Why Nepal’s Trade Deficit Persists Despite Rising Exports

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.