Nepal’s trade deficit has been widening in recent years, with remittance-backed consumption dictating an increase in imports. While the growth in exports of niche products such as handmade garments, carpets and dogchew have grown and the country seems to have gotten favourable US tariffs compared to our neighbours, exporters still seem to struggle to gain foreign markets for their products. In a conversation with the Post’s Biken K Dawadi, economist Astha Bhatta, Program Specialist (Economics) at the Institute for Integrated Development Studies (IIDS), discusses Nepali trade and a host of related issues.

Nepal’s trade deficit has been widening for years, with overdependence on imports, mostly on India, but also China. Is this trend sustainable, or are we headed toward a crisis?

The high dependence on our neighbours has adverse effects on our economic independence. Even in a family setting, an individual without financial independence is influenced by other members during their decision-making. The dependency on our neighbours restricts our bargaining power during trade negotiations. During the 2015 blockade imposed by India, we saw how our neighbours can use economic coercion.

Whether to label the situation as a crisis is a subjective view. One key factor contributing to our widening deficit is our inattention to developing productive capacity internally. On top of that, the deficit is driven by remittances. In our case, our imports are up to seven times larger than our exports, which makes the trend unsustainable in the absence of remittances.

Are remittances masking deeper structural weaknesses in our trade system?

The main question here is: Who is sending the remittance? The hordes of youth departing from Nepal, who are seemingly driving the remittance, also affect our productive capacity. When we don’t have people of productive ages in the country, what does that mean for the economy?

We seem to be contracting the Dutch disease, whereby we are not investing domestically in productive sectors, but using remittance to sustain our consumption. Rather than calling it a crisis, we need to reflect on how this process is not helping us in our growth and development. It has been a way of consuming and surviving without investing in job creation, export capacity building, and productive capacity and capital formation.

Why have sectors like tea, coffee, and handicrafts failed to scale up despite their niche value?

We need to gain a proper understanding of niche value in exports to explain this trend. We want to export niche products while we also want the economy as a whole to grow at scale. These two are contradictory goals. Niche products are not used by everyone, but rather by a certain special segment of consumers. We should not expect to scale up to mass production of these products, as they are high-value products that are optimally produced in low quantities.

Even when there are untapped markets for these products, the absence of a direct market hinders the drive to scale up production and export. As a landlocked country, approximately 98 percent of our exports pass through India, resulting in logistical costs and transit delays. Niche sectors are not meant for economies of scale. If we want to export on a larger scale, our focus needs to shift to exports in the service sector, overcoming transit challenges.

The Trump administration has placed lower tariffs on Nepali products than it has on products from our neighbouring countries. How can we capitalise on this to promote exports of carpets, handmade garments and dogchew (chhurpi), all of which have seen positive growth in recent years?

The comparatively lower tariffs imposed on Nepal by the US government affects us only if we compete with our neighbours in the same export goods. A preferential tariff would shift the supply to us, but without productive capacity and given an intersection of export products, the supposedly preferential tariffs have no real effect on trade. Some of these trade polices are limited to paper. For example, China has listed approximately 8000 products as duty-free and quota-free for import from Nepal, but only 18 of them are currently being exported to China.

Has Nepal benefited from SAFTA and other regional trade agreements, or are they just symbolic?

These international agreements have been made envisioning a fair world. We are all smart enough to realise that the countries with higher economic power have the leverage in trade. In 2024, the US had a trade deficit of $918.4 billion. But they have economic leverage backed by production capacity. Regional free trade agreements like SAFTA do promote values of fair trade, but we cannot exploit them as we do not have comparative advantages in production. Agreements as such have only promoted tariff arbitrage, for example, in increasing exports of palm oil from Nepal. Since India has imposed higher tariffs on the import of such products, Indian importers have used the free trade agreement as a loophole by importing such products through a transit in Nepal, thereby avoiding the hefty tariff.

How will Nepal’s graduation from LDC in 2026 affect trade concessions and competitiveness?

As an LDC, we had certain privileges in trade, in tariffs, quotas and other trade barriers. We are graduating to a middle-income country, but we still want the privileges of an LDC. Even when we are an LDC, we are not able to capitalise on the privileges. Now, with the graduation, our export prices are forecast to be steeper. This will affect our competitive edge in exports, hurting the volume of exports. But we cannot always play the role of an economically vulnerable LDC. When we put on the shoes of a middle-income country, we need to act accordingly and improve our production capabilities.

Does the fixed peg with the Indian rupee help or hurt Nepal’s trade competitiveness?

Currently, public opinion is divided on the Nepali rupee’s fixed peg to the Indian rupee. There are more nuances to the peg than simplistic conclusions. The peg provides us with economic credibility and stability on the global stage. Rationally, the 1:1.6 exchange rate does not reflect the current power of our currency. If we were to revise the agreement, the Nepali rupee would be devalued, resulting in a higher exchange rate.

One Indian rupee would amount to more than 1.6 Nepali rupees, given the economic growth of our southern neighbour. This would mean that it would be more expensive for us to import goods. Approximately 60 percent of our imports are sourced from India. Mainly, these imports will cost more, driving down the import quantity.

In terms of export, such a currency devaluation would theoretically increase our exports by driving down the export prices, but only when we have a strong export base. For example, China has devalued its currency to export goods at cheaper prices since it has a strong export base. In the absence of an export base, as in the case of Nepal, we will not see a positive change in exports.

Could a better use of dry ports and cross-border connectivity transform our trade outlook?

Dry ports are not a solution to our existing trade problems. How would dry ports solve our problem of transit? It is not so clear. Will it decrease the time for documentation or the cost of imports? Have we planned the realistic outcomes of such infrastructures, or will it be like the Pokhara International Airport? Instead of just hoping such infrastructure will help our trade, we must first study and analyse the effects of such construction. Our special economic zones are not utilised, and the airports are not operational. The dry ports might end up as a failed effort without proper studies.

Is Nepal ready to exploit opportunities in digital trade and IT services exports?

We need to be a part of the global value chain. To be a part of the growing trend of digital trade and IT service exports, we should focus on cognitive capital building. We cannot compete against our neighbours in manufacturing. But when it comes to cognitive capital, like the one needed to sustain the digital trade and IT service exports, we can capitalise on the absence of transit.

However, we are not adequately prepared to go up the value chain. We have not prioritised our resources in building a way to sustain the new form of trade. All of these trades are dependent on the internet. And our internet connection is totally dependent on our southern neighbour. Say, the supplier cuts off the connection for an hour, what kind of signal would it send to the world about our credibility and seriousness in the sector? We have problems with our cybersecurity and data security. What matters then is how aligned our data rules are to global practices like the European Union’s General Data Protection Regulation. We need to signal and establish the credibility that we are the right source for such services. The government and the private sector need to work together to invest strategically to establish that credibility.