Nepal’s rising trade deficit: Why it happens every year and how it can be narrowed

KATHMANDU: Nepal’s trade deficit has remained persistently high for years. The data from recent fiscal years clearly shows that imports have consistently exceeded exports by a wide margin. From FY 2017/18 to FY 2024/25, Nepal’s trade deficit has hovered between NPR 1,100 billion and over NPR 1,700 billion annually. This is not a temporary problem. It is structural and long-standing.

The core reason is simple. Nepal imports far more than it produces and exports. The country depends heavily on foreign goods for daily consumption, infrastructure, energy, and industrial inputs. At the same time, Nepal’s export base remains narrow, low-value, and vulnerable to external shocks.

One major driver of the trade deficit is Nepal’s import-dependent consumption pattern. Petroleum products, vehicles, machinery, electronics, medicines, food items, and construction materials dominate the import bill. Fuel alone accounts for a significant share of total imports every year. As urbanization increases and infrastructure projects expand, demand for imported cement, iron rods, heavy equipment, and vehicles rises further.

Another key factor is weak industrial production. Nepal’s manufacturing sector remains small and inefficient. Power shortages in the past, high logistics costs, limited access to finance, and policy instability discouraged industrial growth for decades. As a result, Nepal imports goods that could be produced domestically, such as processed food, garments, basic construction materials, and household items.

Exports, on the other hand, remain limited in both volume and value. Nepal mainly exports low-value products such as carpets, garments, tea, coffee, cardamom, herbs, and some agricultural goods. These products face strong competition in global markets. Their prices fluctuate. Non-tariff barriers, quality standards, and logistics challenges further reduce competitiveness. As a result, export earnings fail to grow at the pace needed to offset imports.

Geography also plays a role. Being landlocked increases transportation costs. Nepal relies heavily on Indian ports and transit routes. This raises the cost of both imports and exports. While imports continue because demand is inelastic, exports suffer due to reduced price competitiveness.

Remittance inflows have also indirectly widened the trade deficit. Large inflows of remittance increase household purchasing power. This boosts consumption of imported goods. While remittance supports foreign exchange reserves, it also fuels import growth without directly strengthening export capacity.

Policy inconsistency is another issue. Frequent changes in tax rates, trade policies, and industrial incentives create uncertainty. Exporters struggle to plan long-term investments. At the same time, import substitution policies are often announced but poorly implemented.

The trade deficit narrowed slightly in some years, such as FY 2019/20 and FY 2022/23. This was not due to export growth. It was mainly due to reduced imports during economic slowdowns, the pandemic, or tight monetary policies. Once economic activity picked up, the deficit widened again.

Narrowing Nepal’s trade deficit requires structural changes, not temporary controls.

First, domestic production must increase. Nepal needs to prioritize sectors where it has clear potential. Agro-processing, hydropower-based industries, tourism-linked products, and light manufacturing should be strengthened. Producing more food domestically can immediately reduce import bills.

Second, exports must move up the value chain. Instead of exporting raw or semi-processed goods, Nepal should focus on branding, quality improvement, and processing. For example, exporting finished tea products instead of bulk tea can increase earnings without increasing volume.

Third, energy surplus should be used productively. Nepal now has growing electricity generation. Reliable and cheap power can support industries such as cement, steel re-rolling, data centers, and electric transport manufacturing.

Fourth, logistics and trade facilitation must improve. Faster customs clearance, better roads, dry ports, and digital trade systems can reduce export costs and delays.

Fifth, import substitution should be practical, not protectionist. Banning imports does not work. Encouraging local production through stable policies, financing, skills development, and infrastructure does.

Finally, remittance should be linked to production. Incentives can encourage migrant workers and their families to invest in enterprises instead of consumption alone.

Nepal’s trade deficit did not emerge overnight. It will not disappear quickly. But with consistent policy, productive investment, and export-focused growth, the gap can be narrowed gradually and sustainably.