Nepal’s Foreign Trade Soars in FY 2081/82: Exports to India Surge by 82.5%, Trade Deficit Widens

Nepal Rastra Bank (NRB) has released its economic data for the first eight months of fiscal year 2081/82 (2024/25), showcasing a remarkable 57.2% surge in total exports, driven primarily by an 82.5% increase in exports to India. Total exports reached Rs. 158,172.4 million, with India accounting for 79.0% of the export share. However, imports grew by 11.2% to Rs. 1,145,566.2 million, leading to a 6.2% widening of the trade deficit to Rs. 987,393.8 million. Despite the deficit, Nepal’s external sector remains robust, with a balance of payments surplus of NPR 310.37 billion, supported by a 9.4% rise in remittance inflows and foreign exchange reserves of USD 17.27 billion. This trade performance, combined with earlier data on inflation, regional CPI, and wage growth, highlights both opportunities and challenges for Nepal’s economic trajectory.

Foreign Trade Performance: A Detailed Breakdown

The Direction of Foreign Trade data tracks Nepal’s trade with India, China, and Other Countries over three periods: 2022/23, 2023/24, and the first eight months of 2024/25. Values are in Rs. million, with percentage changes reflecting year-on-year growth for the eight-month periods.

• Total Exports: Exports grew by 57.2% in 2024/25 (eight months) to Rs. 158,172.4 million, up from Rs. 100,617.4 million in 2023/24. This follows a -4.0% decline from 2022/23 (Rs. 104,796.2 million) to 2023/24.

  • To India: Exports to India surged by 82.5% to Rs. 125,008.8 million in 2024/25, from Rs. 68,512.7 million in 2023/24, reversing a -7.7% decline from 2022/23 (Rs. 74,218.7 million). India’s share in total exports rose to 79.0%, up from 68.1% in 2023/24, reflecting Nepal’s increasing reliance on the Indian market.

  • To China: Exports to China increased by 8.8% to Rs. 2,121.7 million in 2024/25, following a dramatic 275.5% growth in 2023/24 (Rs. 1,950.1 million) from 2022/23 (Rs. 519.4 million). Despite the growth, China’s share remains small at 1.3%.

  • To Other Countries: Exports to Other Countries grew modestly by 2.9% to Rs. 31,041.9 million in 2024/25, from Rs. 30,154.6 million in 2023/24, which was a 0.3% increase from 2022/23 (Rs. 30,058.2 million). Their share in total exports dropped to 19.6%, down from 30.0% in 2023/24.

• Total Imports: Imports rose by 11.2% in 2024/25 to Rs. 1,145,566.2 million, up from Rs. 1,030,227.2 million in 2023/24, which had seen a -2.7% decline from 2022/23 (Rs. 1,058,385.5 million).

  • From India: Imports from India increased by 7.9% to Rs. 688,685.0 million in 2024/25, from Rs. 638,177.7 million in 2023/24, which was a -2.8% decrease from 2022/23 (Rs. 656,800.4 million). India’s share in total imports fell slightly to 60.1% from 61.9%.

  • From China: Imports from China grew by 12.5% to Rs. 219,185.3 million in 2024/25, following a 33.7% increase in 2023/24 (Rs. 194,874.4 million) from 2022/23 (Rs. 145,785.9 million). China’s share in imports rose to 19.1%, up from 18.9%.

  • From Other Countries: Imports from Other Countries surged by 20.6% to Rs. 237,696.0 million in 2024/25, reversing a -22.9% decline in 2023/24 (Rs. 197,175.0 million) from 2022/23 (Rs. 255,799.3 million). Their share in imports increased to 20.7% from 19.1%.

• Trade Balance: The trade deficit widened by 6.2% to Rs. -987,393.8 million in 2024/25, from Rs. -929,605.3 million in 2023/24, which had improved by -2.5% from 2022/23 (Rs. -953,589.3 million).

  • With India: The deficit with India improved slightly by -1.1% to Rs. -563,676.1 million in 2024/25, from Rs. -569,665.0 million in 2023/24, which was a -2.2% improvement from 2022/23 (Rs. -582,581.7 million). India’s share in the trade deficit fell to 57.1% from 61.3%.

  • With China: The deficit with China worsened by 12.5% to Rs. -217,063.6 million in 2024/25, following a 32.8% increase in 2023/24 (Rs. -192,924.3 million) from 2022/23 (Rs. -145,266.4 million). China’s share in the deficit rose to 22.0%.

  • With Other Countries: The deficit with Other Countries increased by 23.7% to Rs. -206,654.1 million in 2024/25, reversing a -26.0% improvement in 2023/24 (Rs. -167,016.0 million) from 2022/23 (Rs. -225,741.2 million). Their share in the deficit rose to 20.9%.

• Export-to-Import Ratio: The ratio with India improved significantly to 13.8% in 2024/25, from 9.8% in 2023/24, due to the sharp export growth. The ratio with China remained low at 1.0%, and with Other Countries, it fell to 13.1% from 15.3%.

Broader Economic Context: External Stability and Inflation

The NRB’s economic report for FY 2081/82 provides a broader context for these trade trends. Total exports grew by 57.2%, aligning with the data, while imports increased by 11.2%, leading to a balance of payments surplus of NPR 310.37 billion. Foreign exchange reserves stood at USD 17.27 billion, offering a strong buffer against external shocks. Remittance inflows rose by 9.4% in Nepali rupees, supporting household consumption and likely contributing to the demand for imports.

Inflation, as reported earlier, was 3.75% in March 2024/25, with an average of 4.72% for the first eight months of 2024/25 (National CPI data). This inflationary pressure, combined with the 11.2% import growth, suggests that rising import costs may have contributed to price increases, particularly in non-food items, as seen in the regional CPI data (e.g., 6.03% non-food inflation in the Mountain region).

Regional Context from Previous Data

The Salary and Wage Index data showed significant wage growth in Sudurpashchim (7.59% year-on-year) and Madhesh (4.26%), which outpaced inflation, suggesting real income gains in these regions. These provinces, particularly Sudurpashchim, likely benefit from remittance inflows, which increased by 9.4%. This increased purchasing power may have driven demand for imported goods, as reflected in the 20.6% import growth from Other Countries and 12.5% from China, where consumer goods like electronics and textiles are sourced.

The regional CPI data highlighted higher inflation in remote areas like the Mountain region (4.77%), which overlaps with provinces like Sudurpashchim and Karnali. The 12.5% increase in imports from China, which includes goods like machinery and electronics, may have contributed to this non-food inflation, as these regions rely on imports due to limited local production.

Interpretation: Trade Dynamics and Economic Implications

The foreign trade data reveals several key trends and their implications for Nepal’s economy:

• Export Surge to India: The 82.5% growth in exports to India, which now constitute 79.0% of total exports, underscores Nepal’s heavy reliance on the Indian market. This growth aligns with the NRB’s reported 57.2% overall export increase and is likely driven by demand for agricultural products, carpets, and textiles, which are Nepal’s key exports to India. The improved export-to-import ratio with India (13.8%) reflects a strengthening trade position, though the trade deficit remains large at Rs. -563,676.1 million.

• Growing Trade with China: Exports to China grew by 8.8% in 2024/25, following a 275.5% surge in 2023/24, though the export volume remains small (Rs. 2,121.7 million). Imports from China, however, increased by 12.5% to Rs. 219,185.3 million, widening the trade deficit by 12.5%. China’s growing share in imports (19.1%) indicates Nepal’s increasing reliance on Chinese goods, such as electronics, machinery, and raw materials, which may contribute to non-food inflation in remote regions.

• Trade with Other Countries: The modest 2.9% export growth to Other Countries, coupled with a 20.6% import surge, worsened the trade deficit by 23.7%. The declining export share (19.6%) suggests challenges in diversifying export markets, possibly due to logistical constraints or lack of competitiveness in global markets beyond India.

• Trade Deficit Dynamics: Despite the export surge, the overall trade deficit widened by 6.2%, driven by the 11.2% import growth. The slight improvement in the deficit with India (-1.1%) is a positive sign, but the worsening deficits with China (12.5%) and Other Countries (23.7%) highlight the need for import substitution and export diversification.

• Impact on Inflation and Wages: The 11.2% import growth, particularly from China and Other Countries, likely contributed to inflationary pressures, as seen in the National CPI data (4.72% average for 2024/25). This aligns with the regional CPI’s high non-food inflation in remote areas, where imported goods dominate. The Salary and Wage Index showed that wage growth (2.85% nationally) lagged inflation, except in provinces like Sudurpashchim, where remittance-driven consumption may have increased demand for these imports.

• External Stability: The balance of payments surplus of NPR 310.37 billion, supported by remittance inflows (9.4% growth) and foreign exchange reserves (USD 17.27 billion), ensures Nepal’s external stability despite the trade deficit. However, the heavy reliance on remittances and exports to India poses risks if global economic conditions deteriorate.

Policy Recommendations

To leverage the export growth and address the trade deficit, the following measures are recommended:

1. Diversify Export Markets: The 79.0% export share to India highlights over-reliance. Nepal should explore markets in China and Other Countries by promoting high-value products like handicrafts, herbs, and processed foods, and addressing logistical barriers to improve the 2.9% export growth to Other Countries.

2. Promote Import Substitution: The 12.5% import growth from China and 20.6% from Other Countries suggests a need for domestic production of goods like electronics and machinery. Incentives for local manufacturing and renewable energy projects can reduce import dependency and mitigate non-food inflation.

3. Enhance Trade Infrastructure: The export surge to India and growing imports from China highlight the need for improved trade infrastructure, such as better roads and customs facilities at border points, to reduce costs and boost competitiveness in global markets.

4. Monitor Inflation Impact: With imports contributing to inflation (4.72% average), the NRB should monitor the pass-through effects on consumer prices, particularly in remote regions, and ensure wage growth (e.g., 2.85% nationally) aligns with inflation to protect real incomes.

Nepal’s foreign trade in FY 2081/82 reflects a dynamic economic landscape, with an impressive 82.5% export surge to India driving a 57.2% overall export growth. However, the 11.2% import increase has widened the trade deficit by 6.2%, posing challenges for long-term sustainability. The growing trade with China and Other Countries, while diversifying import sources, underscores the need for export market diversification and import substitution. Supported by a robust balance of payments surplus and remittance inflows, Nepal has a strong foundation to address these challenges, but strategic policies will be crucial to ensure balanced trade growth and economic stability across all regions.