Foreign trade data of the first nine months of the current fiscal year, released by the Department of Customs earlier this week, show exports are rising at a healthy pace. This should have been welcome news for an import-dependent economy like ours.
However, the underlying structure is fragile and heavily dependent on a narrow set of products and markets. This imbalance continues to expose the economy to external shocks and policy risks, particularly from its largest trading partner, India.
Nepal exported products worth Rs 222.93bn between mid-July last year to mid-March of the current fiscal year. This marked an 18.46 percent increase compared to the same period last year. On a daily basis, exports averaged around Rs 825m. At first glance, the growth looks healthy. However, the composition of the country’s exports trade reveals a different picture. A significant portion, over Rs 90bn, of the country’s total export earnings came from processed soybean oil alone.
The country’s export growth is being driven less by domestic industrial depth and more by opportunistic trade. Nepal imports crude palm and soybean oil from countries as far as Argentina, processes it to meet rules of origin requirements, and re-exports the finished product to India to cash in on preferential treatments. Nepali refineries imported crude soybean oil worth Rs 96.72bn during the review period.
This model is working simply due to tariff differentials and preferential trade arrangements rather than genuine value addition or competitive manufacturing. Such a structure, however, is unstable. A policy change in India, such as revising import duties, tightening rules of origin, or discouraging re-export-based trade, could sharply reduce or even eliminate Nepal’s largest export stream overnight. India has done it in the past. The southern neighbor has been adjusting its tariff regime periodically to protect domestic industries. Any move in that direction could significantly impact edible oil exports from Nepal.
Except for processed edible oils, Nepal’s export basket is relatively thin. Traditional exports like cardamom, carpets, pashmina, tea, and garments are contributing and posting healthy growths. However, none of these products approach the scale of edible oil exports. Nepal may have a competitive edge in these products. However, they face several constraints, ranging from quality consistency and certification issues to supply chain inefficiencies and limited branding.
Meanwhile, imports surged 13.82 percent to Rs 1.49trn. Imports over a single month, i.e. Chaitra (mid-March to mid-Apply), crossed the Rs 200bn mark for the first time. The import bill remains heavily dominated by petroleum products, with diesel imports alone exceeding Rs 100bn, followed by petrol, LPG, and aviation fuel. Since Nepal is heavily dependent on imports, India to be more precise, petroleum imports continues to widen the trade deficit.
The trade deficit itself grew by 13.04 percent to Rs 1.27trn in nine months. The export-to-import ratio slipped slightly to 6.69 percent. Part of the rise in import value can be attributed to global price pressures, due to the crisis in West Asia and subsequent supply disruptions. However, the broader issue lies in our consumption-driven economy. Remittance inflows are sustaining demand for imported goods without a corresponding expansion in productive export sectors.
The customs data suggest that the export sector is growing, but on shaky foundations. The dominance of processed edible oil exports is creating an illusion of strength while masking deeper structural weaknesses. If this single pillar weakens, the overall export performance could deteriorate rapidly.
Nepal needs to diversify its trade if it intends to build a more resilient trade profile. Strengthening high-value, labor-intensive sectors such as garments, carpets, and agro-products, while also investing in new areas like hydropower exports, IT services, and niche manufacturing can be a step in that direction. Equally important is improving trade logistics, certification standards, and market access beyond India.
