated regulatory procedures

in import of inputs Business Environment: Unstable land policy due to likely change in land

ownership regulations Labor unions


Current export performance Exports have grown over the last six years and Nepal has emerged as a net exporter of flower products. In 2005/06 total exports of all floriculture products from Nepal increased by 98 per cent compared to the previous fiscal year, driven by an increase in the export of bulbs by 116% and live plants by 357%. Total export value in the fiscal year 2005/06 reached USD 466,000. Currently, the Netherlands, U.S.A., India, Japan and Denmark are the main markets for bulbs, cut flowers, and other floriculture products.

As with any perishable horticultural products, illegal border trades between Nepal and India are very common for cut flowers, bulbs and live plants. Illegal trades also occur as a means of bypassing complicated, time consuming and costly trade procedures. It is very difficult to estimate the total amount border trade transactions. It has been suggested that a large amount of trade occurs during the monsoon and winter seasons, when domestic supplies are limited in India. Similarly, Nepal receives cut flowers, across the many border points, from India during the marriage and festival seasons.

Domestic supply conditions With a wide variety of topographical and climatic conditions within a short distance, Nepal is noted for its exceptionally rich bio-diversity. There are as many as 6,500 species of flowering plants.41 The range of conditions offer unique prospects for developing many native as well as cultivable species of flowers, flower bulbs, tubers and rhizomes, ornamental plants and orchids. Commercial species of orchids of herbaceous perennials are in general epiphytic42 and terrestrial43 in habitat44. Eastern Nepal is rich in Epiphytic

41 Ministry of Forests and Soil Conservation, Terai Arc Landscape – Nepal, Strategic Plan 2004-2014, September 2003, page 6. 42 Natural growth takes in trees 43 Growth takes in land/soil

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species, West Nepal in Terrestrial species, and Central Nepal possesses both types. Epiphytic species are considered more attractive as they are more colorful and have larger flowers than other species. In 1989 Dahal and Shakya listed 90 genera and 350 species of orchids in Nepal. The commercially most important Orchids are the sympodial and monopodial types. They have different flowering periods and a number of them are of exportable. 14 districts, covering 7 million people (2005 Projection), have been identified as having prospects for floriculture production in Nepal. These districts include Kathmandu, Lalitpur, Bhaktapur, Kavrepalanchowk, Chitwan, Dhading, Makwanpur, and Nuwakot in central Nepal.45 The districts are all located within one to four hours drive from the international airport in Kathmandu. Other districts with favourable climatic conditions for flowers are Jhapa, Illam, Morang, and Sunsari in eastern Nepal and closer to Kolkatta market46 and Dadeldhura, and Doti in western Nepal closer to Delhi market.47 The driving distance from these six districts to the Kolkata and Delhi flower markets is around 5 to 6 hours.

The climatic advantages in the quality and variation of Nepalese flower bulbs, roses, carnations, gerberas, tissue culture plants, have been well recognized in the Indian and overseas markets.

Floriculture business has been flourishing in Nepal since the early nineties. Entrepreneurial enthusiasm and investment in this sector developed both the growth in consumption in the domestic market and gradual penetration to the overseas markets. In 1992, there were four commercial flower growers in three districts with a combined annual turnover of Rs.20 million. Today, there are 550 small and medium-sized nurseries and flower growers, with 80 hectares of land (32 ha covered) and over Rs. 375 million in investments, actively involved in the commercial production of cut-flowers and other floricultural products.48

The level of production has recently increased. Authentic data are not available on the current national production of these items. However, the recent increase in production volume is indicated by the increase of the area under cultivation. There has been an increase in domestic demand for cut flowers and ornamental plants, at the same time, there has been a growth in exports to India and abroad. Thanks to the increase in the area under cultivation, the turnover on the wholesale market has increased. Increased production appears to be successful with increased import substitutions due to a greater domestic supply of, previously, imported varieties such as, gladioli, roses, tuberoses, carnations, gerberas and orchids

Floriculture enterprises in Nepal are privately and domestically owned. So far no foreign investor has ventured in the floriculture sub-sector in Nepal. Their turnover in 2006 was estimated at Rs.230 million. The dramatic growth in the area under cultivation, in less than a decade, has been the result of increased consumer demand, as well as strong support from business associations in developing production and marketing.

The Floriculture Association of Nepal (FAN) wholesale market is the only organized market in the country that maintains transaction records on Cut flowers. Data for last eight years shows a surge in the total volume of stalks transacted and a gradual decrease in unit prices from some local species such as Dutch roses, carnations, and tube roses. This clearly suggests improved production efficiency and indicates that there may be potential to further strengthening Nepalese competitiveness. The cymbidium orchid, which is produced in low volume and is not imported, shows an upward trend in price together with an increase in volume of production.

44 Other two types are Lithophytic (those grow in stones and mountain slopes) and Saprophytic (those grow in rotten wild leaves). 45 Floriculture Association of Nepal (FAN). 46 Mr. Yogesh Pradhan, MD, Bodhibrichhya Nursery, Kathmandu. 47 Dr. Umed Pun, Floriculture Expert in Nepal. 48 Floriculture Association of Nepal (FAN), A Study on Trade Competitiveness of Floriculture Sub-sector in Nepal, (Jan 2007).

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However, the Nepalese suppliers have not yet managed to become competitive in terms of price.

Flower entrepreneurs face many problems in terms of R & D, human resource development, financial capacity and support, information, marketing and infrastructure, as well as government support (Table 48).

Table 48. Major issues effecting flower entrepreneurs Areas Problem Descriptions Production

R & D and Technology Services

Very little modern technology is currently used due to the absence of public sector’s support for R&D on agronomic practices, post-harvesting and marketing. Growers have limited knowledge of IPM systems. Entrepreneurs, at their own initiative, are managing the transfer of the appropriate technology from other countries, which are already exporting to advanced countries. Often such transfers are very much unsystematic.

HRD and Technical Services

There is a scarcity of qualified technical manpower and floriculture extension services. There is only one institution providing formal horticultural education. There no other institution giving any regular formal or informal systematic training in agronomic and post-harvesting practices in Nepal. Moreover, majority of growers are still in process of learning by doing.

Limited financial capacity and support

Business houses and even small entrepreneurs are reluctant to make any significant investment due to the long gestation period and high risks associated with floriculture business. Without an adequate investment, the Nepalese growers and exporters are not able to compete in the global market. Unlike in other developing countries, Nepal neither extends fiscal supports (tax benefits), financial supports (subsidized interest rates, electricity, irrigation, greenhouse, transporting and cooling systems, and air freight) or support in land procurement to floriculture entrepreneurs.

Information, Marketing and Infrastructure

Information Entrepreneurs have limited capacity to access information on market opportunities, improved technologies and market regulations.

Market Promotion Growers and entrepreneurs have limited financial capacity to launch market promotion programmes in developed countries.

Marketing Research Entrepreneurs have no access to up-to-date information on market requirements, demand, market regulations, and opportunities. Limited financial capacity has constrained efforts to undertake international market research to encourage export promotion.

Marketing Infrastructure

Growers and exporters are not supported by appropriate infrastructural arrangements for post-harvesting process such as treatment, warehousing, cleaning, grading, packing, etc. Other requirements are wholesale market facilities, refrigerated van, and laboratory for pre-export testing at plant quarantine check posts, chilling/cooling room at Kathmandu airport.

Policy, Regulatory and Institutional

National Strategies and Action Plans

The country lacks national strategic plans and action programmes extending support to agronomic and post harvesting practices, HRD, technical services, marketing infrastructure, FDI, and R&D, and transparent policy on trade and tariffs

Administrative and Procedural

Entrepreneurs are the victims of confused policies. While the import of inputs is subjected to duties, the import of flowers from India enjoys duty free status. Lengthy and tedious procedures have to be followed for importing and local transporting of pesticides and fungicides such as methyl bromide, sulphur and nitrate.

Source: National Consultants.

Most inputs have to be imported. Growers use imported planting materials, seeds, chemical fertilizers, insecticides and fungicides, greenhouses and equipment, cooling equipment. There are a number of specialised agents, in the private sector, who import these inputs.

The Nepalese government at present plays a minimum role in the development of the floriculture sub-sector. Some farmers outside the Kathmandu valley are, temporarily, receiving electricity subsidy through a project funded by Asian Development Bank. The government, however, is committed to providing credit to the flower cultivators at three per cent subsidy on bank interest through the Agriculture Development Bank of Nepal. Import of certain inputs and greenhouses are allowed at 1 per cent tariff. This policy, however, has been virtually ineffective due to cumbersome and non-transparent rules and procedures.

Competitiveness prospects are satisfactory.

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− Numerous common export plants can be grown in Nepal: Seasonal flowers49, Ornamental Plants (Non-Flowering)50, Shrubs and Climbers51, Cut-flowers52, Bulbs53, Tissue Culture Plants54 and Foliage55. The availability of more than 6,500 species of flowers in Nepal itself indicates that there may be potential to innovate and develop markets for new species of exotic flowers and plants currently unknown to consumers. There are a number of possibilities for growing high value exotic items. Some of these items identified by entrepreneurs are: Gloriosia, Hoemanthus, Kukurma, Zephyranthus, Bird of paradise, Cymbidium Orchids (Pleione, Praecox), Polyanthus (Rosani), Licorisaurea, Eucharis, Achivminis, etc.

− The prospects for improving the quality of Nepalese floriculture products are favourable. The most important areas to focus on, for quality improvement, are investment in greenhouses, proper plant health management and better economic delivery systems. Irrigation and climate control are not as big an issue in Nepal compared to its close competitors such as India, Thailand, and Sri Lanka.

− There is a great potential, if the internal problems are resolved, to expand production gradually through public-private partnership. About 10,000 ha of land are easily available for flower and ornamental plants cultivation. The land under flower and ornamental plants cultivation can be increased further once private sector entrepreneurs and foreign investors are given a more favourable climate to invest in. Adequate labor is available in the selected districts at, daily wages, between USD 1.10 to 2.20. Given the agro-climatic condition, there is a possibility from farmers to shift from low value to high value crops, such as flowers, in these districts. On the basis of the success of trial attempts at hi-tech production, and the improvements in domestic marketing, it is estimated that Nepal should be able to increase the area under flower and plant cultivation to around 1000 ha within the next five years. This estimate can further increase if FDI is attracted, under joint venture arrangements, into the proper agronomic and post-harvesting technologies. Currently, competitiveness and success in export markets can only be achieved if the efforts of the private sector or FDI are backed by government policies and facilities. According to entrepreneurs, such policies and facilities should emulate those currently used in India.56

World markets The demand for flowers is dynamic. The share of world exports increased from 9 per cent in 1999 to 13 per cent in 2004. Total world trade reached USD 11.9 billion in 2005.

The major markets are mostly in Europe, the US and Japan. The top ten largest floriculture importing countries are Germany, U.K., U.S.A., the Netherlands, France, Japan, Italy, Switzerland, Belgium and Russia.57

49 Inca (marigold), Zinnia, Dahlia, Petunia, Pansy, Verbena, Antirrhinum, Calceolaria, Cineraria, Celosia and Reannucolus. 50 Cycas, Tupidianthus, Phoenix, Aerica Palm (Palm Varieties), Nolina, Phylodron, Dracaena, Dhupi (Dhupi varieties), Ficus (Ficus species), Are Curia Cookie and similar other plants. 51 Rose, Bougainvillea, Bleeding Heart, Begonia, Venista. 52 Gladiolus, Rose, Carnation, Gerbera, Tuberose, Cymbidium Orchid, Chrysanthemum, Aster, Lily, Anthurium, etc. 53 Gladiolus, Gloriosia spp., Zephyranthus, Hoemanthus (football lilly), Polyanthus (Rosani), Licorisaurea, Eucharis grandiflora (Amazanlily), Achimenes, Kukurma, etc. 54 Banana, Bamboo, Orchids, etc. 55 Asparagus, ferns, Nephrolepis, Cordifolia, Pulmosus, Junipers, Thuja, etc 56 The GOI has developed four schemes for floriculture development. These schemes include support for research and development (R&D), market development, quality development and infrastructure development. For each scheme, separate check lists with detailed procedures has been designed to facilitate the beneficiaries in submitting applications for support, in approving the requests and in arranging the reimbursement of the costs of development activities. Apart from the facilities under these schemes, GOI also gives 10% subsidy on the air-freight spent by floriculture exporters. 57 Major imported cut-flowers and plants in the world market include Roses, Gypsophila, Hypericum, Decorative foliage, Solidago, Carnation, Calla, Ruscus, Wax flower, and Sunflower. Other flowers preferred are Chrysanthemums, Tulips, Lilly, Gerbera, Cymbidium, Freesia, Anthurium, Gladiolus, Orchids, etc. Houseplants on high demand are Aglaonema, Chamaedorea Eleg., Cocos, Cordyline, Croton, Dracaena, Ficus Benjamina, Philadendron, Phoenix, Schefflera Arbor., and Yucca.

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However, Asian markets are not insignificant and are increasing in importance. In 2005 the value of Asian imports of cut flowers surpassed USD 300 million, imports of ornamental plants reached USD 260 million and bulbs and tubers USD 160m. Imports grew annually from 2001 to 2005 by 10% and above. Japan is the major market, representing approximately three quarters of the continent’s imports, followed by Singapore, Hong Kong (of which 50% is Chinese produce being re-exported) and Taiwan. Japan’s imports of cut flowers increased from USD155 million in 2001 to USD230 million in 2005. Presently, Malaysia, Colombia and Thailand are the main suppliers of cut flowers to Japan. In recent years the Netherlands has lost significant market share to these newer suppliers, mainly due to a loss of price competitiveness. Currently CIF prices of imports from Malaysia are around USD 6 per kg whilst those of the Netherlands are close to USD 22 per kg. Chrysanthemum and orchids are the most popular cut flowers in Japan, these are mostly supplied by Malaysia and Thailand respectively.

As more and more countries have begun to export cut flowers, there has been a commensurate increase in competitiveness. Among the developed countries, the Netherlands (highest quantity supplier), Germany, Italy, Spain, and UK are the largest exporters of floriculture products to the world market. A number of new countries have established themselves in the international market, including, Kenya, Israel, Ecuador, South Africa, Zimbabwe, Uganda, Zambia, Thailand, India, China, Malaysia, and Sri Lanka. Recently Ethiopia, Vietnam, Taiwan, and Colombia have managed to successfully enter the global market with the help of support from their governments through favourable national strategic environment and policy interventions designed to attract FDIs. Countries like the Netherlands and Israel, it appears, are losing market share because of increased supplies from cheap labor, land and air-freight countries.

For the past few years the prices on the world market have remained stable despite the change in production and source patterns.

China’s emerging flower industry, which uses a mass production approach, is already threatening for other exporters in developing countries. Between 2004 and 2005, China’s exports of cut flowers, flower bulbs and live plants grew at 30%, 90% and 23% respectively. According to the recent MNS report by the ITC, China hopes to bring jobs to tens of million of impoverished isolated workers in a bid to narrow down the income gap between rich city dwellers and unemployed farmers.

Nepal’s market access conditions to all markets, especially in terms of market openness, are very favourable. Nepal enjoys tariff preferences in most of the target markets. However, non-tariff barriers are applicable to all floriculture products, in all of these markets (Table 49).

Table 49. Market Access Conditions in the Target Markets Markets Tariff Barriers Non-tariff Barriers

EU Nepal enjoys a special “Everything but Arms” scheme that provides duty free access for floriculture products.

SPS control (PC is required for all items), environmental and safety issues, quality and grading standards, packaging and labelling requirements, breeder’s rights, IPRs and CITES.

USA Nepal enjoys preferential tariffs based on the US GSP Scheme that attract 1.7% tariffs on fresh cut flowers and 0% tariffs on other floriculture products. Other countries face an average tariff of 4.85% on floriculture products.

Plant quarantine control of Animal and Plant Health Inspection Service (APHIS) of USDA and prohibition of imports under CITES, all products must be accompanied by PC. Almost all bulbs being produced in Nepal are under the import permitted list of USDA.

Japan Nepal enjoys preferential tariff under the GSP Scheme attracting 0% duties on all types of floriculture products. Normal tariff in Japan is 3%.

Plant quarantine control is strictly applicable on all items. Import of items under CITES, and items containing soil, pests, diseases etc. are strictly prohibited.

India Nepal enjoys preferential tariffs on import of floriculture products under the bilateral trade treaty.

Plant quarantine regulations are strictly applicable. PC is required in all cases. Special permission is required for import of soil, hay, earth clay, compost, sand, live insects, etc.

Source: Information compiled from ITC Market Access Map.

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World market prospects are high.

− Nepal is only now trying to enter into world market. Some trial consignments of cut flowers have been delivered to overseas markets. Having achieved success in exporting some products, Nepal will need to gradually gain export experience before attempts are made towards investment for large commercial transactions of fresh cut flowers and exotic orchids.

− The Flower Council of Holland has also predicted that the global consumption of floriculture products is to grow by 30 per cent by 2014.

− The major OECD countries (particularly EU countries) as well as big developing countries, such as China and India, are the most attractive markets. All markets have higher growth rates than the world average, particularly in China and India. The most significant fact is that Nepal is highly underrepresented in these attractive markets, except for India. In this regard, the insufficient transportation facility as well as SPS measures may constrain Nepal’s export capacity to overseas.

− Buyers from Japan, India and U.S. have recently shown interests in importing flower products from Nepal and have approached some floricultural entrepreneurs. Items that can be immediately exported overseas are roses, gerberas, carnations, cymbidium orchids, tuberoses, anthuriums, and gladioli. Exportable bulbs include the Gloriosia spp., Zephyranthus, Hoemanthus (football lilly), Polyanthus (Rosani), Licorisaurea, Eucharis grandiflora (Amazanlily), Achimenes and Kukurma. Tissue cultural plants (annually 500,000) and some live plants are being exported but prospects of expanding their export have yet to be explored.

Table 50. Cut flowers: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied

to Nepal

(%)



(%) 1. UNITED KINGDOM 8.0 13 0.0 0.0 2. NETHERLANDS 4.5 12 0.0 3.5 3. GERMANY 7.6 9 0.0 0.0 4. CANADA 4.6 9 0.0 2.9

Bulbs, tubers, tuberous roots, corms, crowns and rhizomes, dormant (060110)

145

5. CHINA 2.8 40 2.7 0.0 1. GERMANY 23.4 20 0.0 0.0 2. BELGIUM 5.0 17 0.0 0.0 3. UNITED KINGDOM 9.2 15 0.0 0.0 4. FRANCE 12.1 15 0.0 0.0

Plants live, nes (060290) 66

5. INDIA 0.0 54 0.0 10.0 * Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact According to the FAN, the 550 small and medium farm units involved in floriculture production and their associated networks employ about 2,500 people, of which more than 60% are women. The full-time employment equivalent (FTEE) is currently low for this sector (Table 13).

The contribution of floriculture products to Nepal’s total export earnings is currently negligible. However, if the cultivation of flower and other floriculture products is extended in future, it will be possible to create employment opportunities with a direct impact on poverty reduction and improvement in women empowerment. If flower and other floriculture products cultivations are extended up to 1000 ha in future, it will be possible to create employment opportunities for 25,000 people. Such job and income opportunities in rural areas will have direct impact on poverty reduction and empowering women. Moreover, it will have positive impact on the environmental situation with increased plantation and flower cultivation.

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Cut flowers

Bankable Scheme/Area Development Project on Cultivation of high value cash crops under Green house/poly house in Darjeeling hills region.

Centre for the Promotion of Imports from Developing Countries (CBI), The Netherlands, CBI News Bulletin, Nov.-Dec. 2002, The Flower Trek, Stephen D. Teeuwen.

Centre for the Promotion of Imports from Developing Countries (CBI), The Netherlands, EU Market Survey 2002, Cut Flowers and Foliage.

Department of Customs, Ministry of Finance, GON, Foreign Trade Statistics and Barshik Bastugat Bibaran (Annual Commodity-wise Descriptions).

Floriculture Association of Nepal (FAN), An Insight Into Floriculture Scenario of Nepal, Proceedings of Workshops of Floriculture in Nepal, 2003.

Floriculture Association of Nepal (FAN), Floriculture Trade Fair Souvenir, 2004, 2005 and 2006.

Floriculture Association of Nepal and Agro Enterprise Centre (AEC/FNCCI), A Report of Symposium on Prospective of Floriculture Industry in Nepal, April 2001.

Government of India, Plant Quarantine (Regulation of Import into India) Order, 2003.

Government of Israel, Ministry of Foreign Affairs, Centre for International Cooperation (MASHAV) and Ministry of Agriculture and Rural Development, Centre for International Agriculture Development Cooperation (CINADCO), Identification Mission Report: Flower, Dairy, and Seed Development in the Kingdom of Nepal, June 2005.

Informal Sector Research and Study Centre, Kathmandu, District Development Profile off Nepal 2004.

Japan International Cooperation Agency (JICA), Nepal and Centre for Policy Research and Analysis (CPRA), Kathmandu, A Study on Floriculture Development in Nepal, Dec. 2002.

Ministry of Agriculture and Cooperative, Department of Agriculture, District Agriculture Development Office, Kathmandu, Flower Marketing in Kathmandu Velley, July 2002.

Ministry of Forests and Soil Conservation, Terai Arc Landscape – Nepal, Strategic Plan 2004-2014, September 2003

Trade Promotion Centre, Cut Flowers and Orchids for Export Availability Study, 1989.

Trade Promotion Centre, Market Development Division, Mr. Murari Prasad Gautam, The Japanese Market on Ornamental Plants and Cut Flowers, 1995.

Trade Promotion Centre, Nepal Overseas Trade Statistics ( Annual Publication)

Persons contacted

− Mr. Suresh Bhakta Shrestha, The Standard Nursery.

− Mr. Yogesh Pradhan, Bodhibrikechya Nursery.

− Mr. Rajiv Pradhan, Botanical Enterprises Pvt.Ltd.

− Mr. Chandra Kumar Golchha, Flora Nepal Pvt. Ltd.

− Mr. Shreedhar Karki, President. Floriculture Association of Nepal (FAN).

− Mr. Arun Chhetri, Floriculture Association of Nepal (FAN).

− Mr. Loknath Gaire, Vice-President, Floriculture Association of Nepal (FAN).

− Dr. Dev Bhakta Shakya, Executive Director, Agro-Enterprise Centre/ FNCCI.

− Mr. Kiran Pandey, Program Officer, Agro-Enterprise Centre/ FNCCI.

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12. Coffee Export potential Medium

Current socio-economic impact Low

The export potential for coffee is medium. 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 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.

Priority actions − Increase production and quality by increasing the area under cultivation, improving

the processing systems and introducing national grading and quality standards.

− Increase proportion of highland and organic coffee beans.

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SWOT analysis for coffee Strengths Weaknesses Resources: Favourable natural conditions for Highland Speciality

Coffee Farmers trained in organic coffee farming technology

transferred from the El Salvador and are adopting coffee in large scale in steep landscapes.

Technical manpower is developed to extend coffee farming and processing technology among farmers

Widespread farmer interest in growing coffee Only 50% of trees planted have reached fruit bearing age

Production: Inconsistency of supply quality Processing systems inefficient Market: Local market insufficiently explored Business Environment: Existing organizational structure of commodity association

is poorly backed up with commercially viable service package to generate revenue by benefiting the farmers.

Poor physical infrastructure and poor SPS facility. No provision of public warehouse and special

transportation facility. Poorly equipped local level commercial processing

infrastructures. NCPA and coffee board collaboration is poor to monitor

farm level, processing level and marketing level practices

Undeveloped grading system

Opportunities Threats World Markets: Demand for specialty coffee continuously increasing Product: Bulk coffee in excessive surplus Potential to grow more highland specialty and organic

specialty coffee for the international markets. Production: Improvement in processing methods will increase

production significantly District Coffee Producers' Association (DCPA) and Nepal

Coffee Producers' Association (NCPA) can be instrumental to develop data base, establishment of internal control system(ICS), monitoring code of conduct for specialty and fair trade labelling and training and development and policy lobby.

Production: Spreading of epidemic pests may damage the crop Research into the different varieties of coffee and the

gains to productivity has not yet been institutionalized. Business Environment: Due to the shortcomings in physical and institutional

infrastructures, quality of coffee is unpredictable which is detrimental to efforts to acquire brand status in the international market.

World Markets: Low international price of mainstream coffee


Current export performance The recent export trend of Nepalese green bean coffee to overseas markets has been very encouraging. Stakeholders in the coffee industry estimate that less than 10% of the total production is for domestic consumption with the remaining 90% going to export. Export growth has been higher than overall world import growth. In terms of quantity it has increased more than 9 fold and in terms of value it has grown by 15 fold in the last five years. The total export of coffee from Nepal increased to 34.5 Mt. (valued at Rs. 10 million) in 2004/2005 from 3.7 Mt. (valued at Rs. 672,914) in 2000/2001.

Japan and the EU (notably Netherlands, UK and Germany) are the major export markets of Nepalese coffee. The EU has been the most consistent and significant market for Nepal coffee, but internally the countries purchasing the coffee within the common market have changed. However, UK and Germany markets have been stable for many years. On the other hand, Japan has been rapidly growing as a market over the years. During the past three years the USA has also emerged as an important buyer. This is very encouraging for Nepal, as the USA, EU and Japan together consume about 75% of the total world production58.

58 India has not been the export destination for Nepali coffee, but in the year 2004/05 the statistics indicate a large amount of coffee exported to India. The data is likely to be reflecting mis-declarations by Nepalese exporters reporting India as the destination when a shipment transits through Kolkata port.

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Nepal remains a very small player in the world arena. It produced about 249 Mt. of fresh cheery coffee in the year 2004/05.

Table 51. Export of Coffee to India and Oversea Markets, NEPAL F.Y. Country Quantity (kg) Value (Rs.)

Japan 3676 672,764 Germany 1 150 2000/01 Total 3677 672,914 Japan 7396 1,263,402 Germany 371 82,170 UK 958 929,396 Netherlands 350 180,282 India 56,000

2001/02

Total 9075 2,455,250 Japan 16305 4,604,555 Canada 500 569,148 UK 56 30,823

2002/03

Total 16861 5,204,526 Japan 14388 3,694,379 Egypt 18 12,798 Germany 109 5,097 Czech Republic 7600 331823 Switzerland 2000 1,868,890 USA 180 33,903

2003/04

Total 24295 5,946,890 Japan 14349 3,718,259 USA 8000 1,821,575 France 50 97,493 Germany 1000 7,04,100 UK 5123 231,3148 Netherlands 6000 1,385,738 India 92,704 1,134,200

2004/05

Total (India not included) 34,522 10,040,313

Source: OTS/TPC.

Domestic supply conditions The coffee planted in Nepal is all Arabica as the climate and soil in the mid and high hills of Nepal are very suitable for species of this coffee. The climatic conditions best suited to growing coffee consists of temperatures between 20-25oc, around 70% to 80% humidity, 1600 mm to 2500 mm average rainfall and 10-12 hours of sunshine daily with no frost conditions. For Nepal, the most appropriate altitude range is between 800 m to 1600m. Coffee needs adequate shade and grows well on the northern slope of the hills. It is, therefore, feasible to produce coffee in the whole of the mid hills areas (which are relatively easily accessible by road) with the potential to realise high quality production for the international niche markets. At present, the major production is coming from 21 districts in the Mid-hill region but more than 62% of total production comes from six districts (Palpa, Gulmi, Arghakhanchi, Syangjya, Kaski and Parbat) of the Western Region of Nepal.

The total areas under coffee cultivation, total production as well as overall yield have been increasing over the last decade (Table 52). Over the period 1995-2005, the cultivated area and the number of growers have increased fivefold, the production almost tenfold while the average yield has increased by more than 70% .The total area under cultivation, in 2004/05, was estimated at 1,078 Ha. It is also estimated that less than 50% of the plantations have reached the full fruit bearing stage. Therefore, the total production will increase swiftly as those plants soon come to full fruit bearing age.

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

Year Area(Ha) Growers Production

(Mt) yield

(kg/ha)

1995-96 220.3 1,984 29.20 132.55

1996-97 259.0 2,590 37.35 144.21

1997-98 272.2 2,723 55.90 205.36

1998-98 277.1 2,751 44.50 160.59

1999-00 314.3 2,822 72.40 230.35

2000-01 424.0 2,993 88.70 209.20

2001-02 596.0 3,654 139.20 233.56

2002-03 764.0 6,384 188.00 246.10

2003-04 925 7,000 218 235.67

2004-05 1,078 10,000 249 230.98

Source: Compiled from different sources.

Yields in Nepal are still relatively low compared to major competitors. The average yield of green bean is 231 kg per ha. and varies across districts. This yield is comparatively lower than in major coffee producing countries of the world like Vietnam and Papua New Guinea.

There are about 15,000 farmers involved in coffee production. These farmers are facing few production problems. The inputs necessary for coffee cultivation are mainly the coffee shrubs, organic manure or compost and organic pesticides. The farmers can easily access these inputs. They can prepare their own organic pesticides at the farm with the technical supports from the extension services. Therefore, the respondents did not identify any serious production problem that could interfere with the production of coffee. At some places, there have been cases of attacks from ‘stem borers’ on the plants. With this exception, pest or diseases are very insignificant.

Coffee production in Nepal is new and is mostly being cultivated by conventional methods. The production process adopted by the farmers is not very advanced mainly because the coffee plantations by most of the farmers are not run on a commercial basis and scale. Instead they are still mainly based on small-scale ‘kitchen gardening’. As a result, the farmers are not giving due attention towards improved cultivation practices, proper harvesting and post-harvest handling. The ripe cherries are harvested by hand picking by the farmers. One study has found that, due to inefficient harvesting, the traders end up receiving dry cherries that are unripe and over-ripe cherries in the same mix. This results in the coffee having a non-uniform color, the occasional presence of fruit stalks with dry cherries, the potential for insect and mould infestations, and higher moisture content.

The system of coffee processing adopted in Nepal is mostly wet process. There are two systems of coffee processing adopted in Nepal: dry process and wet process (Box 13). Out of the total green bean production, 20 to 22% is processed by the dry system and 78 to 80 % by the wet system in Nepal. Farmers sell coffee in two forms: Fresh cherry and dried cherry. Fresh cherry, is generally sold directly to the pulping centers or the coffee processors. There are more than 200 coffee pulping centers59 where cherries are delivered by the farmers who opt for wet processing. Dried cherry, however, is sun dried by the farmers themselves. The farmer then sells the dried cherries to the local collectors or directly to the processing factory/coffee roasters. Drying is done on the floor and takes about 2-3 weeks depending on the weather condition. Middlemen/local collectors also collect dried coffee beans from the farmers. With the introduction of the wet processing method and the direct linkage of primary producers with pulping centers and with the processors or exporters, the middlemen are being eliminated from the supply chain.

59 At present, these pulpurs are operating only at about 25% of their processing capacity.

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Box 13. Coffee Product Forms

There are two systems of coffee processing adopted in Nepal: dry process and wet process.

− The dry process, which is also called the natural process, consists of the following steps: Ripe cherry collection → Drying (dry cherry production) → Hulling → Green been production → Sorting (grading) → (possibly also: Roasting → Grinding →) Packing.

− The wet process consists of the following steps: Ripe cherry collection → Cherry pulping→ Fermentation→ Washing → Drying (parchment coffee production) → Hulling → Green bean production → Sorting (grading) → (possibly also: Roasting → Grinding→) Packing.


The major problem at this level is the disparate quality of the dried coffee beans as they are collected from many small farmers. There are around 30 collectors. Differences exist in the size of the beans, their color, the amount of foreign materials mixed in, such as dried leaves, twigs, soil, and differences in the drying process.

The coffee buyers supply the farmers with jute bags to package dried coffee beans to ensure that they get a standardized product package. The dried beans are packed in jute bags and are transported in tractors or trucks (depending on the quantity and distance to be covered) and are then sold to the processing factory.

There are eight major processing enterprises, handling almost all coffee produced in Nepal. All of them are private companies domestically owned and operated by Nepali nationals except for HCPCL, which is a public limited company with the majority of shares owned by the farmers group and related associations60. A recent study61 found that the collection of coffee (green beans equivalent) is dominated by the HCPCL (Highland Coffee Promotion Company Ltd) with a market share of 30%, followed by seven other companies whose market shares range from 2% to19%62. Four companies dominate the exports market. The HCPCL (38 % of export) and the Nepal Coffee Company Limited, NCCL (43% of domestic market) have the highest market share of the export and domestic markets respectively.

It was reported that there are quite a number of common processing errors in both the wet and dry processing systems.63 These errors could be minimized significantly improving the overall quality of the coffee. Common errors in the dry processing system are: (1) mixing of under-ripe and over-ripe cherries; (2) over-drying and under-drying of beans; (3) storing of un-dried beans; (4) storing beans in a room without good ventilation and insufficiently dried floor; and (5) inefficient hulling. The errors in the wet processing system are the same as in dry processing with the additional problems including: (1) fresh cherries not pulped within 24 hours of picking due to the establishment of pulping centres in distant areas; (2) the fermentation process sometimes not properly followed; (3) use of unclean water; (4) use of un-cleaned equipments; and (5) over-drying and under-drying of the parchment beans.

Traders reported significant quality loss in transit from heat damage caused by poor ventilation in the containers and the lack of temperature-controlled containers. The cost of a typical coffee transit and its duration is presented in Table 53.

60 The details of those enterprises are presented in Annex – A. 61 Rakesh Munankami, Coffee Processors and Exporters; An Overview, Coffee Promotion Project (CoPP), Helvetas Nepal, May 2005. 62 These companies are notably GC, NCCL, Plantec, NOCP, HCP, NMCC. 63 Rakesh Munankami (4).

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

Leg Mode Minimum

transit time(hours)

Maximumtransit time

(hours)

Distance (km)

Cost(USD)

Kathmandu-Birganj Road 8 24 298 65

Birganj-Raxaul (Border) 6 48

Border crossing charge 167

Transit charge

Document charge 124

Raxaul-Kolkota port trust Road 96 144 960 525

Kolkota port 48 72

Port charge 125*

Other charge Case by case

Total 158 (6.5 days) 288 (12 days 1,006

* With regard to wharfage, free time of 20 clear working days is given for containerized cargo; for all other cargo free time is 7 clear working days.

The Government has already recognized coffee as an important high value crop and has taken some positive steps to encourage its development. One good starting point is the conversion of the Nepal Tea Development Board into the Nepal Tea and Coffee Development Board. Similarly, the Government has embarked on a clear Coffee Policy agenda, which incorporates many of the provisions necessary to encourage the development of coffee. This agenda strengthens the institutions involved in coffee development, extension works, quality testing, fiscal measures such as concessions on tax, tariff rates and other charges, and the creation of the Coffee Development Fund. This policy has also included the founding of a Coffee Board with a defined strategy for financial management, marketing and export promotion. The Government’s role so far has, however, been limited to providing a cost rebate of 50% on the selling price of coffee shrubs sold to the farmers.

Currently, no agency, private or government, in Nepal has fixed a quality standard for coffee (other than dry cherries). Also, there are no standard guidelines for grading structures commonly accepted in Nepal. In practice, grading is done on the basis of size, color, uniformity and the existence of pale and broken beans. In Arabica coffee, bigger size beans are preferred. The District Coffee Cooperative Association in Gulmi has established an experimental mechanical process for grading. In this process, the green beans, after hulling, are passed through a sorting machine where they are separated in five grades: Grade A and Grade B coffee are exported to different overseas markets. Grade C contains pea berries and small beans, Grade D medium size beans and Grade E contains smaller sized and broken beans. All the C, D and E grades coffee are consumed in the domestic markets. Similarly, Helvetas, in 2002, introduced a Random Sample Observation process.

Competitiveness prospects are very favourable.

− There are still large tracts of land that could be brought under coffee cultivation. At the same time, the farmers who are already growing coffee only devote 5% of their total land to this crop, a figure which could be expanded to at least 20%. Most farmers also only have on average 50 coffee plants. There is scope to increase the number of coffee plants fourfold. There is further scope to extend the cultivation beyond the areas currently used for coffee plantation, even semi-fertile land could be brought under coffee cultivation. Moreover, there are some institutions assisting the coffee growers and launching programmes for promotion of coffee export. The Tea and Coffee Development Board provides technical assistance such as technology transfers through field demonstrations, exhibitions and training. It is providing technical know-how, information on the pricing of coffee, and monitoring and evaluation of coffee development programs. The District Coffee Growers Associations supplies the necessary information on coffee production. It organizes

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the farmers’ groups and transmits training in coffee plantation, picking and grading. It also buys coffee from the producers. Winrock International is assisting coffee growers by launching the ‘farmers to farmers’ program and encouraging interaction between foreign coffee production specialists and the local farmers. In the same manner, the HELVITAS Nepal are also assisting coffee promotion, by improving training, conducting farmers’ orientations, assisting technology transfers, and helping in market promotion. Similarly, the government’s District Horticulture Development Office distributes the coffee shrubs and provides necessary guidance to the coffee growers. Recently, private nurseries have begun to supply the coffee shrubs.

− Production could be increased by improving the yield rate – measured both in terms of land area and per individual tree – as there are large variances in the yield across different districts. Through proper management, adequate shading and correct manuring practices, the productivity level can go as high as 1,800 kg per ha, as is the case in Nicaragua. Farmers have reported that the yield variation per tree ranges from 2-10 kg. However, they also expressed the belief that, with proper care and attention, the productivity can easily reach up to 10 kg per plant and may even reach as high as 20 kg per plant. Thus, total production could be vastly increased by changing farm practices. This could be done by allocating more fertile land, instituting better land preparation, using higher quality inputs and ensuring better cultivation practices (timely pruning and topping). These measures are not difficult to implement, as most of the inputs used in coffee plantation are farm based and the farmers are very receptive to new techniques. A number of respondents, however, did express the concern that the supply of manure, pest and disease control materials are not available on a commercial scale and that they cannot be delivered on demand to farmers. Even improvements in the more basic areas, such as coffee harvesting and picking, could help increase the production as it effects the next season’s crop. It would also help improve the quality of Nepali coffee. The present harvesting system results in the final crop including about 3-4% un-ripe and 1- 2% over-ripe cherries.

− Very significant increases in production can be achieved by improving the processing efficiency. At present the return of clean beans from a fresh cherry is calculated at around16%. However, the Nepali processors, aware of the unsatisfactory situation, believe that with some improvements in the existing technology and processing methods, the same cherries can yield about 21-23%, showing a clear indication that by increasing the processing efficiency, the present output can be increased by 30-40%. Due to the shortage of fresh cherries, the pulping machines, on an average, are running 75% below their capacity. Therefore, if the production of fresh cherries is increased the processing efficiency, even with the present high losses, can be enhanced more than fourfold. Technical losses could also be minimized to some extent by replacing the wooden pulpers or disc pulpers currently used with drum pulpers. It is estimated that the area under cultivation of coffee, and the total output of coffee, in Nepal will have increased sixfold and twelvefold respectively by 2020.

Table 54. Forecasts of Coffee Area and Production in 2015 and 2020 2010 2015 2020

Production (Mt) 5,000 15,000 60,000

Area/Plantation (ha) 10,000 30,000 60,000

Source: Rakesh Munankami, Coffee Processors and Exporters; An Overview, Coffee Promotion Project (CoPP), Helvetas Nepal, May 2005.

In addition, Nepal has great potential for product diversification by introducing ‘Speciality Coffee’ - coffee beans that are produced under special micro-climatic conditions and possess outstanding flavour. Nepal’s isolated and variable geo-climatic situation provides them with many great opportunities to specialise their coffee production. Of the five main categories of speciality coffee in the world market, (De-caffeinated coffee, Organic coffee, One estate coffee, One variety coffee, Highland coffee), Nepal is capable of producing all except the de-caffeinated coffee. Nepalese coffee is considered by default, as organic by international buyers. Nepal is trying to ensure that their coffee receives the same

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treatment by overseas consumers. As a result, the demand for Nepalese coffee has been increasing over the last few years.

World markets The world is still in the process of recovering from the aftermath of market slump caused by excessive oversupply earlier in the decade. In order to avoid a reoccurrence of the same oversupply, it is essential that coffee producers ensure that domestic demand for coffee is strengthened in their own country as well as in new consuming countries, such as Russia and China, where annual demand is growing by 12% but volumes demanded are small (Public Ledger Nov.10, 2006).

So far Nepal has not come across any problems exporting coffee to overseas markets. The exporters usually need to obtain a Certificate of Origin, Weight Certificate and Quarantine Certificate. However, the Quarantine Certificate is not still needed to export to USA. In the USA, coffee can enter without any duty. The basic regulations that are enforced in the USA are related to insects, filth of any kind and chemicals. Similarly, there is no import duty on coffee entering the EU or Japanese markets. However, there is a Wood Packing Material Regulation in force in the US and EU under an International Standard for Phytosanitary Measures (FAO-ISPM 15).

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 the market represents only 7% of total world import demand is not an issue. Efforts to curb the oversupply by differentiating the product by different grades of quality have made the consumer exceptionally selective. To quote a study report: “As the consumers in the international markets are increasingly demanding and becoming more sophisticated in terms of both quality and image, there is a good prospect for both specialty and organic coffee. Together with the demand, the price for such coffee is also increasing over years. The share of the specialty coffee in the total world coffee market is about 7%. The largest market for the specialty coffee is USA. The annual consumption of the specialty coffee in US alone is estimated to be valued at more than USD 8 billion. Similarly, the largest consumer of the organic coffee is Denmark followed by Switzerland and Austria. The share of these three countries in the total organic coffee sale is 2.8%, 2.3% and 2.0%, respectively. USA's share in the total organic coffee is about 1%. The total sale of organic coffee was 42,000 Mt. in 2002/2003 (ICO website) and is less than 2% of the world total coffee sale. However, it is reported by the traders that the organic coffee fetches around 10-33% premium in the international markets.”

− The interviewed traders reported that they have not been able to meet the demand for Nepali coffee of their client countries due to shortfalls in production. Therefore, export diversification in terms of markets could be easily undertaken with the improvements in the availability.

− A number of EU countries, the US and India are the most attractive markets for Nepalese coffee. Nepal is highly underrepresented in EU markets, except for Belgium and Austria. The Indian market shows a particularly strong growth rates, both much higher than the world average as well as other attractive markets. Nepal’s market access conditions to all markets, especially in terms of market openness, are very favourable. However, only India grants high tariff advantage to Nepal through the India-Nepal trade treaty.

− India has potential to become a market for Nepalese coffee as chains like Barrista and Coffee Day (similar to Starbucks) are on the rise reflecting a new taste for exotic speciality coffees in India.

− Organic Nepalese coffee is especially successful in Japan. There is currently only one cooperative in Nepal that has managed to acquire an organic certification from Japan and Australia.

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Table 55. Coffee: Most attractive markets Product (HS 6-digit code)



(%, 2004)


from 2001-05)

Tariff applied to

Nepal(%)

Nepal’s tariff advantage (+) or dis-advantage (-)

(%)

1. GERMANY 17.0 -3 0.0 0.0 2. ITALY 6.6 -5 0.0 0.0 3. United States 24.4 -6 0.0 0.0 4. BELGIUM 3.6 0 0.0 0.0

Coffee, not roasted, not decaffeinated (090111)

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5. INDIA 0.2 108 0.0 100.0 1. GERMANY 7.8 18 0.0 0.8 2. FRANCE 14.7 15 0.0 0.6 3. U. KINGDOM 6.5 13 0.0 0.0 4. AUSTRIA 3.0 22 0.0 0.7

Coffee, roasted, not decaffeinated (090121)

0

5. NETHERLANDS 5.5 9 0.0 0.6

* Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact 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) (Table 13). Most of the practices used in the cultivation and processing of coffee, at the farm level, are labour intensive. Furthermore, a large number of workers are employed in the total supply chain, mostly in transporting (include the truckers and tractors), cleaning, packaging, loading/unloading the coffee. With the promotion of export and product diversification into organic and specialty coffee, this sector could generate a much larger amount of employment. ABTRACO study estimated the following projection of new employment opportunities in the Nepalese coffee sector.

Table 56. Projected Employment in Coffee Industry, Nepal

Year Farm families Employmentin farm families

Employmentin processing/marketing

Total beneficiary population

2006 5,000 28,000 5,500 33,500

2011 25,000 140,000 15,000 155,000

2016 75,000 420,000 40,000 460,000

2021 150,000 840,000 80,000 920,000

Note: Family is calculated at the national average of 5.6 members. Source: ABTRACO (Agri-Business and Trade Promotion Multi-Purpose Co-operatives Ltd.) The Study Report on Trade Competitiveness of Nepalese Coffee, Submitted to Agro Enterprise Center (AEC)/Federation of Nepalese Chambers of Commerce and Industry (FNCCI) May, 2006.

Coffee is not, as yet, a very important export commodity for Nepal but is becoming an important agricultural export item. The earnings from coffee exports constituted less than 0.03% of the total export earnings in 2004/05 (Rs. 43.31 billion total in 2004/05).

Besides the significant employment created by this sector in rural areas, coffee farming contributes towards rural development in several more ways. It brings pulping centers into the rural area, generating income and employment for rural people. Coffee farming helps toward crop diversifications. Apart from helping them meet their cash flow requirements, the income is also often invested into farm improvements. Additional benefits are also generated in coffee farming through the inter-cropping of coffee with “rahar” (peasant pea). The coffee plantation also requires proper shade management. Therefore, fodder trees, softwood, banana, are normally planted in coffee plantations to create shade. The intercrops, such as pulses and fruits, not only benefit the coffee production process but also create higher income for the farmers. As it is being produced in the whole of the mid-hill area, this crop is very important for the development of this region.

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Traders have also reported that the coffee plants help reduce soil erosion in the mid-hills. Coffee, as an agro-forestry cash crop, and because of its need for shade, conserves soil and water in the mid hills. It does not need tilling which is the prime cause of the loss of topsoil in steep landscapes as well as in the highland terrains. Many poor farmers have entered a vicious circle whereby they are forced to continue growing crops, which accelerate the loss of the topsoils of their marginal land. Coffee appears to be the most promising crop to stop this trend.

Coffee has a direct impact on the economy of the rural people. Its development can contribute significantly to the poverty alleviation of the people of the mid-hill areas, as the variety of coffee grown in Nepal is best suited to the areas lying between 3000-6000 ft. above msl. It provides cash income to small and excluded farmers who often have little fertile land and are suffering from further soil erosion. One hectare of coffee provides a net income of about Rs. 200,000 using paid labor or about Rs. 250,000 using family labor. The corresponding income from maize and wheat is only Rs. 35,000 using paid labor and Rs. 92,000 using family labor. Thus the impact on rural income is substantial. Very poor farmers do not have fertile land parcels and often need cash to buy staple foods. Coffee, can grow on these areas and provides a source of cash income, it is therefore, from the perspective of improving the livelihood of poor farmers, a very attractive crop.

Table 57. List of coffee processors and exporters in Nepal Name Contact persons Address Established year

Nepal Coffee Company Private Limited (NCCL)

Mr. Pashupati Ghimire Manigram, Rupendehi Tel: 071 560024, 561824

1984

Nepal Organic Coffee Products (NOCP)

Mrs. Shanti Devi Ghimire Madanpokhara, Palpa Tel: 075 520947

1995

Plantec Incorporated Inc. Mr. Ujjal Rana Chandole, Kathmandu Tel: 4416327

1994

Everest Coffee Mill (ECM) Mr. Phul Kumar Lama Thamel, Kathmandu Tel: 4413959

1996

Gulmi Cooperatives Federation (GC)

Mr. Pharsu Ram Khanal Tamghas, Gulmi Tel: 079 20320

1993

Himalayan Coffee Products Ltd. (HCP)

Mr. Kiran Lal Tamrakar Chakrabahil, Patan Tel: 4431836

1999

Highland Coffee Promotion Company Ltd. (HCPCL)

Mr. Krishna P. Pathak Babarmahal, Kathmandu Tel: 44229796

1999 (Limited Company 2003)

Nepal Mountain Coffee Company (NMCC)

Mr. Purna Thapa Bhanimabdal, Lalitpur Tel: 5538656

2003

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

Measures Grade-A (Score)

Grade-B (Score)

Grade-C (Score)

Grade-D (Waste)

Method

Moistures Less than 11%

(Score-50) 11-12%

(Score-40) 13-14%

(Score-10) More than

14% Observing sound

of breaking in teeth biting

Cherry diameter less than 9 mm

Less than 10% (Score-50)

11-20% (Score-30)

More than 20%

(Score-20)

- Observation in random samples

Light Cherries Less than 5% (Score-50)

6-10% (Score-30)

11-15% (Score-20)

More than 15%

Observation in random samples

Mould Cherries No (Score-50)

1-3% (Score-50)

4-5% (Score-20)

More than 5%


Black brown and bits Less than 10% (Score-50)

11-15% (Score-30)

16-20% (Score-20)

More than 20%


Total Score 230-250 140-229 90-139

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Coffee

ABTRACO (Agri-Business and Trade Promotion Multi-Purpose Co-operatives Ltd.) The Study Report on Trade Competitiveness of Nepalese Coffee, Submitted to Agro Enterprise Center (AEC)/Federation of Nepalese Chambers of Commerce and Industry (FNCCI) May, 2006.

ABTRACO (Agri-Business and Trade Promotion Multi-Purpose Co-operatives Ltd.) The Study Report on Identification of Administrative and Policy Constraints that Small Farmers Face in Palpa (Coffee), submitted to Agro Enterprise Center (AEC)/Federation of Nepalese Chambers of Commerce and Industry (FNCCI) July 2004.

Krishna Prasad Pathak, Prospects for Coffee in Nepal – power point presentation, Nepal Coffee Producers’ (Federated) Association.

Rakesh Munankami, Analysis of Quality Management Practices in Coffee Supply Chain in Kavrepalanchowk District, Nepal, A Research Project Submitted to Larenstein University of Professional Education in Partial Fulfillment of the Requirements for the Degree of Masters of Engineering in Agri Chain Management, September 2004.

Rakesh Munankami, Coffee Processors and Exporters; An Overview, Coffee Promotion Project (CoPP), Helvetas Nepal, May 2005.

Rakesh Munankami, Operational Aspects of Pulping Centers, Coffee Promotion Project (CoPP), Helvetas Nepal, June 2005.

Persons contacted

− Mr. B K Shrestha , Chief Accountant, Plantec Nepal, Patan.

− Mr. Ishu Shankar Shrestha , Officiating Executive Director, National Tea & Coffee Development Board, Kathmandu.

− Mr. Krishna Prasad Pathak , Managing Director, Highland Coffee Promotion Co. LTD, Kathmandu.

− Mr. Kiran Tamrakar, Managing Director, Himalaya Coffee Product Pvt. LTD, Kathmandu.

− Mr. Kirishna Prasad Ghimire, President, Nepal Coffee Company, Kathmandu.

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13. Honey Export potential Low


The export potential is low. 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. There is scope for improving production methods. This would allow production to increase, as well as improving quality levels.

The world market is dynamic, but increasingly competitive, with new exporters emerging. 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 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 considered 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.

Priority actions − Establish an international standard laboratory for accreditation of produce

− 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, honey

− Improve packaging

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SWOT Analysis for Honey Strengths Weaknesses Resources: Abundance of natural flora and fauna Varied climatic conditions Unique honey flavour Farmers have recognized beekeeping as an economic

activity. Significant groundwork already done by various

organizations. Business environment: Government program available for the promotion of the

sector and technical assistance. Processors and entrepreneurs involved in the sector have

established good networks to mobilize produce. Good backward/forward linkages

Production: Lack of hi-tech facilities and equipment for processing

and extraction of high quality honey. Absence of proper equipment and a laboratory facility to

test for residue presence (bottleneck for EU market) and to test for grayanotoxin (bottleneck for Korean market).

World markets: Domestic market almost saturated, failure to find new

markets. Nepal not in the EU list of authorized honey supplying

countries. Business environment: Infrastructure to support the sector not sufficient

Opportunities Threats World markets: Global market is huge Tourist market emerging again Seasonal advantages can be exploited

Competition: Cheap Indian and Chinese honey Competition in domestic market


Current export performance Despite difficulties estimating the proportion of Nepalese honey exported, a number of empirical estimates allow us to conclude that more than half of the production is destined for overseas markets. Official statistics suggest that most of the honey produced in Nepal is sold in the domestic market and only a very small quantity exported. However, export statistics for Nepalese honey are erratic and inconclusive. While Nepalese honey is consumed domestically, usually either directly as a foodstuff or in treatments based on ayurvedic medicine, export statistics for Nepalese honey are too unreliable for us to estimate the quantity of exports. One way to estimate the magnitude of exports may be to look at the shortfall in total demand. The estimated domestic demand for honey is only about 300 Mt. Since the production is estimated at 600 Mt, this leaves more than 50% of the total production unaccounted for. We can assume that this is exported.

Export statistics for Nepalese honey are very erratic and inconclusive (Table 59). Nevertheless, the main uses of honey in Nepal appear to be its direct consumption as a food item and use in ayurvedic medicines. The estimated domestic demand for honey is only about 300 Mt. This leaves more than 50% of the total production unaccounted for. We can assume that this is exported.

Currently, nearly all of Nepal’s honey exports are to India, which means that Indian demand accounts for more than 50% of the total honey produced. Honey exports to overseas countries are not very stable. Both the volume and destinations of Nepalese honey exports has been fluctuating over the years. Statistics indicate that the export markets for Nepal’s honey are highly erratic, with some countries disappearing and other, new, countries becoming large buyers every year. At the same time, the value of Nepal’s honey exports has been fluctuating wildly over the years.

The, once very large, number of overseas markets for Nepalese honey has been drastically reduced. Besides India, Norway was for some time the largest buyer of Nepalese honey. However, owing to problems relating to pesticide residue, Nepalese honey has been banned from entering into any EU countries as well as Norway. The ban was imposed because of Nepal’s failure to submit a national residue plan.

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Table 59. Nepal’s export of honey (Values in Rs.) Countries 1999/2000 2000/01 2001/02 2002/03 2003/04

India 2,640,000 124,700,000 95,980,000 57,000,000 27,000,000

Overseas 17,610,109 1,606,086 9,737,011 442,985 506,807

Japan 205,282 0 32,639 16,668 13,634

Korea Rep. 369,371 229,779 188,820 125,224 480,850

USA 720,192 0 62,941 0 1,483

Germany 248,953 0 0 1,790 0

Norway 16,066,311 1,376,307 9,447,943 0 0

Hong Kong 0 0 4,668 3,628 0

Qatar 0 0 0 6,781 0

Thailand 0 0 0 281,748 0

Switzerland 0 0 0 7,146 0

China PR 0 0 0 0 4,648

UAE 0 0 0 0 6,192

Source: Trade Promotion Centre.

India has remained a steady market for Nepalese honey exports. India has been the major destination for Nepalese honey for a long time. The value of its honey imports from Nepal have fluctuated strongly but have, on average, remained high over the years. Dabur Nepal64 was the single most important exporter of Nepalese honey to India. However, a number of difficulties have meant that Dabur Nepal has stopped handling honey. Since Nepal’s honey has free access to the Indian market and as trading takes place in an informal manner, mainly through bordering Indian cities and towns, traditionally Nepal’s main competition comes from the domestic supply of honey in India. Recently, Nepal has also been facing stronger competition in Indian honey markets as a result of India’s trade liberalization and consequent diversification of imports. Honey is now imported from countries like China and Australia which are becoming a serious threat to exports of Nepali honey to India. This is particularly the case as the production technology and packaging of honey in these countries are superior.

Domestic supply conditions Nepal is a small producer of honey although its production has been increasing over the years. Estimates suggest that Nepal produced about 600 Mt. of honey in the year 2004/05. Rival estimates, however, go as high as 865 Mt (by Api-net), while the NBA estimates production at more than 1,000 Mt. from the A. mellifera species of honeybee alone. This constitutes only about 0.5 % of total world production (Table 60). The commercial production area has doubled over the last 10 years, from 11 districts to 22, with the help of government programmes and donor support. The spring (February- April) and the autumn (September-December) are the two main flow periods of honey in Nepal

Nepalese Honey has a unique flavour and is produced all over Nepal. Its abundant forest flora, diversified horticultural and crop producing farming system, geo-climatic conditions and bio-diversity are very conducive to honey production.

There are more than 50 brands of Nepali honey in the market. The traders are trying to establish their own brand of honey based on the forage sources (such as mustard seed/rapeseed, orange, buckwheat, rudely or cheuri). Some are trying to establish themselves as producers of “organic” honey while others are branding their produce as “jungle” or “Himalayan” honey.

About 60% of the total honey produced comes from the A. mellifera, 38% from the Dorsata and only 2% from the A. cerana honeybee. Dorsata honey production has been

64 Darbur Nepal is the Nepalese subsidiary of Darbur India Ltd., an Indian Multinational

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traditionally practiced in Nepal for centuries65. However, the commercial production of honey, by raising A. mellifera (imported specie) and A. cerana, is of recent origin. These species are highly concentrated in the Terai and inner-Terai areas of the country, which compose a 40km wide strip all along the Southern border of the country. The commercial production from the A. mellifera bee is estimated to be based on around 130,000 hives, which have been distributed by the Government and various development programmes.

Table 60. Nepal’s honey production

Year Bee Hives (No.) Production(Mt.)

Production (kg/hive)

1996/97 588 60 n.a.

1997/08 800 100 n.a.

1998/99 1,000 129 n.a.

1999/00 1,050 150 n.a.

2000/01 1,100 155 n.a.

2001/02 126,884 529 4.17

2002./03 127,501 530 4.16

2003/04 130,000 577 4.44

2004/05 130,000 600 4.62

Note: In the year 2001/02, the data included natural beehives and its production. Source: Statistical Information on Nepalese Agriculture, HMG/MOAC Agri-Business Promotion and Statistics Division.

Productivity estimates compare unfavourably to the level of productivity in major honey producing countries. According to HMG/MOAC the yield was 4.62 in 2004/2005 (production per hive), though this estimate does not seem realistic. Independent studies indicate that the A. mellifera hives have an average productivity of 30-40 kg per honey colony per year. The productivity of A. cerena is believed to have increased from 5-8 kg to 10-12 kg per colony per year.

Processing technology used in the country is still rather primitive, but changes are taking place. There is almost no processing of honey in the areas using the A. cerana hives. The honey is squeezed out of the cut comb by pressing and then strained with a cloth. Very few beekeepers reported using an extractor. However, recently MEDEP (Micro-Enterprise Development Project) started providing beekeepers with micro unit processing plants that heat and condense the raw honey for extraction. In the A. mellifera belt, the beekeepers use honey extractors and honey straining devices. In Chitwan, the NBA (Nepal Bee-keepers’ Association) has installed a medium sized honey processing plant. In Kathmandu, Gandaki Bee Concern has imported a honey processing plant of European standard. Other, smaller, enterprises have also developed simple processing units for small-scale production to meet the demand for processed honey.

Standards for honey in Nepal do not meet international standards which means that the country faces export restrictions in a number of markets. The government has responded by prescribing mandatory standards for honey production (Table 61). However, Nepal’s standards have not specified certain parameters that other countries using the Codex rely on, such as: electrical conductivity, Diastase unit (Schade Scale), Invertsae (Siegenthaler unit) and Proline. Such differences make it more and more difficult for Nepal to overcome export market restrictions.

65 Nepal benefits from the occurrence of five popular species of the honeybees. Among these, A. cerana, A. dorsata, A. laboriosa and A. florea are indigenous to Nepal while the final one, A. mellifera, is an exotic species. The A. cerana and the A. mellifera species are the only two bees that are kept in hives. The other three are wild and nest in the open.

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Table 61. Mandatory standards for honey Parameter (unit) Nepal Canada Codex

Moisture (% d.b.) Not more than 23 Not more than 17.8, for pasteurized 18.6 Max. 21

Ash (%) Not more than 0.5 Not more than 1 Max. 0.6

Sucrose (%) 5.0 in flora; honey,10 in other honey Not more than 10 Max. 5

Reducing sugar (%) >65 in pure honey, >60 in other honey Not less than 60 Min. 60

Fructose sucrose ratio (%) Not less than 0.95

Acidity (%) Not more than 0.2 Not more than 40 millie equivalents per 1000 gm. NA

Water insoluble solid (%) Not more than 0.5 Not more than 0.1, when pressed 0.5 Max. 0.1

HMF (mg/kg) Not more than 40 Max. 40

Published in Nepal Gazette, 5 February 2001 and GTZ/PSP.

The supply chain for the production of honey is not well organized. Because the production is new it is scattered and each supply consignment from the farmer is very small. It has been reported that a large number of beehives have been distributed in the remote hill areas and that their production has not been taking into account in the commercial transactions mentioned here as it is traded and consumed locally. Transporting the honey from the farm to the processing unit or wholesaler is the major marketing cost for each item constituting as much as 50% of the total marketing cost.66 The high transport cost is related to the small size of consignments.

Usually, the marketing functions of the processor-wholesaler-exporters are integrated into one family business and most of them are located in Kathmandu valley. However, each individual family business’ market share does not exceed 6 % of the total domestic market transaction. In the case of the exporters, however, very few traders are involved and each share 12-15% of total exports. This is because the production of honey is done by a large number of bee keepers/farmers scattered all over Nepal. The domestic market can, thus, be characterized as a “buyers’ market” with the producers having very little bargaining power. In response to this weakness, the beekeepers/producers in the major producing districts have been organizing themselves into groups and cooperatives to market their honey.

Grouping of producers is especially important for mobilizing honey from the farm to the processor/exporters. Farmers’ cooperatives and groups have been organized and are linked with the traders so that the required quantity of honey can be swiftly produced and delivered. One of the respondents even claimed that he can mobilize 100 Mt. and more of honey in a very short period if the need arises.

Both the upstream and downstream enterprises relating to honey have been expanding over the years. The upstream enterprises, which supply inputs necessary for the honey production like beehives, are large in number and small in size and scattered around the honey producing areas. This is particularly the case for the localized beehive manufacturer or suppliers. Most of the respondents reported that their efficiency is high but that improvements in beehives are needed. The main downstream industries, which buy honey as an input, are the manufacturers of ayurvedic medicines. There is only one large company (Dabur Nepal) involved in this trade, while the other buyers are still, as was the case traditionally, very small and scattered in the urban centres throughout Nepal.

The government’s role in the sector has focused on subsidizing hives and tools, developing a national standard and coordinating donor activities. The government has been providing a 25% cost subsidy on beehives and a 50% subsidy on other tools, equipments and services. These supports are, however, subject to limits in the Government’s physical targets and budget allocations. The Agriculture Perspective Plan

66 Api-net Nepal, Report on Study on Policy Recommendation for the Development of Beekeeping in Nepal, submitted to MEDEP and GTZ, October 2006

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adopted by the Government has given high priority to promoting honey as a high value crop in Nepal. Accordingly, honey pocket area development programmes are being implemented in 22 districts. The Government has also established a mandatory standard for honey. The Bee-Keeping Development Section of the Department of Agriculture also plays a coordinating role in the honey development activities implemented or sponsored by different institutions, including Agro-enterprise Centre, MEDEP/UNDP, ICIMOD, SNV/Nepal, CARE/ Nepal, Hyfer International, and SCF/US.

Competitiveness prospects are satisfactory: The productivity and production of honey in Nepal could be increased.

− First, by improving the bee hives. The hives used are: standard Langstroth hives designed for the A. mellifera bee, the Newton A type for the A. cerana bee in Terai and low hills areas, the Newton B type for the A. cerana bee in the Hills and Mountains, and Jumla top bar in Jumla district. The beehives made by the localized hive production units are not up to the standard.

− Second is the management of diseases, although it is not a serious problem of this sector. Farmers/bee keepers do not have sufficient knowledge on diagnosis and use of antibiotic and sulphur. Other service providers and support agencies are also unskilled in this area. Training and extension programmes could help in these regards. Respondents also recommended establishing more resource centres to provide technical support to the farmers.

− The level of production can be increased significantly. A study has indicated that Nepal has the potential to produce more than 10,000 Mt. of honey every year (15-20% of it alone from mustard/rapeseed as forage source).67 This, however, will require support to ease the resource constraints in terms of financing and processing techniques (honey extraction) that the farmers and the processors are facing.

− There is also great potential for diversifying Nepalese honey export in terms of product. Opportunities for product diversification exist at two levels. First, to produce specialty forage based honey and ensure its quality for export into special markets like Japan. The second opportunity lies in producing organic and pesticide free honey. Some traders market their honey as organic and pesticide free because it is collected from the forest and, as such, is considered organic by default. In the absence of an accrediting authority, however, such opportunities for diversification are being delayed. Improvements in the packaging of honey in itself could help diversify the products. Traders reported that buyers from a range of countries have already approached them, looking to buy ‘organic honey’ but they have been unable to meet the demand.

World markets China is currently by far the largest honey-producing nation in the world, followed by the United States and Argentina. Thailand and Vietnam are also starting to emerge onto the world as large-scale honey producers. China’s exports have returned to their previous level after the EU health–related ban on Chinese honey was lifted. In 2005 China was the second largest exporter after Argentina.

On the international demand side, the major buyers are in Europe and the United States. In value terms, European imports accounted for over 55% of world imports. The single largest importer is the United States whose net imports accounted for 101,000Mt of honey in 2005. Germany - net imports 71,000 Mt.- and Japan 43,000 Mt are also significant importers of honey. A market also exists in the Middle East – Saudi Arabia and UAE imported close to 10,000 Mt in 2005. World imports grew by 13% in value and 3 % in quantity over 2001-2005.

67 Dr. Surendra Raj Joshi and Sanjita Shrestha, Overview of honey Sub Sector, GTZ/PSP

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Closer to home, while India is one of the world’ top exporters of honey, in 2004 imports still amounted to 2,605 Mt, 90% of which was supplied by China. Bangladesh and Sri Lanka import a much smaller amount, in the order of 24Mt. Pakistan is the other big producer in the region, exporting 2,677 Mt in 2005, mainly to the Middle East.

There is great potential for diversifying Nepalese honey exports in terms of market diversification. By ensure the quality of its honey, Nepal could produce specialty forage based honey for export into special markets like Japan. Improvements in the packaging of the honey in itself could help diversify the products. Traders reported that buyers from a range of countries have already approached them, looking to buy ‘organic honey’ but that they have been unable to meet the demand. Nepal enjoys free access (without tariff) to the Indian market. However, certain fees are imposed that form non-tariff restrictions on India. There are now figures for the combined value of these costs but they are considered to be nominal - constituting less than 1% of total marketing cost for exporting honey to India. Nepalese honey has a well-established traditional export channel to the Northern Indian markets. The informal export consignments are sent through innumerable open border points and also through 12 trade and transit land routes/custom points.

Nepal benefits from a preferential access to the EU and the US whereas Japan and Korea are highly protective. It has a 0% tariff, under the Everything but Arms agreement, on exports to the EU markets. Similar preferential treatment is offered in the United States. In contrast, Japan, has a much higher tariff of 25.5%. The Korean, Republic also has a high tariff of 20% below a quota of 420 tons and higher tariffs once this quota has been reached.

World market prospects are not promising because of SPS measures: demands for a National Residue Plan and Grayonotoxin Certificate are hampering exports, especially to the EU and South Korea:

− In order to be eligible to export honey into any EU member country Nepal has to be listed as an authorized country for import under EU Directives 92/118/EEC of 17 December 1992. For this purpose Nepal will have to submit a national residue plan, guaranteeing the monitoring of the groups of residues and substances identified by EU. Nepal has not yet submitted its national residue plan. Nepal has already suffered from the SPS measure in the form of Pesticide Residue Content in its export to Norway.

− South Korea has been another important regular destination for Nepal’s honey (Table 59). This stability is being threatened because the South Koreans have asked Nepal to provide a grayanotoxin certificate for their honey. At present facilities are not available in Nepal to comply with this request.

Therefore, all the respondents have recommended that the Government should submit a Pesticide Residue Control Plan to EU, establish an international standard laboratory for accreditation of the produces and establish a system to ensure effective quality supervision, control and certification in Nepal.

The most attractive markets are EU countries, namely UK, Italy, France, Germany, and Spain. Nepalese honey is very underrepresented in all markets, expect for Spain. These markets also show higher growth than world import growth.

Nepal’s market access conditions to all markets are significantly favourable. In terms of market access conditions, owing to the EBA program, Nepal has duty-free market access to EU markets and high tariff advantages compared to its competitors.

Yet, the most stringent problem is that Nepal does not have a capacity to meet NTB requirements.

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Table 62. Honey: Most attractive markets Product (HS 6-digit code)

Export Value

(USD 1,000)


(%, 2004)


from 2001-05)

Tariff applied

to Nepal

(%)



(%)1. U. KINGDOM 8.1 31 0.0 11.72. ITALY 4.7 30 0.0 6.93. FRANCE 5.9 26 0.0 8.24. GERMANY 25.6 22 0.0 15.05. SPAIN 3.5 25 0.0 11.0

Honey, natural (040900) 49

27. INDIA 0.3 22 0.0 30.0* Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

Current socio-economic impact The socio-economic impact is considered low compared to other sectors. Around 13,000 people full time equivalent (FTE) might rely on this sector for their livelihood.

This sector is expected to create more and more jobs over the years with the increase in its production and improvements in the extraction and marketing system. Apart from the employment of around 2.4 million labor days in the production of (600Mt.) honey in Nepal, the amount of labor used by the supply chain is limited. It is estimated that more than 50,000 farmers are involved in honey production and it is considered to be a highly valued, comparatively advantageous and sustainable means for raising income. The number of registered traders/exporters of Nepal does not exceed 25 and they employ only a few hundreds laborers. Apart from this, a large number of petty traders are seasonally involved in the collection and selling/exporting of honey to India who are scattered all over Terai. However, the respondents viewed that this sector is expanding fast and will be creating more and more jobs over the years with the increase in its production and improvements in the extraction and marketing system. They particularly referred to the jobs created by the increasing number of enterprises producing beehives to meet the expanding demand for it by the bee-keepers/farmers.

Honey is not currently a very important export commodity for Nepal. The earnings from honey exports constituted less than 0.01% of the total export earnings in 2004/05 (Rs. 43.31 billion total in 2004/05).

However, the honey sector is an important source of cash income for the small farmers whose farm economics are constrained by land-resources. An additional net income of Rs.1445/hive/year to the farmers from honey production is significantly high. The net return on total investment is believed to be more than 44%. Production of honey by small farmers is very adaptable to their farms as its production is forage base and does not require the use of scarce land. The investment required is also not substantial as for other crops. Honey is a non-perishable produce and has long storage life. Apart from helping them meet their cash requirements, the income is invested into farm improvements.

The impact on rural income is substantial. As it is being produced in the whole of the Terai and Hill areas, honey is very important for the development of this region. All the respondents have reported high or very high contributions from the honey sector to rural development.

Honey has a very positive environmental Impact as bee-keeping helps increase the yield of all agricultural crops like mustard rapeseeds, oranges, etc. The greatest environmental impact of bee-keeping is its contribution toward pollinating plants. Beekeeping, thus, complements the production of other crops, especially those which are not self-pollinating. It has been reported that beekeeping helps increase the yield of all agricultural crops, such as mustard rapeseeds and oranges. All the respondents rated this sector as high or very high in its impact on environmental sustainability. No negative environmental impacts have been reported to be caused by beekeeping. The only, minor,

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issue was the small impact caused by the expanding use of wood in manufacturing the beehives (this is further mitigated by the fact that very low quality timber is used in their production).

The increasing production trend also indicates that this sector has increasingly helped to reduce rural poverty and shows a large potential for the future. Most of the bee-keeping farmers are small farmers who receive cash income from this produce. Programme activities, specially certain subsidies to this sector, are being launched by the Government and the donors, through NGOs, to enhance the participation of poor and excluded sections of society into bee-keeping and honey marketing enterprises. All the respondents have expressed the view that this sub-sector has high potential to contribute towards poverty reduction in Nepal and that this trend has already become apparent. “The ‘Dalit’ farmers have free access to honey related programs including the collection of honey organized by the local cooperatives and bee entrepreneurs association. These organizations help ‘Dalits’ by delivering the output to wholesalers. With small honey enterprises, ‘Dalits’ have been able to generate income that has made it easier to meet some of their day-to-day expenses”.

Honey

ABTRACO, (Agri-Business and Trade Promotion Multipurpose Cooperatives Ltd.), The Study Report on Administrative and Policy Constraints Faced by Honey Producing Small Farmers in Dang District, submitted to AEC/FNCCI, September 2004.

Api-net Nepal, Report on Study on Policy Recommendation for the Development of Beekeeping in Nepal, submitted to MEDEP and GTZ, October 2006.

Canada Agricultural Produce Act, Honey Regulation.

Dr. Surendra Raj Joshi and Sanjita Shrestha, Overview of honey Sub Sector, GTZ/PSP.

Ganesh Dawadi and Sanjay Bhandari, The Need to Address Non-Tariff Barriers of Nepalese Honey for the Assurance of Its Access in Export Markets, September 2006.

J.N. Thapaliya and N.C. Lamichhane, Presentation on Trade Competitiveness of Nepalese Honey, September 2006.

Kiran Raj Pandey, Presentation on Nepalese Honey Market at First National Honey Festival in Ratnanagar Mahotsav 2062, AEC/FNCCI, January 2006.

Shankar Prasad Neupane, 2059, Bee-farming in Nepal.

Persons contacted

− Mr. Prem Singh , Proprietor, Nepal Stone Bee Cencern, Patan.

− Mr. Gopal P. Kafle , President, Apiculturists' Network Nepal, Patan.

− Ms. Vandhana Thapa , Family member, Thapa Bee Cusultancy Pvt. Ltd, Kathmandu.

− Mr. Pawan Satyal , Proprietor, Garden Apiery, Kathmandu.

− Ms. Mahalaxmi Shrestha, Proprietor, Beekeeping & Research Centre, Patan.

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14. Mandarin orange Export potential Low


Export potential is low. 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 are 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).

Priority actions − Support farmer’s training in techniques for grading, packaging and post-harvest

handling

− Implement national quality and grading standards

− Negotiate better access to the Bangladesh market

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SWOT Analysis for orange Strengths Weaknesses Resources: The geo-climatic situations of the mid-hills are very

suitable for quality orange production. Unique quality and seasonal advantage in the sub-

continent. Majority of orange farmers have become experts in its

production as they are traditionally growing this crop. Production: The farmers are interested to increase the area under

orange cultivation. Marketing: Orange produced in Nepal is sold in most of the urban

areas of the country from Kakarvitta in east to Dhangadi in the west.

Production: Farmers lack improved knowledge and training in the

techniques of grading, packaging and post harvest handling.

No national quality or grading standard. Extensive losses caused by fruit damage during

transportation. Crude packaging methods. High post-harvest losses. High transport costs. Business Environment: Inadequate irrigation facilities, all season agricultural

roads or access to inputs and credits in some production pockets.

Collection centres are not properly organized and supported by necessary infrastructure and information.

Marketing: Production centres are scattered and are far from market

centres. Farmers have inadequate information on market and

marketing of orange. The contractual selling system (orchard buying by

contractor) failed up to now due to low price offered and uncertainty of payment.

Opportunities Threats World Markets: Seasonal export to neighbouring countries like India and

Bangladesh. Business Environment: Government has categorized orange as a high value crop

in mid hills of Nepal and policy supports are available to provide facilities to the farmers and traders. Government is emphasizing orange for commercial cultivation.

Department of Agriculture has set up National Citrus Fruit Development Program to provide services to the farmers.

Department of Agriculture has its Agro-business and Marketing Development Directorate providing marketing information services to the producers and traders.

Production: Lack of appropriate variety of orange to prolong

harvesting season. Inconsistency in internal as well as external demand and

lack of co-ordination between production and marketing.

Recent supply of oranges from Haryana and Punjab to Nepal’s traditional border markets.


Current export performance Traditionally mandarin oranges have been exported to India through informal channels. This export flow still exists but is now limited to the bordering small towns. The traders from Indian bordering towns visit the assembling markets centres in Nepal, purchase the oranges and take them across the border. In the Bharatpur market, traders estimated that less than 5% of the total market arrivals continue on to India. Assuming that 90% of the total production (97,480 Mt.) is sold in Nepalese markets for consumption in Nepal, it could be estimated that about 4,400 Mt. (5% of 87,632 Mt.) was exported to India through informal channels in 2004/05. Official export statistics of course do not reveal such data (Table 63).

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Table 63. Nepal’s export of oranges

Year Market Amount(tons)

Value (Rs)

1997-1998 Bangladesh 14.3 283,891

1998-1999 Bangladesh 38.4 639,198

1999-2000 Bangladesh 3.3 37,368

1999-2000 Tibet 10.9 218,000

1999-2000 India 46.7 935,000

2000-2001 India 15.2 305,000

2001-2002 India NA 300,200

Source: Nepal Overseas Trade Statistics, Trade Promotion Center, Foreign Trade Statistics, Department of Customs (MOF)

India and Bangladesh are, historically, the two largest destinations for Nepali oranges. Today, Nepal continues to export oranges to India, through bordering towns, while there are very few exports to Bangladesh. There are several reasons why Nepal has lost the Bangladeshi market: first, trading from the agreed land route from Nepal to Bangladesh via Indian territory is not functioning well; second, Bhutan gets preferential treatments both in the Bangladesh market and land route passes via India; and finally farmers from Bhutan have easy access into the Fruits and Vegetables Wholesale Markets of India (Siliguri) through which the orange is exported to Bangladesh and such access is not available to Nepali farmers or traders.

Nepal is a very small exporter of mandarin oranges. Nepal’s share of the total world trade of mandarin oranges is a negligible amount estimated at less than 0.2% and based on exports to India through illegal channels. The major competitors for Nepal in the Indian and Bangladeshi markets are Bhutan and India itself.

Domestic supply conditions The Mandarin Orange (Citrus reticulata) is the main fruit among the citrus crops and is an important commercial fruit crop in the mid-hill region of Nepal. It is considered important as a cash-generating commodity for the farmers there. Oranges can be grown in all the mid-hill area and in some parts of mountain areas.

Exports of Nepalese oranges were started by the 'Agro Enterprise Center'68 in 1995 by sending sample oranges to Bangladesh with the objective of promoting Nepalese oranges in the Bangladeshi market. In 1997 the efforts paid off with the first exports of oranges to Bangladesh. A four-day training program on "Orange Marketing Management Training" was conducted prior to beginning exports in Pokhara, Damauli and Syangja under the co-ordination of the local Chamber of Commerce (CCI). AEC also facilitated the exporters to meet with the importers. The export was only successful for a few years.

The area under cultivation and the total level of production has been gradually increasing. Marginal, as well as fertile, fields covered by other crops like maize and millet are being converted into citrus orchards in the mid-hill areas. Due to its simple production technology and the practice of inter-cropping with staple crops like maize, cash crop and fresh vegetables, it has great significance in the cropping system and farm economics of the small farmers in the mid-hills. It is being grown in all the mid-hill districts but the quality of fruit from Gorkha, Tanahu and Dhankuta districts is considered best. The Ministry of Agriculture is implementing programmes to commercialize orange production in 42 districts of mid-hills and high hills, which have been, identified as commercially viable areas for orange farming. The total land area under orange cultivation is estimated at 16,783.9 ha, which constituted about 60% of the total citrus fruit area in 2005/06. Nepal

68 Agro Enterprise Centre (AEC) - technical wing of the Federation of Nepalese Chambers of Commerce (FNCCI) focused on agro business development and promotion in Nepal.

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produced about 97,480 Mt. of fresh oranges in the year 2004/05. Likewise, the share of orange production to total citrus fruit production is about 60% (Table 64).

Table 64. Production of Citrus Fruits and Orange in Nepal Oranges Citrus

Year Area (ha)

Productive area(ha)

Production (Mt.)

Area (ha)

Productive area (ha)

Production (Mt.)

1993/94 7,640 4,511 46,517 13,543 7,899 76,470

1994/95 8,175 4,807 49,905 14,630 8,487 83,375

1995/96 8,671 5,182 54,088 15,243 8,977 88,646

1996/97 9,080 5,418 57,350 15,923 9,330 92,994

1997/98 9,864 5,863 62,094 17,026 10,034 100,352

1998/99 10,509 6,258 66,655 18,007 10,595 107,258

1999/00 11,103 6,588 70,824 19,018 11,277 115,067

2000/01 12,276 6,946 74,796 20,673 11,891 121,665

2001/02 13,515 7,369 80,644 22,423 12,615 130,928

2002/03 14,399 7,777 85,696 23,663 13,312 139,110

2003/04 15,205 8,146 91,094 24,799 13,931 148,010

2004/05 15,987 8,627 97,480 25,909 14,606 156,956

2005/06 16,784 .. .. 27,022 .. ..

Source: Statistical Information on Nepalese Agriculture, HMG/MOAC, Agri Business Promotion and Statistics Division.

The yields remain very low. The national average productivity of orange is only 11.18 Mt/ha., reaching up to 17 Mt./ha in districts like Dadeldhura and Tanahu.

The Mid-hill region is the production area of orange in Nepal. The Citrus Development Section under Fruit and Development Directorate of Department of Agriculture has identified 42 districts of the mid-hills as the commercially most viable districts for orange cultivation. However, 29 of them (Dhankuta, Bhojpur, Sankhuwasabha, Illam, Terathum, Ramechhap, Sindhuli, Kavre, Makwanpur, Nuwakot, Dhading, Gorkha, Tanahu, Lamjung, Kaski, Syangjya, Parbat, Baglung, Palpa, Gulmi, Surkhet, Dailekh, Pyuthan, Jajarkot, Kalikot, Dadeldhura, Baitadi, Bhajang, and Achham) have more potential due to their specific ecological advantages for orange cultivation.

The vast majority of the crop is traded in fresh form. More than 97% of the production is traded as fresh and less than 3% in processed form. It is processed as juice, wine, squash and marmalades.

There is only one major processing unit producing orange juice and selling its products mainly domestically (Table 65).

Table 65. Fruit Processing Industry in Nepal

Name of the Industry Major products Brand name Quantity of

orange utilization (tons)

Rijal Tashi Industries Itahari Squash Juice Druk 160

Wonder Products Juice Rasilo 13

Butterfly fruit and canning industries Squash Butterfly 12

Takura Squash Takura 15

Makalu Wine Industries Wine Hinwa 14

Source: Sub-sector publication- Oranges, GTZ/Nepal.

No quality standards exist for oranges in Nepal. Neither are there any commonly accepted guidelines for grading structures in Nepal. In practice, grading is done on the basis of size of the fruits and then only at the retail level. Some agencies have tried to introduce semi-mechanical grading machines at the farm level, but such practices are still very rare. An interviewed trader complained that each consignment of oranges arriving in the market, often, contains more than ten, either natural or cultivated, varieties of orange

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and that they are not even graded by size. Consequently, it becomes virtually impossible for him to export the fruit unless he makes a heavy investment in grading the oranges.

Significant losses occur due to diseases, insects and bulk transportation. Few pesticides are used and as a result greening disease and insect attacks are very common among the orange trees. These have not only affected the tree yield but have also reduced the quality of the fruit. Almost all the deliveries to the market from the farm are done in bulk, resulting in high product loss during transportation.

The oranges pass through a rather simple marketing channel involving two main stops – collection centres and assembly points. Orange producers first bring their harvest to collection centres, located along the roadhead, where the collectors, marketing agents and wholesalers are located. Each of them accounts for around 3 to 10 percent of the total volume of arrivals at a particular collection centre. From the collection centers, the oranges are brought to major assembling centres like the Narayanghad (Bharatpur), Kalimati (Kathmandu) and Pokhara markets for further distribution to the retail markets and export to Indian border towns. At these assembling centres a number of wholesaler/commission agents operate. Each of them handles less than ten percent of the total market arrival. The role of transporters – porters and trucker – is very important in the whole supply chain. There is no uniform price, as the cost of transport is dictated by the individual transporters, causing the cost to vary.

Each of the players in the supply chain is a small business owned and operated by family. The concept of a larger ‘company’ has not yet entered in orange trading. Farmers, as well as the traders, sell fresh oranges. It is, therefore, a seasonal business for the traders as the supply of oranges is limited to the months from November- January only.

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

Role of the Government: Government intervention in orange trading is limited to launching programme activities which aim to establish and help manage the collection centres and wholesale fruits market at the above mentioned assembling markets. The Agriculture Perspective Plan (APP) has designated oranges as a priority crop for Nepal’s agricultural development. The government has established a “Citrus Development Board” under the Ministry of Agriculture in Kirtipur. The Board aims to increase the area under citrus cultivation by 1,000 hectares of land every year. To achieve this target they plan to distribute 300,000 to 500,000 orange saplings every year. This appears to be insufficient, and does not meet the farmers’ demand for the saplings. The government has allocated 34 priority districts where they have introduced a number of extension services. The government has the authorisation to distribute new plantations/saplings to farmers but, at the same time, provides only a limited amount of knowledge and information to farmers regarding correct orchard management issues like irrigation, pesticides as well as the proper methods of harvesting, handling, and market linkages.

The initial step taken by the government to create the institutional organizations required for citrus development, was the establishment of the Citrus Research sub-station at Malepatan, Pokhara in 1961 and citrus research station at Paripatle, Dhankuta in 1962. A large amount of R&D activities are being done in these Sub-stations, especially looking at diseases and pests. With the underlying objective to increase the production of mandarin and Junar, and thereby increase the cash income and employment opportunities for farmers, the government launched a citrus priority program in the Dhankuta, Sindhuli, Ramechhap, Kaski and Dailekh districts in 1985. This program successfully increased the area under coverage as well as the production, the development of nurseries and the level of training.

Donors’ involvement: A number of donors have been involved in this sector. The Horticulture Development Project (HDP) was established under the technical co-operation of the Government of Japan. The main objective of this project was to increase the production of citrus and deciduous fruits, by providing assistance with technological development, training and extension. By doing so they hoped to contribute to Nepal’s development by creating employment opportunities, as well as raising both the income and nutritional level of the people. A number of exotic varieties of oranges were introduced from Japan without much success. Japan also provided short term training for JT/JTA's and farmers.

After this, the Hill Fruit Development project, under loan assistance of the Asian Development Bank (ADB/M), was implemented in 11 hill and mountain districts of eastern development region lasting from 1988-95. The main achievements of the project, by the year 1995, were an increase in the area under citrus cultivation by 2660 ha and the construction of buildings, laboratories, market yards and cellar storage units across Nepal. 35 citrus nurseries were also established, under private sector initiative.

In 1998 the Agro Enterprise Center (AEC) took the initiative to help farmers and traders develop market linkages and discover new markets. They explored the possibility of exporting Nepalese Mandarin oranges to Bangladesh. They also linked traders and entrepreneurs across the country with importers in Bangladesh. Backward linkages were also made with the farmers, mostly from Syangja, Gorkha, Tanahu,

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Kaski and Dhankuta, by procuring quality oranges for exports. 14 metric tons of oranges were exported to Bangladesh in the first year (1998) of the program and 38 Mt. in the second year (1999) on the Phulbari-Bangladesh trade road.

Numerous research reports on different aspects of citrus cultivation done by the Lumle Agriculture Research Center (LARC) are available at NARC documentation centre. The Poverty Reduction through Irrigation and Small holders Markets (PRISM) project of the IDE (International Development Enterprise) is involved in the backward linkage of buyers of mandarin oranges (now Wonder Products Pvt. Ltd: manufacturers of Rasilo juice) and farmers in the Syangja district. They also plan to give extension services/training on orchard management issues and marketing. BDS MaPS/IDE/Nepal was involved in this sector for a short duration in the Syangja district. Their major intervention was in the marketing aspect. They have supported the mandarin orange farmers to build cooperatives, one cellar store and two collection centres.


Competitiveness prospects for mandarin orange are below average.

− Yet, there is ample scope for enhancing the quantity as well as the quality of the fruit. Proper management of the orchards could help enhance the yield and quality of the oranges. Similarly, the introduction of grading practices and cleaning of the fruits at the farm level could help enhance the quality of the oranges. Simple grading at the farm level will improve the product quality that could bring higher prices for the farmers as well. Consignments contain fruits of different ripeness, as the harvesting procedure does not select the oranges by ripeness. Another opportunity is generated by the short orange season in Nepal, which only runs from November-January. With some improvements in post-harvest handling, the fruit could be stored in order to sell it after the main harvesting period when prices are higher. A few cellar storages have been constructed, at the farm level, for this purpose but have a limited storage capacity. Similarly, the existing cold storages are not sufficient to provide storage services to the orange sub-sector. For the time being, the available volumes for export are likely to be too small to enable Nepal to consider any other markets in the short and medium term.

− As only about 50% of the total current planted fruit trees have reached the productive stage, production of orange is gradually increasing and is expected to increase even further in the future. There is also great potential to increase the average yield of each tree. A study has demonstrated that the existing yield of an orange tree could be increased by around 40% through improved farmers’ practices.69 The government set up a "National Citrus Development Program" (NCDP) in 1996-97 with the objective of contributing to poverty alleviation by increasing the income of farmers through citrus cultivation. The emphasis has been to enhance the area (about 1,000 ha. every year) under orange cultivation and improve the yield per tree.

World markets World mandarin orange production is estimated by the FAO at 23.4m Mt in 2004. The world’s major producers are China (47%), Spain (10%), Brazil (5%), Japan (5%), Iran (3%) and Turkey (3%). Of China’s massive 11 million Mt a small proportion, around 300,000 Mt., is exported in the form of fresh oranges and an additional 300,000 Mt in the form of canned citrus fruit. Spain, Morocco and Turkey are the major exporters during the Northern hemisphere’s season, and South Africa, Argentina and Australia are the key suppliers from the Southern hemisphere’s season.

Global demand for the fruit is concentrated in Europe and North America. New markets are rapidly emerging in Eastern Europe especially in the Russian Federation for both fresh and canned oranges (buying 176,000 tons fresh in 2005, showing 44% annual growth since 2001), Hungary and Bulgaria. Closer to Nepal, Vietnam has rapidly become an attractive market buying 24,000 tons, but not surprisingly China dominates this market with a 94% market share. Globally speaking the market for mandarin oranges looks bright, from 2001-5 world imports grew by 13% in value and 7% in quantity.

69 Sub-sector publication- Oranges, GTZ/Nepal.

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Bangladesh is also a sizeable market. Bangladesh’s import data is incomplete, which makes it impossible to rely on too heavily. The data does make it clear, however, that the country’s citrus (orange and mandarin) imports are sizeable – in the order of 3,500 tons. The main sources of supply are Bhutan, India and Australia.

Nepal’s oranges have easy entrance to India but face high tariffs, taxes and non-tariff barriers in Bangladesh with a significant disadvantage vis-à-vis Bhutan. So far Nepal has not come across any tariff or non-tariff barriers to exporting oranges to India. The exporters do not even need to submit Certificate of Origin, Weight Certificate and Quarantine Certificate when exporting to India. When exporting to Bangladesh, exporters have to submit all these documents and also pay 35% custom duty, and other taxes and fees, which add up to 58% in total. From this perspective, as well as in the use of the land route via India for deliveries, Nepal is disadvantaged in Bangladeshi markets compared to oranges from Bhutan. Oranges from Bhutan pay half the custom duty (17.5%) that Nepali exporters have to pay.

World market prospects are below average.

− The most attractive markets for Nepal are the EU countries and Russia. Nepal is considered highly underrepresented in these markets. These countries have import growth rates in excess of the world average and are therefore highly dynamic markets.

− Nepal’s market access conditions to all markets, especially in terms of market openness, are very favourable. Most markets do not give tariff advantages to Nepal, except for Spain, simply because Nepal and its top 5 competitors already receive almost exactly the same duty rates in these markets.

− Traders are of the opinion that Nepalese oranges have great potential as exports to India and Bangladesh. The unique quality of the fruit and the seasonal advantage are two basic strengths of Nepali oranges. However, the traders reported that, in order to exploit this export potential, the production volume must be increased. Secondly they believe that Nepal’s ability to introduce necessary quality improvements will be a key determinant of their success. A third item considered by traders as very important to improve the export of Nepali oranges is an improvement in the packaging method. Bearing these issues in mind, it does not appear likely that Nepal will achieve similar levels of exports to other markets than India and Bangladesh in the short and medium term.

Table 66. Mandarin Orange: Most attractive markets Product (HS 6-digit code)


Markets* World share(%, 2004)

Import growth

(% p.a. from 2001-05)

Tariff applied to

Nepal (%)


advantage (-)

(%)1. RUSSIA 4.6 33 8.9 1.32. ITALY 4.5 23 0.0 0.33. NETHERLANDS 6.4 19 0.0 0.74. UNITED KINGDOM 12.3 15 0.0 0.6

Mandarins (tangerines & satsumas) clementines & wilkgs & similar citrus hybrids, fresh/dried (080520)

0

5. FRANCE 14.0 11 0.0 0.51. SPAIN 3.4 46 0.0 5.62. FRANCE 12.2 19 0.0 1.73. RUSSIA 4.8 22 5.0 2.54. GERMANY 13.2 16 0.0 1.45. NETHERLANDS 7.2 14 0.0 1.8

Oranges, fresh or dried (080510) 0

78. BANGLADESH 0.3 8 27.6 4.9* Markets in UPPERCASE are new markets for Nepal. See Annex 3 for information on the market attractiveness index. Source: Calculation by ITC staffs based on TradeMap and Market Access Map.

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Current socio-economic impact The current socio-economic impact is low owing to a relatively low current employment impact. The full-time employment equivalent (FTEE) is relatively small (Table 13). Around 17,000 farm families are dependent on this sector.70 Farm families are involved in its pre-production and also in post-production activities. They are also employed in transporting the product from the farm to the road head collection centres. A large number of people are employed in the total supply chain, mostly loading/unloading, transporting, grading and packaging the fruit. In the assembling markets all the family members, including women, participate in orange marketing. With the promotion of export and product diversification into processed products, this sector could generate large employment opportunities.

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. It provides higher returns to farmers compared to other annual crops, especially to small farmers for whom there is a scarcity of land. A study has found that the average income level of a small farm’s household increased to Rs. 50,700 from Rs. 12,623 with the introduction of citrus tree into the farm71. Another study indicates that orange farming alone accounts for 44% of the total annual income of a farm household.72 The trend towards increasing production also indicates that this sector is supporting the reduction of rural poverty. Therefore, it has a positive economic implication for Nepalese farmers. It accounts for a major portion of household cash income. As it is being produced in the whole of the mid-hill areas, this crop is very important for the development of this region. The impact on rural income is substantial. There is high positive correlation between the amount of orange sales and the total household income of the farm family.

Oranges are, as yet, not a very important export commodity for Nepal. The earnings from the export of oranges constitute a very negligible proportion in the total export earnings of the country. There is, however, potential to develop it as an important agricultural export item. Seasonal exports to neighboring countries like India, the Tibet region and Bangladesh appear to be promising. Oranges could emerge as an important generator of foreign exchange earnings.

Orange cultivation helps check soil erosion, thus its production is environmentally friendly and sustainable. The Governments policies and programme aim to focus orange cultivation in the mid-hills as it is appears to be helping to check soil erosion and increase the greenery in the hills as well as improving the overall quality of the land.

70 See Annex 4. 71 Business Promotion Research and Communication Pvt Ltd (BPRC), Comparative Cost Benefit of Citrus Fruits Production in Nepal, submitted to Marketing Research and Statistics Program, Directorate of Agribusiness Promotion and Statistics, Department of Agriculture, Ministry of Agriculture and Cooperatives, June 2005. 72 Sub-sector Publication, Mandarin Orange, GTZ/Nepal.

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Mandarin orange

Business Promotion Research and Communication Pvt Ltd (BPRC), Comparative Cost Benefit of Citrus Fruits Production in Nepal, submitted to Marketing Research and Statistics Program, Directorate of Agribusiness Promotion and Statistics, Department of Agriculture, Ministry of Agriculture and Cooperatives, June 2005.

Ramesh Munankami, Mandarin Orange Market Profile for Rapti Nepal, Prepared for VFC program under Rapti Development Project of USAID/Nepal, No-Frills Consultants, May 1992.

Ramesh Munankami, Market Profiles of Lemon, Sweet Orange and Apple at Selected Markets (18 different markets including the Indian border markets) for CBED Project Area (of Baitadi, Dadeldhura and Jumla), CBED/CECI/CIDA, Kathmandu, 18 different volume, July-August 1996.

Sub-sector Publication, Mandarin Orange, GTZ/Nepal.

Persons contacted

− Ms. Dil Kumari Sapkota, Proprietor, Nepal Fruit Centre, Narayanghat.

− Mr. Bharat Karki, Proprietor, Dhaulagiri Fruit Centre, Narayanghat.

− Mr. Dol Raj Panta, Proprietor, No company's name (Dol Raj Paunta), Naraynghat.

− Mr. Bhakti Ram Gautam , Proprietor, Arati Fruit Centre, Narayanghat

− Mr. Salik Ram Ghimire, Proprietor, Narayani Fruit Centre, Narayanghat

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Sub-sector Publication, Mandarin Orange, GTZ/Nepal.

Suhrid Prasad Chapagain, Experience Sharing Of Lotus Opportunities involvement in Cardamom Marketing Linkages, presentation materials.

Synthesis of Seminar Presentations and Discussions on Herbs, Herbal Products and Spices. November 2005.

Tenth Summer Crop Workshop. RAS. NMDP. Chitwan.

The Rising Nepal: Nepal’s Leather Exports 2005

Trade Promotion Centre, Cut Flowers and Orchids for Export Availability Study, 1989.

Trade Promotion Centre, Market Development Division, Mr. Murari Prasad Gautam, The Japanese Market on Ornamental Plants and Cut Flowers, 1995.


Trade Promotion Centre, Pashmina Products – Current Status – A Study Report (in Nepali) prepared by B.N.Adhikary, 2059/1/10 (2003).

Trade Promotion Centre, Profile of Nepalese Gold and Silver Jewellery, 2005

Trade Promotion Centre, Profile of Nepalese Pashmina Products, 2005

Trade Promotion Centre, The Market for Silver Jewellery in the European Community and the USA, prepared by Murari P. Gautam, (1990).

148

UNIDO. Nepal: Establishment of Tannery Affluent Treatment Facitities.

United Nations Development Programmes (2005), Human Development Indicators.

VLTA. Fair Trade Organization

World Bank (2006), World Development Indicators.

149

Annex

Annex 1. Definition of the industries in terms of underlying products

Industry Product Code (HS) Product description

Export Potential Index

(from 1 to 5)

Exports in value

(USD '000)

Export growth in value (p.a. %)

Share in world export

(%)

Cardamom 090830 Cardamom 3.7 11,694 2.0 10.45

060110 Bulbs, tubers, tuberous roots, corms, crowns and rhizomes, dormant 3.1 145 391.0 0.02

060290 Plants live, nes 2.8 66 1.0 0.00

060210 Cuttings and slips, unrooted 2.4 0 0.00

060240 Roses, grafted or not 2.1 0 0.00

Cut Flowers

060310 Cut flowers & flower buds for bouquets or ornamental purposes, fresh 2.4 0 0.00

711311 Articles of jewellery & pts thereof of silver w/n platd/clad w/o prec met 3.3 5,811 14.0 0.22

711719 Imitation jewellery nes of base metal whether o not platd w prec metal 2.6 618 16.0 0.02

711790 Imitation jewellery nes 2.5 338 -8.0 0.04

711620 Articles of precious o semi-precious stones,natural,syn o reconstructd 2.8 121 35.0 0.02

711320 Articles of jewellery & pts thereof of base metal clad w precious metal 2.7 110 82.0 0.07

711411 Articles of gold/silversmith & prt of silver w/n platd/clad w/o prec met 2.6 104 7.0 0.05

711319 Articles of jewellery &pt thereof of/o prec met w/n platd/clad w prec met 2.3 95 -61.0 0.00

711420 Articles of gold/silversmith & pts of base metal clad w precious metal 3.1 81 55.0 0.11

710310 Prec/semi-precious stones (o/t diamonds) unworked/simply sawn/rough shaped 3.5 79 322.0 0.03

711610 Articles of natural or cultured pearls 3.0 21 203.0 0.02

710399 Precious/semi-precious stones nes further worked than sawn/rough shaped 2.2 12 -30.0 0.00

Gems and Jewellery

711590 Articles of precious metal or of metal clad with precious metal nes 3.2 3 86.0 0.00

Ginger 091010 Ginger 3.2 2,518 19.0 0.82

480210 Paper, hand-made, uncoated, in rolls or sheets 3.3 649 21.0 0.93

Hand Made Paper

480820 Paper, sack kraft, creped or crinkled, in rolls or sheets 3.1 295 66.0 1.25

Honey 040900 Honey, natural 3.0 49 -56.0 0.01

410422 Bovine leather, otherwise pre-tanned, nes 3.1 3,699 16.0 0.16

410612 Goat or kid skin leather, otherwise pre-tanned 3.3 1,048 14.0 0.35

410429 Bovine and equine leather, tanned or retanned, nes 2.9 458 26.0 0.04

410439 Bovine and equine leather, nes 2.8 239 151.0 0.01

410431 Bovine and equine leather, full/split grains, nes 2.9 160 87.0 0.00

410620 Goat or kid skin leather, nes 2.8 93 -18.0 0.02

410410 Bovine skin leather, whole 2.0 0 -81.0 0.00

410421 Bovine leather, vegetable pre-tanned, nes 2.1 0 0.0 0.00

410611 Goat or kid skin leather, vegetable pre-tanned 2.0 0 -71.0 0.00

Leather

410619 Goat or kid skin leather, tanned or retanned, nes 1.7 0 -88.0 0.00

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Industry Product Code (HS) Product description

Export Potential Index

(from 1 to 5)

Exports in value

(USD '000)

Export growth in value (p.a. %)

Share in world export

(%)

080510 Oranges, fresh or dried 2.5 0 0.0 0.00 Mandarins

080520 Mandarins(tang&sats) clementines & wilkgs & sim citrus hybrids, fresh/drid 2.3 0 0.00

121190 Plants &pts of plants (incl sed&fruit) usd in pharm, perf, insect etc nes 2.8 1,568 0.0 0.15

330129 Essential oils, nes 2.7 214 3.0 0.04

330119 Essential oils of citrus fruits, nes 3.3 98 33.0 0.09

330190 Conc&aqueous distls of essentl oils;terpenic by-prods of essentl oils 2.5 98 28.0 0.04

Medicinal Plants and Selected

330125 Essential oils of other mints 2.5 1 41.0 0.00

090240 Black tea (fermented) & partly fermented tea in packages exceedg 3 kg 2.7 2,548 51.0 0.15

090230 Black tea (fermented)&partly fermentd tea in packages not exceedg 3 kg 3.0 2,317 109.0 0.24

090210 Green tea (not fermented) in packages not exceeding 3 kg 3.0 240 178.0 0.09

090220 Green tea (not fermented) in packages exceeding 3 kg 2.3 45 -3.0 0.02

Tea

210120 Tea or mat– extracts,essences & concentrates & preparations thereof 3.2 19 195.0 0.00

071340 Lentils dried, shelled, whether or not skinned or split 3.4 11,342 3.0 2.26

071390 Leguminous vegetables dried, shelled, whether or not skinnd or split,nes 2.4 111 15.0 0.04

071339 Beans dried, shelled, whether or not skinned or split, nes 2.8 24 213.0 0.01

071310 Peas dried, shelled, whether or not skinned or split 2.7 0 0.0 0.00

071320 Chickpeas, dried, shelled, whether or not skinned or split 2.5 0 0.00

071331 Urd,mung,black/green gram beans drid shelld,whether/not skinnd/split 2.2 0 0.00

071350 Broad beans&horse beans dried, shelled, whether or not skinned or split 2.2 0 0.00

Pulses

120100 Soya beans 2.3 0 0.00

621420 Shawls, scarves, veils& the like,of wool or fine animal hair, not knitted 3.3 13,267 -33.0 3.98

611010 Pullovers, cardigans & similar article of wool or fine animal hair,knittd 3.2 4,499 7.0 0.08

621410 Shawls, scarves, veils and the like, of silk or silk waste, not knitted 3.4 3,931 -19.0 1.09

500500 Yarn spun from silk waste, not put up for retail sale 2.4 145 391.0 0.06

500790 Woven fabrics of silk, nes 2.5 129 -12.0 0.06

500600 Silk yarn&yarn spun from wilk waste,put up f retail sale;silk-worm gut 3.2 72 145.0 0.27

500710 Woven fabrics of noil silk 2.4 49 11.0 0.06

500400 Silk yarn (other than yarn spun from silk waste) nt put up f retl sale 2.5 29 -14.0 0.01

500390 Silk waste, nes 2.7 8 138.0 0.02

Silk and Pashmina Products

500720 Woven fabrics of silk/silk waste,o/t noil silk,85%/more of such fibres 2.1 2 -76.0 0.00

090111 Coffee, not roasted, not decaffeinated 2.4 169 49.0 0.00 Coffee

090121 Coffee, roasted, not decaffeinated 2.2 0 0.00

442010 Statuettes and other ornaments of wood 2.5 285 -8.0 0.04 Wooden Handicrafts 442090 Wood marquetry and inlaid wood; caskets

and cases for jewellery etc 2.6 65 2.0 0.01

151

Annex 2. Data sources World markets, Nepal’s market access conditions and its current export performance are essentially analysed on the basis of desk research and on two Internet-based tools.

− For market access conditions, tariff data are from ITC’s Market Access Map database (www.macmap.org/). Market Access Map is a comprehensive source of tariffs and market access measures applied at the bilateral level by 170 importing countries to the products exported by 239 countries and territories. Products are described at the most detailed level, the national tariff line. It includes MFN tariffs as well as multilateral, regional and bilateral preferences; bound tariffs; multilateral and bilateral tariff-quotas; anti-dumping duties; and Rules of Origin and Certificates of Origin.

− Trade data come from ITC’s Trade Map (www.trademap.org/). Trade Map is an online database of global trade flows and market access barriers for international business development and trade promotion, providing detailed export and import profiles and trends for over 5,300 products in 200 countries and territories. Based on the world’s largest database COMTRADE, Trade Map presents import/export values and quantities, growth rates, market shares and market access information. It allows users to analyse markets, select priority countries for export diversification, review the performance of competing countries and assess opportunities for product diversification by identifying existing and potential trade between countries.

Concerning trade data, Nepal has not reported trade data for the years 2004 and 2005 to the United Nations’ Statistical Division (UNSD) in the Harmonised System HS 6-digit. In that case, ITC’s Trade Map uses partner country data, an approach referred to as “mirror statistics”. In other words, the sum of all reporting partner countries’ imports is taken as a proxy for Nepal’s exports for a given industry. Though it may generally be better to have mirror statistics rather than no data at all, they have a number of shortcomings, of which the most important is that mirror statistics do not cover trade with other non-reporting countries, as is the case for example with Nepal.

152

Annex 3. Market attractiveness index ITC’s market attractiveness index allows identification of those markets in which enterprises in Nepal have the potential to export more. The market attractiveness index is a summary measure of the attractiveness of importing markets. It compares, for each product, the relative standing of importing countries in four areas:

− The dynamism of import markets, as measured by the difference of the growth of import markets and the growth of world imports for the same product. The presence in fast growing countries may positively impact on Nepal’s exports.

− The under-representation of import markets in Nepal’s exports, as measured by the difference of the share of the importing country in Nepal’s exports and its share in world exports. Strong under-representation, especially in large markets, suggests that enterprises in Nepal have a potential to export more.

− The openness of import markets for products from Nepal, as measured by the ad valorem equivalent tariffs they apply to imports from Nepal. All things being equal, it is easier for enterprises in Nepal to export to open markets than to relatively closed markets.

− The preferential access to import markets, as measured by the tariff differential between Nepal and the tariff faced by its five major competitors in each import market.73

All four dimensions are important, hence combining them into a single summary measure allows identifying those import markets that are dynamic, open, granting a preferential access and where Nepal is currently under-represented. Variables come in a variety of statistical units and different variable sets have different ranges or scales.

Variables need to be put on a common basis to avoid problems in mixing measurement units (e.g. firms, people, money). Variables need to be standardised or normalised before they are aggregated into a composite indicator. Several techniques can be used to standardise or normalise variables, with each method having its advantages and disadvantages (EC Joint Research Centre, 2002; Freudenberg, 2003).

The normalisation method used here converts each indicator into a range of 1 (weak performance) and 5 (best performance). It gives 1 point to markets with values below a certain threshold value and 5 points to markets with values above the threshold value. All other markets obtain points between 1 and 5 depending on their relative distance between these two thresholds, according to the following formula:

If the value of the market equals the upper limit, the ratio is 1 and the term becomes 1+4*1=5. If the value equals the lower limit, the ratio is 0 and the term becomes 1+4*0=1.

The thresholds are used to avoid having extreme values dominate and also to partially correct for data quality problems, as there is reason to believe that values extremely far from the average or normal range are more likely to reflect poor underlying data. The thresholds used here vary from one indicator to another. For example, regarding the openness indicator, the markets applying a tariff below 5% get 5 points whereas markets applying a tariff superior to 30% get 1 point.

The market attractiveness index is the simple average of the four indices.

73 Therefore, the index can be higher for a country A than for a country B, even though both apply the same tariffs to imports (e.g. because A and B are members of a customs union). This is the case because A and B may import from different countries, to which the customs union applies different tariffs. If, for example, Spain imports mostly from China (high tariff), and France mostly from Italy (zero tariff), then the resulting index for Spain and France will be different, even though both belong to a customs union.

153

Table 67. Market attractiveness index for products: indicators and thresholds Dimension Indicator Lower

threshold (1 point)

Upper threshold (5 points)

Dynamism of import markets Difference (D1) of the growth of import markets and the growth of world imports in value terms:

D1<-15% D1>15%

Under-representation of import markets in Nepal’s exports

Difference (D2) of the share of the importing country in world exports and its share in Nepal’s exports

D2<0% D2>5%

Openness of import markets for products from Nepal

Ad valorem equivalent tariff (T) rate applied to imports from Nepal

T>30% T<5%

Preferential access for products from Nepal in import markets

Difference (D3) of average tariff rate (Ad valorem equivalent) applied to imports from the top 5 competitors and tariff rate applied to imports from Nepal.

D3<-10% D3>10%

154

Annex 4. Full-Time Employment Equivalent (FTEE) The full-time employment equivalent (FTEE) is based on the number of people directly employed in each sector. Employment information for each sector is from ITC National Consultants or/and the representatives of three sectors, namely handmade paper, leather and tea. Employment information is presented in different formats – i.e. labour days, families, and labour days. For instance, the number of people employed in Cardamom sector is derived from labour days dividing by required labour days. Since some sectors require only seasonal employments (e.g. 2-3 months per year), we have calculated the number of people as a full-time equivalent in order to compare employment impact on each sector.

Sector Labour days

Families People employed

Nb of months per year

FTEE Days Note

Cardamom 1,000,000 33,333 2 5,556 30-40 days per year

67000 farm household, 5000 in value chain

Coffee 1,400,000 46,667 2 7,778 30-40 days per year

15000 farmer, 45000 farm labour 10000 labour in value chain

Cut flowers 2,500 12 2,500 Full time Gems and jewellery

10,000 12 10,000 Full time

Ginger 2,000,000 66,667 2 11,111 30-40 days per year

22,333 Simple average of two information from a) the Nepal Handmade Paper Association (36,250) and b) National Consultant (8,417).

58,000 7.5 36,250 a) Information from Nepal Handmade Paper Association: There are 58,000 people are engaged in Handmade Paper Industry. Lokta cutting, Paper making occurs in hills and mountains whereas Paper product conversion of the handmade paper occurs in urban areas. We consider all three sectors lokta cutting, paper making and product making as a chain of Handmade paper. Lokta paper making, mainly lokta cutting and paper making are complementary to agriculture sector. The agriculture sector in Hills and mountains does not provide adequate income as well as engagement mainly for the marginalized farmers. In most ofthe hills and mountains, a single crop takes nine month cycle. So paper making provides a good complement to the work as well as income. Rough estimation indicate that agriculture sector can absorb less than 100 days of work of the farmers and rest of the time of the year are for paper activities. But these are rough estimates as our association does not have the exact figure.

28,000 8,417 4,500 12 4,500 Full time

Hand made paper

23,500 2 3,917 44 days per year

b) Estimate from National Consultant: Grand Total: 28000. The 28,000 figure represents people engaged in all and complete lokta paper value chain. This means starting from those in the villages who care after lokta bush, lokta bark harvesting, paper making to those in paper mills in towns who further work to make different products from the paper. Based on the field study contacts and the pubished study reports I have had on the subject, about 4500 would be the ones who would be more or less occupied in making lokta paper and goods through the year, the balance 23, 500 would be those who are in the hills and have primarily the seasonal job of lokta harvesting.

Honey 2,400,000 80,000 2 13,333 30-40 days per year

155

Sector Labour days

Families People employed

Nb of months per year

FTEE Days Note

6,300 12 6,300 Full time From National Consultant: There are 12 bigger tanneries directly employing some 1800 workers, 25 smaller ones hiring about 500 workers. Taking into account other intermediaries like village hides and skin collectors, truckers etc. this is reported to add another 1500 hands approx. There are then some 50 small leather goods manufacturing units, who hire about 2500 workers in total. The grand total makes 6300 workers. The workers, be they working on the tannery floor or those who have functions like making trips between the tanneries and the villages to collect the hides and skin, they all keep themselves busy throughout the year. In the leather sector this is a year round job.

Leather

800-1000 12 900 Full time An alternative estimate that does only take into account direct employment is from United Tanneries: In Nepal, there are no large scale tanneries (with more than 500 workers). Normally 25-100 workers are involved in various leather Industries in Nepal depending upon the business situation. An estimated 12 tanneries exist in Nepal, located at Biratnagar, Birgunj & Hetauda. An estimated 800-1000 people are employed directly.

Mandarin Oranges

3,000,000 100,000 2 16,667 30-40 days per year

18,000 farmers have orange orchard of different sizes and in the orchard they plant/cultivate other crops as well. In the cultivation process of those crops and of the orange itself the farm households take care of the orange tree throughout the year. In terms of the magnitude of employment in a agriculture commodity sector, it is always a seasonal business - the full involvement of producer/farmers, transporters, pickers, packers, collectors, wholesalers, retailers, etc. is limited to certain months (30-40 days or more) within a year.

Medicinal plants and essential oils

40,000 12 40,000 Full time The 40,000 people (according to USAID study) represent those engaged in aromatic plant harvesting, trade and essential oil processing. If the number of people involved in collection and trading of medicinal plants is added to this, the total figure will be a lot higher.

Pulses 200,000 0.75 12,500 10-15 days per year

Silk and pashmina products

5,000 12 5,000 Full time

105,000 From Orthodox Tea Producers Associations. Tea 100,000 Full time

Wooden handicrafts

2000 4,000 12 4,000 Full time In case of wooden handicrafts in an average two persons from a family can be taken as full time employed.

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