Nepal’s trade statistics for the last fiscal year have recently been released. They show that the country imported goods worth Rs2.1 trillion in 2025-26 and exported Rs315 billion. For every rupee we sold to the world, we bought Rs6.65 from it. We recorded a trade deficit with 134 of the 162 countries we traded with, notably with most countries poorer than us. The usual explanation for this is that manufacturing is expensive in Nepal. But is that the only reason? Or are there other factors that make us a consumption nation?

Let’s see the worsening trade direction. Imports grew by 16.2 percent last year while exports grew by 13.8 percent. The trade deficit widened by 16.6 percent to Rs1.78 trillion, which is the largest on record. This figure is a part of a longer trend. Manufacturing has dropped to 4.37 percent of GDP, less than half of its 1996 share and below the world average. Overall, the industry has fallen from 15 percent of GDP to 12.8 percent in a decade.

Nepali economy is already losing its factory base before it has properly built one, which, in economics, is known as premature deindustrialisation. Services now account for 62 percent of GDP, which looks modern on paper but cannot absorb our youth bulge, leading to rising youth out-migration.

The export figure is flattering. Nepal’s largest export item is processed soybean oil, at Rs129 billion or roughly 41 percent of everything we sold abroad. This oil is refined from crude we import from Argentina and Brazil and ship on to India under preferential tariffs. Argentina is now our third-largest import partner, selling us Rs116 billion of crude oil in a year when we sold goods worth Rs18,000 to the country. If we exclude this arbitrage-driven trading, our true exports are closer to Rs186 billion against Rs2 trillion of imports, a ratio above 10 to one. What remains is revealing: Cardamom, carpets, jute, fruit juice and chhurpi, now worth Rs4 billion a year in American pet shops. These small numbers demonstrate that when production relies on Nepali materials and skills, it can compete in the toughest markets worldwide.

Now let’s examine imports. For each item, ask yourself, does making this require anything Nepal lacks? Aside from fuel, machinery and smartphones, we don’t expect to drill oil or fabricate chips. But last year, we imported roughly Rs11 billion of soap, Rs21 billion of cosmetics, Rs18 billion of packaged foods, Rs18 billion of paper and Rs74 billion of plastic goods. None of this is technically demanding. The agricultural imports are even harder to justify: A country that calls itself agricultural imported nearly Rs60 billion of cereals, Rs38 billion of vegetables and Rs35 billion of fruit, part of an agro basket approaching Rs380 billion. Ironically, we imported Rs44 billion of apparel while exporting only Rs13 billion.

The import data reveals something that our private sector should pay attention to. Each of those numbers represents an existing market with proven demand and counted volumes. Rs74 billion of plastics is not a niche; it represents the scale needed for a serious manufacturing plant, available to any investor willing to start one. Yet few of our large businesses manufacture goods; most import, distribute and take a margin. Policy support follows production, not the other way around. If Nepali capital begins by investing in the goods we already buy in billions, the state will have every reason to protect that investment and industries will gain the standing to demand it. Customs data shows demand and scale, but is there a willingness to produce?

Remittances have reached around Rs1.7 trillion a year, amounting to roughly a quarter of GDP. A young man leaves because there are no factory jobs, earns wages abroad and sends them home; the family spends that money on imported goods; the imports cross the border, where the government taxes them; the taxes pay the officials who discuss industrialisation. The reason capital doesn’t break this cycle is that we have made trading the logical choice. An importer can turn capital over within weeks at low risk. A manufacturer must find industrial land, which can take years, borrow at interest rates of 9 to 12 percent, train workers and wait two or three years to break even, all while competing with imported goods already on the shelves.

Our banking data confirm the trend: Trading companies command a larger share of bank credit than the combined manufacturing and processing industries. The government also has a stake in this. Just over Rs1 trillion of government revenue was collected at the border on imports last year, in the form of duties, VAT and excise, close to half of all treasury receipts. A government that funds its salaries through import volumes has a vested interest in keeping them high. When import substitution and payroll needs pull in opposite directions, payroll typically wins.

Beneath these incentives lies a straightforward problem—scale. A factory’s cost per unit decreases as it produces more. Our firms are small, which makes their goods expensive. That is what expensive really means in this context, and we have faced the consequences of overlooking this before. Our garment industry, once the top export earner at about Rs12 billion a year, had a decade’s warning that quota protection would end in 2005. Rather than merging into bigger plants, firms stayed small and re-stamped imported goods for quick margins. When the quotas went, so did the industry.

Cement shows the opposite. Two decades ago, we imported 90 percent of our cement; today we make our own, with turnover near Rs150 billion and exports to India. Everything lined up: limestone in our hills, a product too heavy to import cheaply, demand large enough for scale, foreign partners who financed large plants and state help through export subsidies and cheaper power. Cement succeeded despite policy but because policy, for once, supported what we could naturally do well.

The goal is to reduce production costs and make the process reliable—what one might call policy bullet-proofing. Make industrial land available without years of limbo. Price surplus electricity for industry at predictable tariffs, not just as an export. Clear VAT refunds so working capital stops dying in queues. Take agro-processing off the foreign-investment negative list, where our own law bars the capital our food bill begs for. Give the SEZ regime a workable export threshold and harmonised rules. Keep raw-material duties a tier below finished-goods duties, the one sound principle the last budget preserved and offer infant industries support that is time-bound and tied to performance. Above all, maintain stable policies long enough for a three-year investment to outlast the government that approved it. Stability is the most cost-effective support a developing country can provide.

Is manufacturing expensive in Nepal? It is expensive to manufacture poorly, in small batches, on land that took years to secure, under rules that change every year. It is not inherently expensive to manufacture well. However, our government lacks the willingness to earn revenue outside of border taxes, and our private sector is hesitant to build what it currently imports.