Nepal’s overdependence on imports has led to a swelling of its balance of payment deficit and rapid depletion of foreign exchange reserves.

Imports constitute nearly 90 percent of the country’s total international trade, and with Nepal lacking export materials, the balance of payment gap has been huge. Since export earnings are limited, the country largely relies on inflows of remittances sent by the migrant workers to fill the gap of foreign exchange requirements to sustain rising imports.

But the situation could change in the near future.

The country is set to have a promising export item—electricity.

In November last year, the Nepal Electricity Authority (NEA) started exporting its surplus power to India's energy exchange market. Nepal earned around Rs180 million by selling electricity generated from two hydropower projects—the 24MW Trishuli Hydropower Project and the 15MW Devighat Hydropower Project—for over a month, according to the NEA.

From Wednesday midnight, the NEA started exporting surplus energy to India.

“We started selling 37.7MW electricity to Indian buyers from 12.15am on Thursday,” said Suresh Bhattarai, spokesperson for the Nepal Electricity Authority. “We have already sent a proposal to India Energy Exchange (IEX) for selling equivalent power on Friday also.”

In April this year, two important developments took place between Nepal and India which paved the way for Nepal to gain wider market access to India’s vast energy market and potentially certain parts of the entire South Asian region.

Prime Minister Sher Bahadur Deuba and his Indian counterpart Narendra Modi agreed on the Joint Vision Statement on Power Sector Cooperation which talks about strengthening cooperation on joint development of power generation projects in Nepal, and development of cross-border transmission infrastructure and bi-directional power trade with appropriate access to electricity markets in both countries based on mutual benefits.

The two sides also agreed to expand cooperation in the power sector to include their partner countries under the Bangladesh, Bhutan, India and Nepal (BBIN) framework, subject to mutually agreed upon terms and conditions between all involved parties.

On April 6, India allowed the NEA to sell additional 325MW of electricity generated from four hydel projects—Kali Gandaki (144MW), Middle Marsyangdi (70MW), and Marsyangdi (69MW)—all developed by the NEA, and Likhu 4 Hydropower Project (52.4MW) developed by the private sector.

With this, during the upcoming monsoon season, Nepal will be able to export 364MW of electricity, according to the power monopoly.

“Based on existing agreements with Indian authorities, we can sell electricity worth around Rs12–13 billion in the upcoming wet season,” said Kulman Ghising, the NEA managing director. “It will help the country earn foreign exchange.”

He believes the NEA could export more power in the wet season as more power projects are awaiting trade approval from the Indian government.

The export of electricity is becoming a real option at a time when the country is facing a balance of payments deficit of Rs.268.26 billion in the first three quarters of this fiscal against a surplus of Rs.42.54 billion in the same period of the previous year, according to the Nepal Rastra Bank. Balance of payment is the difference in total value between payments coming into and going out of the country over a period.

The gross foreign exchange reserves decreased by 18.2 percent to $9.61 billion in mid-April 2022 from $11.75 billion in mid-July 2021.

Ghising said there will be an energy surplus of 400-500MW in the upcoming monsoon and the power must be exported to save it from being wasted. The NEA has already invited bids from Indian companies to sell 200MW under long-term power purchase deal. It plans to export additional power through India’s power exchange market.

Amid a widening trade deficit, the government through the budget for next fiscal year 2022-23 has adopted a policy of maintaining trade balance in the next five years.

Besides import substitution through wider use of electricity in the country, the budget says that the country would also export surplus energy through bilateral and multilateral deals.

“Electricity can become an important revenue earning export item for the country as the market for Nepal’s electricity is just opening up,” said Ghising.

For electricity to become a tool to offset trade deficit, however, will take long.

Since most of Nepal's power projects are run-of-river type, during the dry season, it falls short of electricity and it has to import energy from India.

In the last fiscal year 2020-21, Nepal imported electricity worth Rs22.48 billion, according to the NEA.

Nepal’s trade deficit with India stands at Rs814.1 billion and overall trade deficit stands at Rs1,306 billion in the first nine months of this fiscal year, according to the Trade and Export Promotion Centre (TEPC). Nepal’s overall exports stood at a paltry Rs160.57 billion during the same period.

“With exports, we can at least make up for the expenses incurred in importing electricity,” said Ram Prasad Dhital, former member of the Electricity Regulatory Commission which is responsible for fixing electricity tariff.

Experts say offsetting the trade deficit by exporting electricity is not possible in the short term, hence Nepal must continue to focus on manufacturing competitive products which it can export.

“Immediately, there is no potential of reducing the massive trade deficit by exporting electricity, but it can happen in the long run,” said Posh Raj Pandey, executive chairperson of South Asia Watch on Trade, Economics and Environment (SAWTEE), a South Asian think tank headquartered in Kathmandu. “But we should not worry about the trade deficit if the recent vision statement on power cooperation leads to a massive increase in Indian investments in Nepal’s power sector.”

According to Pandey, the vision statement has envisioned developing an integrated market at sub-regional level involving Bangladesh, Bhutan, India and Nepal (BBIN), which may help attract more investment in the power sector.

Stakeholders say with surplus energy, Nepal stands a chance of saving its foreign exchange reserves.

“With widespread adoption of electric vehicles and electric stoves, we can reduce the import of fossil fuels, which are the largest import items on which Nepal spends a huge amount of money,” said Ashish Garg, vice-president of the Independent Power Producers’ Association of Nepal (IPPAN), a grouping of the private sector power developers.

Nepal imported petroleum products worth Rs218.14 billion during the first nine months of the current fiscal year, according to the TEPC. Second, third, fourth and fifth largest import items include iron and steel; machinery parts; transport vehicles and their parts; and cereals, respectively.

“There is no other product in the country that can contribute as effectively as electricity to foreign exchange earnings,” said Garg.

Although the policy has been introduced to promote the use of electric goods and electric vehicles, no drastic measure towards that end has been taken yet. In 2014, the government introduced the Environment-friendly Vehicle and Transport Policy aimed at increasing the share of electric vehicles up to 20 percent by 2020. But the target could not be met.

Now the NEA has started work to set up charging stations for electric vehicles. The government in the budget for next fiscal year presented on Sunday said the NEA would run charging stations.

There were no concrete measures in place to make people switch to electric cooking. But in the new budget, the government has announced a ‘Let’s give up Liquified Petroleum Gas and use electricity’ campaign to promote the use of bio-gas, electric stove and improved stove. The government will provide such stoves to 100,000 households for free, according to the budget.

Nepalis still prefer cooking gas to electricity because of outages and power tripping.

“We need to make electricity available in the areas where fuel and cooking gas are mostly used,” said Dhital.

Former commerce secretary Purushottam Ojha said that Nepal should prioritise using electricity for industrialisation of the country.

“Obviously, power exports will help minimise the trade deficit to some extent,” he said. “But our focus should be on exporting manufactured goods. Electricity can play an important role in promoting both manufacturing and services industries.”