Why Nepal’s Trade Deficit Persists Despite Rising Exports

Published on September 24, 2025

Nepal’s external trade data from FY 2082/83 (2025/26) highlights a paradox: while exports have surged—nearly doubling by 95.7% in mid-August 2082/83 and growing by 81.8% in FY 2024/25—the country’s trade deficit remains deeply entrenched. This is because Nepal’s imports, though growing more modestly, still dwarf export earnings in absolute terms. For example, by mid-August 2082/83, imports reached Rs. 143 billion, while exports totaled only Rs. 23.9 billion, leaving a trade deficit of over Rs. 119 billion in just two months.

The structural reason for this imbalance lies in the composition of Nepal’s trade. Exports are concentrated in low-value-added goods such as carpets, garments, pashmina, and agro-based products, along with emerging contributions from hydropower. In contrast, imports are dominated by high-value items—petroleum products, machinery, vehicles, electronics, and industrial raw materials—necessary to sustain domestic consumption and production. This mismatch ensures that even rapid export growth cannot close the gap.

Another factor is dependency on remittance-driven demand. Strong remittance inflows, which reached Rs. 177 billion by mid-August 2082/83, fuel household consumption, much of which is met through imports rather than local production. While remittances improve the current account and foreign reserves, they indirectly widen the trade gap by sustaining demand for imported goods.

Infrastructure and productivity constraints also play a role. Nepal’s manufacturing base remains underdeveloped, Gross Fixed Capital Formation has declined to just 24.1% of GDP, and capital expenditure remains weak. Without a strong industrial backbone, Nepal struggles to substitute imports or expand high-value exports.

This is why, despite the positive momentum in exports, the trade deficit persists as a structural feature of Nepal’s economy. Policymakers face the challenge of diversifying exports into higher-value sectors such as hydropower, IT services, and processed agro-industries while simultaneously promoting import substitution in energy and manufacturing. Only then can Nepal move toward narrowing the trade gap meaningfully.

Policy Lessons from India: Can Nepal Control Inflation More Effectively?

India has kept inflation relatively moderate through strong agricultural systems, buffer stocks, and inflation-targeting policies, while Nepal has historically struggled with food-driven volatility. Nepal’s CPI fell below India’s in 2025/26 for the first time in four years, but to sustain this trend, Nepal must strengthen supply chains, adopt buffer policies, and set clearer inflation targets.

Inflation Convergence in South Asia: What Nepal-India CPI Data Reveals

Nepal and India’s inflation rates, once far apart, have gradually converged—Nepal’s CPI dropping from 7.74% in 2022/23 to 1.68% in 2025/26, while India’s remained steadier around 2–5%. For the first time in four years, Nepal’s inflation fell below India’s, highlighting both shared regional cycles and unique domestic vulnerabilities.

Nepal vs India: Monthly CPI Comparison and Regional Economic Impact

Nepal’s inflation fell to 1.68% in August 2025/26, below India’s 2.07%, reversing a four-year trend. While both economies share similar seasonal inflation cycles, Nepal’s sharper food-driven spikes contrast with India’s steadier, monsoon-driven patterns. Regionally, this convergence impacts household costs, trade competitiveness, and economic stability.

Inflation Gap Narrows: Nepal’s Deviation with India Falls to -0.39% in 2025/26

In August 2025/26, Nepal’s CPI stood at 1.68%, lower than India’s 2.07%, with the inflation deviation dropping to -0.39% for the first time in four years. While Nepal gained from falling food prices, India’s inflation stayed higher due to agricultural pressures, though both countries continue to face rising service costs.

Cross-Border Inflation Trends: How Nepal and India’s Prices Move Together and Apart

Nepal and India’s inflation trends usually move in sync, reflecting shared regional and global factors. But in August 2025/26, Nepal’s inflation (1.68%) fell below India’s (2.07%) for the first time in four years, thanks to easing food prices in Nepal, while India faced higher agricultural pressures.

Nepal vs India Inflation 2025/26: Why Nepal’s CPI Fell Below India’s for the First Time

In August 2025/26, Nepal’s inflation dropped to 1.68%, falling below India’s 2.07% for the first time in four years. While food price declines drove Nepal’s slowdown, India’s inflation held slightly higher due to agricultural pressures. However, Nepal’s service costs remain a long-term challenge, even as headline CPI looks favorable.