Analysing the ban in Nepal from an economic perspective – according to trade statistics from the Ministry of Finance, Nepal’s total import value for the financial year 2018/19 was Rs. 1.4 trillion or around 12 billion USD.
As a protectionist measure with the aim of checking depletion of forex reserve during the pandemic, the government has barred import of luxury vehicles and certain foods and alcoholic beverages.
The records of the Department of Customs show that Nepal, in fiscal year 2018/19, imported alcoholic beverages and related products worth Rs 3.54 billion. The government earns 2.5 times the revenue from customs and excise, excluding VAT. There are several renowned foreign liquor brands that have an established market in Nepal.
Traders fail to understand the government’s move considering it is a very small percentage estimated at 0.19% impact on forex reserves whereas the resultant trade deceleration and unintended consequences such as increase in illicit trade and counterfeit products can have a long term impact.
The Transnational Alliance to Combat Illicit Trade (TRACIT) is a private sector initiative to mitigate the economic and social damages of illicit trade by strengthening government enforcement mechanisms and integrating supply chain controls across industry sectors most impacted by illicit trade.
TRACIT draws from industry strengths and market experience to build habits of cooperation between business, government and the diverse group of countries that have limited capacities for regulatory enforcement.
Suriya Prabha Padmanaaban is a policy advisor and lawyer specialising in international trade, intellectual property law, and global governance. She is a consultant operating between Paris and Bangalore and her clients include international business organizations and multinational corporations including CropLife International, the International Chamber of Commerce and P&G. Her focus areas include anti-counterfeiting and piracy, capacity building and consumer protection. She holds an LL.M. in Intellectual Property and Technology Law from the National University of Singapore and is admitted to the All India Bar.
In an email interview with B360, Padmanaaban shares her views on the recent import ban on alcohol in Nepal and how TRACIT works around restrictive and unstable policies in countries like Nepal that fluctuate their rules and regulations without proper measures leading up to such decisions. Excerpts:
How do you view the recent ban on import of liquor in Nepal?
On March 29, the Government of Nepal banned import of alcoholic beverages to protect the country’s foreign currency reserves in the face of the public health and economic emergency. TRACIT recognises the seriousness of the COVID- 19 crisis and understands the need for rigorous and sustained government action in these unprecedented times. However, there is plenty of evidence to demonstrate that bans on alcoholic beverages drive illicit markets and are financially counterproductive.
We are concerned about the unintended consequences of these measures in Nepal. Illicit alcohol can lead to severe public health consequences due to contamination with toxic ingredients such as methanol (which can lead to blindness and death). Its trade supports organised crime, political corruption and terrorist networks. It also deprives governments of much-needed revenue, particularly, when it involves counterfeiting or smuggling of high value (and highly taxed) international wines and spirits.
Prohibition measures are detrimental to our efforts to hold back illicit alcohol and are the last thing we need during the COVID-19 crisis when health care systems are under strain, government budgets are limited and with unemployment swelling, and businesses struggling to stay above water.
How do you work around restrictive and unstable policies in countries like Nepal that fluctuate their rules and regulations without proper measures leading up to such decisions?
Just in the last three months, TRACIT has worked with several governments to demonstrate the impact that alcohol bans have on driving illicit markets along with illustrations of the related economic and social impact. Heightened awareness and education on the problem of illicit alcohol is an essential ingredient to motivate governments to reverse such blanket decisions. TRACIT works with the private sector to evaluate the implications of such bans and devises solutions that governments can implement to promote responsible consumption of alcohol and mitigate illicit trade.
For example, TRACIT issued an Illicit Alcohol Market Alert (https://www.tracit.org/covid-19.html) warning governments that COVID 19 related prohibitions on alcoholic beverages result in unintended adverse consequences. For example, in Mexico, more than 100 people have recently been killed by unknowingly consuming tainted, toxic illicit alcohol. Prior to the Mexican government’s enactment of the COVID 19 dry laws, there were no reports of fatalities linked to the consumption of illicit alcohol. In India, the government lifted alcohol bans in response to rapid and significant excise tax losses and increase in illicit alcohol trade. In South Africa, the illicit trade of alcohol is now bigger than it has ever been, effectively increasing from 15% to 100% of the market.
Nepal would be considered a volatile market. Just how important is it to TRACIT members? What are the wider economic impacts on business and the government?
Nepal is an important market for several of TRACIT’s member companies. The decision of the government to ban the import of alcohol has a slew of diverse repercussions on the operations of these companies.
Firstly, such sudden and spontaneous regulations create an unpredictable and precarious environment for businesses to operate, affects continuity in their supply chains and impacts consumer reliability on their brand. This may also caution other unrelated sectors from operating in the country due to such impulsive changes in the law.
Further, this severely impacts the ability of a company to invest resources in a local market confidently, which has direct consequences on the government’s ability to generate FDI and secure employment for its population. Finally, as noted, import bans propel the manufacture and sale of counterfeit versions of the banned products. This burdens companies’ as well as the government’s budgets to police such illicit activities and prosecute perpetrators.
Do protectionism measures such as the import ban during a crisis actually work for or against the economy from your standpoint?
We have noticeably clear evidence from our experiences in several national markets that, overall, bans on alcohol drastically impact government revenue generation. In recognition, several governments including India, South Africa, Sri Lanka and Zimbabwe that had initially imposed a ban during the pandemic have now reserved their decision.
Analysing the ban in Nepal from an economic perspective – according to trade statistics from the Ministry of Finance, Nepal’s total import value for the financial year 2018/19 was Rs. 1.4 trillion or around 12 billion USD. Imported wines and spirits represented only 0.19% of this. The ban can therefore only have a negligible impact on the balance of payments issue, which was cited by the government as its main rationale.
Notably, the government does collect substantial revenue from these imports in the form of excise and customs duties on these alcohol products. The ban translates to the government forgoing almost $55 million annually through this new policy (much of which will instead be diverted to the criminal black market). Beyond this immediate impact, the government’s already strained budget would also be disbursed for enforcement and monitoring of the ban.
Moreover, once international tourists start visiting again, they will expect the brands that they know and trust to be available. If consumers cannot buy legal alcohol, they will start looking for it on the illegal market. This may have potentially disastrous consequences for Nepal’s tourism industry (both from an economic and safety standpoint) – which is also one of the largest revenue generators for the country.
TRACIT’s fight against illicit alcohol is only one among various other sectors. Could you tell us a little more about these efforts especially in the context of Asian markets? What are some of the solutions?
Yes, TRACIT employs a cross-sector approach to fight the problem by recognising the transitional and interconnected nature of illicit trade. We rely on business’ important role in shaping the regulatory response to illicit trade. We do this by facilitating stakeholder dialogues among the key sectors impacted by illicit trade – ranging from pharmaceuticals and consumer goods to wildlife, forestry and others. This could be in the form of intelligence or data sharing, mobilising resources and expertise to effectively control illicit trade and mitigate associated supply chain abuses.
Asia is an important market for our members and as a first step, we studied the extent that countries are equipped through their policies and initiatives to combat illicit trade. To measure this, we commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index (https://www.tracit.org/featured-project-global-illicit-trade-index.html). The Index expands upon an Asia-specific version, to score 21 economies on the extent to which they enable or prevent illicit trade. This generated much-needed attention on the issue within the region to provide perspectives and new insights on nations’ structural capability to protect against illicit trade. The findings are intended to help policy makers identify areas that merit greater attention and to jump start the process of implementing strategies. Building on this success, we launched specific programs in the region. For example, in response to the Index’s findings, with our support, the government of Myanmar stepped up efforts to fight illicit trade and formed the Illegal Trade Eradication Steering Committee empowered by the Ministry of Commerce. The Committee coordinates state-level departments and establishes policies, strategies and programmes to control illicit trade. These commitments offer a model that any government – developing or developed – could replicate.
TRACIT is now engaging other countries in the region to develop model solutions – regulatory and legislative – with the support of our members. Fundamentally, these would include: increasing government-business partnerships, engaging more deeply with neighbouring countries, intensifying public awareness, increasing enforcement and prosecution of illicit activities, rationalising tax policies and relaxing onerous regulations that often promote illicit trade.