By Dipesh Ghimire
Nepal’s Cash Incentive Export Program Under Fire: Auditor General Flags Legal, Structural, and Transparency Flaws
Despite Nepal’s long-standing efforts to promote exports through financial incentives, the nation’s export contribution to total foreign trade remains minimal. A major government initiative to address this imbalance—the Cash Incentive Program for Exporters—is once again under scrutiny for its legal ambiguity, lack of transparency, and questionable effectiveness.
The recently published 62nd Report by the Office of the Auditor General (OAG) has highlighted multiple flaws in the implementation of this program, which has been operational since Fiscal Year 2068/69 (2011/12).
1. Background of the Cash Incentive Scheme
The government introduced the cash incentive program to stimulate domestic production for exports. Exporters were initially promised a 1% cash back on the total value of their exports. Over time, this rate was gradually increased to as high as 8%, aiming to make Nepalese products more competitive in international markets.
But here lies the first problem: this incentive escalation wasn’t governed by any specific parliamentary law. Instead, it was altered frequently through internal procedures and directives (कार्यविधि), raising concerns about governance and legal integrity.
2. Auditor General’s Key Allegations
A. Lack of Legal Basis
The OAG notes that no standalone legislation exists to manage or regulate the export incentive program. Even though the annual Finance Act—passed by Parliament—mentions export incentives in broad terms, this is not a substitute for a dedicated law.
Implication:
This leaves room for discretionary and non-transparent allocation of billions in taxpayer money, possibly influenced by lobbying and vested interests.
B. Questionable Revisions in Incentive Percentages
The incentive rate was initially set at 1% but later raised up to 8%. These adjustments were made through updates in procedures—not laws—without clear justifications based on export performance or economic rationale.
Auditor General’s View:
Such practice not only bypasses legislative oversight but may be driven by sectoral lobbying, raising the risk of policy capture and favoritism.
C. Double-Dipping by Exporters
The report criticizes the stacking of benefits: exporters receive tax exemptions (customs duty, VAT, income tax) plus cash incentives. In many cases, the same company enjoys multiple incentives for the same export volume.
Problem:
This leads to unfair advantage and inefficiency, draining public funds without adequate return on investment.
D. Transparency and Distribution Gaps
Although the government has distributed around NPR 7.89 billion so far under this scheme, another NPR 6 billion remains in pending claims. Exporters have raised concerns about the non-transparent and delayed processing of their incentive requests.
Even beneficiaries have alleged that the system lacks transparency in fund allocation and approval criteria.
3. Legal Confusion: Is It Even Parliament-Approved?
The government argues that since the annual Finance Act (passed by Parliament) includes provisions for export promotion, the cash incentives are within legal bounds.
However, the Auditor General disagrees. He argues that no clear law governs the procedures, eligibility, ceilings, or oversight mechanisms. The method of distribution depends entirely on executive directives, which contradicts public finance norms that demand legal clarity when spending from the state treasury.
4. Misaligned Targeting and Poor Strategic Focus
While the government has repeatedly attempted to identify potential exportable goods, actual exports of many of those listed items have declined. This suggests a disconnect between policy and market realities.
Exporting low-demand or uncompetitive products, even with high incentives, doesn’t yield results. The OAG warns against wasting resources on politically-favored industries or products that lack international market potential.
5. Systemic Weaknesses Identified
Problem Area | Details |
|---|---|
Legal Framework | No dedicated export incentive law; governed only by procedures |
Oversight | Lack of parliamentary monitoring of distribution and rate adjustments |
Incentive Rate Volatility | Fluctuating from 1% to 8% without economic justification |
Double Subsidies | Same firms receiving tax exemptions and cash support |
Transparency | Delays, non-uniform processing, and lack of clarity in recipient selection |
Targeting | Weak identification of high-potential export goods |
6. Recommendations from Auditor General
Enact a Dedicated Export Incentive Act: This law should outline eligibility, incentive ceilings, monitoring procedures, and appeal mechanisms.
Fix and Rationalize Incentive Rates: Base rates on cost-benefit analysis and performance benchmarks.
Avoid Overlapping Benefits: Establish a coordinated framework to prevent double subsidies.
Enhance Monitoring & Auditing: Use real-time digital platforms and third-party audits.
Prioritize Competitive Sectors: Government should back only those products that have real potential in international markets.
7. Way Forward: Strategic Overhaul Needed
Nepal’s export competitiveness needs more than just cash. The government should:
Invest in infrastructure, quality assurance, logistics, and international marketing.
Partner closely with the private sector and trade associations to identify market trends.
Shift focus from reactive, politically-driven handouts to a targeted and performance-linked support system.
The cash incentive program—though well-intentioned—suffers from legal loopholes, poor targeting, and transparency issues. As the Auditor General rightly observes, incentives backed by vague procedures and unchecked disbursements risk turning into rent-seeking schemes.
To genuinely support export-led growth, Nepal must institutionalize its policy through legislation, streamline oversight, and tie support to results, not relationships.
Without this shift, cash incentives will remain unsustainable giveaways, not catalysts for transformation in Nepal’s foreign trade landscape.
