Nepal’s trade dynamics in focus: Persistent deficit, Structural challenges, and pathways for export growth

KATHMANDU: Nepal’s import-export landscape continues to be a defining feature of its macroeconomic profile, marked by a persistent trade deficit, a concentrated import base, and traditional export segments struggling to compete on quality and scale. As policymakers, private sector actors, and international partners analyze “Day 6” developments in Nepal’s economy, trade performance remains central to understanding growth prospects, external sustainability, and structural transformation.

Trade Balance: Persistent Deficit Amid Structural Constraints

Nepal’s merchandise trade is characterized by a substantial deficit, with imports consistently outstripping exports by a wide margin. Latest Balance of Payments data indicate that Nepal’s trade deficit remains a drag on external accounts, driven by high dependency on imported goods for energy, capital equipment, and intermediate inputs. The deficit has narrowed marginally in recent fiscal periods, but remains historically large as a share of GDP.

Key import categories include mineral fuels and oils, iron and steel products, machinery and mechanical appliances, electronics and electrical equipment, vehicles and automotive parts — reflecting Nepal’s limited domestic production capacity in both industrial and energy sectors. India and China rank as Nepal’s largest merchandise import partners, accounting collectively for more than two-thirds of total imports; this geographic concentration underscores logistical and policy implications for trade diversification and supply chain resilience.

Major Import Commodities

• Fuels and oils (energy imports)
• Iron and steel (raw and semi-finished)
• Machinery and equipment (including electrical)
• Electronics and telecommunication devices
• Vehicles and parts

These imports are critical for domestic consumption, infrastructure development, and production activities. However, the reliance on imported energy and capital goods suppresses foreign exchange reserves and elevates vulnerability to external price shocks, particularly in global oil markets.

Export Profile: Traditional Goods, Limited Diversification

Nepal’s export basket remains narrow and heavily weighted toward traditional products. Carpets and rugs, pashmina and woolen textiles, handicrafts, spices, and essential goods like cardamom and herbs comprise the bulk of merchandise exports. Processed agricultural products, particularly tea and coffee, also contribute, but at significantly lower values compared to imports.

Primary export destinations include India, the United States, and countries within the European Union — reflecting historical trade linkages and established market preferences. Despite this footprint, export volumes and values have struggled to sustain growth due to competitive pressures, quality compliance challenges, and supply chain inefficiencies.

Key Export Commodities

• Handmade carpets and rugs
• Textiles and ready-made garments
• Spices (cardamom, ginger)
• Pashmina and wool products
• Herbal products and essential oils

Exporters have repeatedly highlighted quality standards, production cost constraints, and limited access to working capital as barriers to expanding market share in high-value markets. Compliance with international labor standards and environmental sustainability certifications — increasingly required by Western markets — also presents additional costs for small and medium enterprises.

Policy Measures and Trade Trends

In Fiscal Year (FY) 2079/80 (2022/23), the Government of Nepal implemented a series of import restriction measures targeting non-essential imports. These restrictions were meant to conserve foreign exchange, support domestic industries, and reduce pressure on the trade deficit. Preliminary analysis suggests that these policies succeeded in reducing overall import volumes temporarily, and also saw a parallel contraction in export shipments in certain categories due to supply chain linkages.

While the import controls marginally narrowed the trade gap, economists warn of potential negative fallout if domestic industries are not concurrently equipped with competitiveness enhancements. Trade policy experts argue for a calibrated approach that balances import substitution with export promotion, avoiding protectionism that could isolate Nepalese producers from global value chains.

Services Trade: Tourism and Beyond

An important counterpoint to the merchandise trade deficit is the services trade, where Nepal has exhibited relative strengths. Tourism services revenues — including earnings from international travelers, mountaineering expeditions, trekking permits, and hotel services — have, at times, exceeded services imports, contributing positively to the services balance. According to Balance of Payments data, the services account often registers a surplus, largely driven by tourism and remittance-linked transport services.

Growth in Nepal’s IT and business process outsourcing sectors also holds promise for diversifying services exports. However, the scale remains modest relative to merchandise trade deficits and constrained by infrastructure, skills gaps, and digital connectivity challenges.

Drivers of Trade Imbalance

A combination of structural and cyclical factors underpins Nepal’s trade imbalance:

1. Energy Import Dependency: Nepal’s lack of domestic refining capacity and limited hydropower export capacity make it heavily reliant on imported petroleum products.
2. Industrial Base Limitations: The manufacturing sector remains small, with limited economies of scale and weak integration into regional production networks.
3. Export Competitiveness: Cost structures, quality assurance systems, and access to finance restrict the ability of Nepalese firms to scale exports.
4. Infrastructure Constraints: Transport bottlenecks, customs inefficiencies, and logistical costs along trade corridors with India and China elevate import costs and complicate export supply chains.

Private Sector and Trade Facilitation Efforts

Business associations, including the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), export councils, and sector-specific bodies have underscored the need for enhanced trade facilitation, improved logistics infrastructure, and targeted export incentives.

Recommended reforms include streamlined customs procedures, expansion of bonded warehouse facilities, adoption of digital trade documentation, and partnerships to develop export processing zones. Elevating product quality through standardization, supporting technology adoption, and facilitating enterprise access to international certifications are also prioritized within private sector advocacy.

International Engagement and Regional Opportunities

Nepal’s engagement in regional economic frameworks, including South Asian trade initiatives, and bilateral trade agreements with key partners, aims to reduce tariff and non-tariff barriers for Nepalese exports. Enhanced connectivity under South Asian transport and transit agreements could broaden export routes and diversify destination markets beyond the Indian subcontinent.

Trade promotion through participation in global trade fairs, buyer-seller meets, and targeted market access programs — particularly for niche products like organic spices and specialty handicrafts — is emerging as an actionable strategy for export growth.

Forward Outlook and Strategic Imperatives

Experts suggest that addressing Nepal’s trade deficit sustainably requires a multi-pronged strategy: expanding exportable capacity, modernizing industrial sectors, reducing energy import dependence through renewable energy scale-up, and deepening services exports beyond tourism.

In addition to domestic reforms, stronger integration with regional value chains and adherence to global standards can enhance Nepal’s competitiveness. Quality improvement, branding of Nepalese products in international markets, and targeted incentives for strategic sectors will be crucial to shifting the trade trajectory.

As Nepal navigates global economic volatility, including fluctuations in commodity prices and shifting demand patterns post-pandemic, a comprehensive trade strategy aligned with industrial policy is essential for resilient economic growth and external balance.