Current Status, Problems and Prospects of Foreign Trade in Nepal

GP Chudal

Foreign trade is an important aspect of Nepal’s economy. Nepal is an inland country and heavily relies on foreign trade for its economic development. The country’s exports and imports largely depend on its neighbors, India and China. This blog post will look at the current status of foreign trade in Nepal, Problems of Foreign Trade in Nepal, and Prospects of Foreign Trade in Nepal.


Current Status of Foreign Trade in Nepal

Export Scenario

According to the Nepal Rastra Bank (NRB) Annual Report 2020/21, Nepal’s total export in the fiscal year 2020/21 was NPR 124.68 billion, an increase of 1.9% compared to the previous year. However, this growth rate is much lower than the previous year’s growth rate of 26.5%. The table below shows Nepal’s exports by commodity group for the fiscal year 2020/21.

Commodity GroupAmount in NPR Billion
Textile and textile products37.02
Iron and steel products8.57
Leather and leather products7.82

As we can see from the table, textile and textile products were the largest exported commodity group, followed by handicrafts and tea.

Import Scenario

In the fiscal year 2020/21, Nepal’s total import was NPR 1,442.67 billion, a decrease of 7.4% compared to the previous year. The table below shows Nepal’s imports by commodity group for the fiscal year 2020/21.

Commodity GroupAmount in NPR Billion
Petroleum products214.61
Iron and steel products141.13
Electrical equipment126.19
Transport equipment115.99
Food grains109.80

As we can see from the table, petroleum products were the largest imported commodity group, followed by iron and steel products and electrical equipment.

Trade Deficit

Nepal’s trade deficit is widening every year. In the fiscal year 2020/21, Nepal’s trade deficit was NPR 1,317.99 billion, which is a decrease of 6.5% compared to the previous year. However, this is still a large deficit for a small economy like Nepal.

The table below shows Nepal’s trade balance for the fiscal year 2020/21.

ItemAmount in NPR Billion
Total export124.68
Total import1,442.67
Trade deficit1,317.99

Problems of Foreign Trade in Nepal

  1. Dependence on Neighboring Countries: Nepal’s foreign trade relies heavily on its neighbors, India and China, which account for over 70% of Nepal’s total foreign trade. This dependence on neighboring countries makes Nepal vulnerable to any political or economic changes in these countries, which can have a significant impact on Nepal’s foreign trade.
  2. Lack of Infrastructure: Nepal’s inadequate infrastructure, including roads, ports, and airports, is a major hindrance to its foreign trade. The lack of proper infrastructure increases transportation costs and time, which reduces Nepal’s competitiveness in the international market.
  3. Trade Imbalance: Nepal’s foreign trade balance is heavily tilted towards imports, which has led to a significant trade deficit. The country’s imports far exceed its exports, which is a cause for concern. This trade imbalance is mainly due to Nepal’s weak manufacturing base and limited export capacity.
  4. Limited Product Diversification: Nepal’s exports are limited to a few commodity groups, such as textiles, handicrafts, and tea. The lack of product diversification reduces Nepal’s competitiveness in the international market and limits its export potential.
  5. Political Instability: Political instability is a significant challenge to Nepal’s foreign trade. Nepal has witnessed frequent government changes, resulting in policy inconsistencies and bureaucratic hurdles that hinder foreign trade.
  6. Limited Access to Finance: Nepal’s private sector faces difficulties accessing finance, which is essential for foreign trade. The lack of access to finance limits the private sector’s ability to invest in trade-related activities, such as infrastructure development and technology upgrades.
  7. Non-Tariff Barriers: Nepal’s foreign trade is also affected by non-tariff barriers, such as customs procedures, technical regulations, and standards. These non-tariff barriers make it difficult for Nepali exporters to access foreign markets and reduce their competitiveness.

Prospects of Foreign Trade in Nepal

  1. Trade Agreements: Nepal has signed several trade agreements with its neighboring countries, such as India and China, to increase its access to foreign markets. These trade agreements can increase Nepal’s exports and reduce its dependence on neighboring countries.
  2. Geographic Advantage: Nepal’s geographic location between the world’s fastest-growing economies, India and China, gives it a strategic advantage in foreign trade. Nepal can be a gateway for Indian and Chinese goods to other South Asian countries and vice versa.
  3. Economic Growth: Nepal’s economy has been growing steadily over the years, which has led to an increase in domestic demand for goods and services. This domestic demand can be leveraged to increase exports and promote foreign trade.
  4. Tourism: Tourism is a significant contributor to Nepal’s economy, and the country has enormous potential to increase its exports of tourism-related goods and services. This can help to diversify Nepal’s exports and increase its competitiveness in the international market.
  5. Investment in Infrastructure: Nepal has identified infrastructure development, such as roads, ports, and airports, as a key priority for the country’s economic development. Improved infrastructure can reduce transportation costs and time, increasing Nepal’s competitiveness in the international market.
  6. Private Sector Investment: The government of Nepal has been promoting private sector investment in foreign trade-related activities, such as manufacturing and export-oriented industries. Private sector investment can help increase Nepal’s export capacity and reduce import dependence.
  7. Preferential Trade Treaties: Nepal has signed several preferential trade treaties with countries such as the United States and the European Union, which offer duty-free and quota-free access to Nepali goods. These preferential trade treaties can increase Nepal’s exports and help diversify its export base.

Existing Nepal-India Trade Treaty

The Nepal-India Trade Treaty, also known as the Treaty of Trade between the Government of Nepal and the Government of India, was signed in 2009. The treaty governs the bilateral trade relationship between Nepal and India and provides a framework for promoting economic cooperation between the two countries.

Under the treaty, Nepal and India agreed to grant each other the most favored nation (MFN) status in trade. This means that each country will treat the other’s exports as favorably as it treats the exports of any other country. The treaty also provides for establishing a Joint Committee on Trade to monitor the agreement’s implementation and resolve any disputes that may arise.

The Nepal-India Trade Treaty has played a significant role in promoting trade between the two countries. In the fiscal year 2020-21, Nepal’s total trade with India amounted to USD 4.53 billion, accounting for 65.8% of Nepal’s total trade. Nepal’s exports to India amounted to USD 368.7 million, while its imports from India were USD 4.16 billion.

The following table provides a breakdown of Nepal’s trade with India for the fiscal year 2020-21:

SectorsExport (USD million)Import (USD million)Total Trade (USD million)
Minerals and Mining0.7126.9127.6

Source: Nepal Rastra Bank

The manufacturing sector dominates Nepal’s imports from India, accounting for 46% of total imports. Nepal’s main imports from India include petroleum products, vehicles, raw materials for manufacturing, and pharmaceuticals. On the other hand, Nepal’s main exports to India include agricultural products, textiles and clothing, and handicrafts.

While the Nepal-India Trade Treaty has successfully promoted bilateral trade, it has faced criticism for being lopsided in favor of India. Nepali businesses have complained about non-tariff barriers to trade, such as lengthy customs procedures and restrictions on trade in services. Additionally, Nepali businesses have called for greater access to the Indian market, especially in the agricultural and manufacturing sectors.

Nepal and India have a long history of commercial and trade exchanges, with India being Nepal’s largest trade partner. The bilateral trade volume between the two countries exceeded NPR 976.78 billion in the last 11 months of the fiscal year 2020-21. Soybean oil, cardamom, woolen carpets, and polyester yarn are among Nepal’s top exports to India, while major imports from India include petroleum products, transportation equipment and parts, and crude soya bean oil.

The bilateral trade and transit mechanisms are provided by the Nepal-India Treaty of Trade (2009), the Agreement of Cooperation to Control Unauthorized Trade (2009), the Transit Treaty (1999), and the Rail Services Agreement (2004).

Except for a short negative list, duty-free access into the Indian market for all Nepali-manufactured goods is provided non-reciprocal under the Treaty of Trade. To enjoy duty-free market access, export items must meet the criteria of 30% domestic value addition and a change in HS classification at the four-digit level in the course processing in Nepal.

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