The trade deficit in Nepal has been spiraling out of control for years. However, it has been reported that due to a 20.68 percent decline in imports in the first half of the current fiscal year (2079/80), the trade deficit has decreased by 19.15 percent.

The trade deficit has decreased by about 168 billion compared to the corresponding period of the previous fiscal year owing to the regulations that the government imposed to make the pressure on the foreign reserve easier.

Until 1951 AD, Nepal’s foreign trade was just restricted to India and Tibet. However, after 1951, the trade relation extended with Japan, the USA, Germany, Malaysia, Singapore, Thailand, etc. The expeditiously rising foreign trade has, in fact, increased the trade deficit as well.

The graph has risen over time in a way that has caused the imports to soar and the exports to stagnate.

However, the import of goods has reached Rs 792.66 billion in the past six months, down from Rs 999.34 billion during the same period last year, according to a report released by the Nepali Customs Department.

In a similar vein, exports have decreased by 32.01 percent when compared to the same period in the previous fiscal year. In the past six months, goods worth about 80.80 billion have been exported.

Proper irrigation and fertilizers have not been provided to farmers. As a result of the farmers’ excessive reliance on monsoon rains for irrigation and the lack of equipment such as fertilizers, proper production of goods is discouraged, which opens the door for more imports.

According to reports, the trade deficit rose by about Rs 321 billion in the fiscal year 2078/79 compared to the fiscal year 2077/78, when imports totaled Rs 1920 billion compared to Rs 1539 billion.

However, compared to the prior year, the export had increased by 41.74 percent. The export increased from roughly Rs 200 billion the year before to almost Rs 283 billion in 2078/79.

In the fiscal year 2078/79, the trade deficit was comparatively wider due to the dependence on foreign commodities which included daily necessities, especially from India. India holds a major share in the foreign trade with Nepal and the majority of goods are imported from India.

It is believed that Nepal and India share a long history of trade and are the largest trade partners. One cannot deny that Nepal has an informal economic relationship with India. Nepal-India treaty of Trade (2009), Agreement of Cooperation to Control Unauthorized Trade (2009), Treaty of Transmit (1999) and Rail Services Agreement (2004) facilitate a bilateral mechanism for trade and transit between India and Nepal.

Cardamom, tea, carpets, soybean oil, and polyester yarns are among Nepal’s top exports to India. Traditional products like jute, leather, wool, handicrafts, agricultural and forestry products, and medicinal herbs also have significant value.

Similarly, goods like drinking water, energy, and floriculture products can be seen as exports with huge economic potential.

Similarly, the major imports include petroleum products, machinery, telecommunications, clothing, and parts and equipment for transportation.

The inability to achieve production self-sufficiency and excessive reliance on remittances for income generation are the main factors contributing to Nepal’s trade deficit.

The government has not been able to concentrate on creating jobs for young people, which encourages people to look for work abroad.

According to reports, up to 68,564 Nepalese workers were granted work visas to work abroad in November and December 2022. The economists contend that creating jobs domestically has a greater impact on self-sufficiency than receiving remittances later.

Nepal needs to take action concerning hydropower, small and cottage industries, and agriculture. Controlling the import of goods that can be produced in Nepal, such as rice, grains, fruits, vegetables, etc., should be a top priority.

Nepal has not made the best use of its natural resources, particularly its water resources, forestry, land, biodiversity, and minerals.

Proper irrigation and fertilizers have not been provided to farmers. As a result of the farmers’ excessive reliance on monsoon rains for irrigation and the lack of equipment such as fertilizers, proper production of goods is discouraged, which opens the door for more imports.

When crops are being harvested, fertilizers are either unavailable or of poor quality and are often tampered with. Since Nepal lacks a fertilizer plant, it is dependent on formal and unofficial fertilizer imports, particularly from India.

With high operational costs, electricity charges, and additional taxes imposed by the government, doing business in Nepal is expensive.

The majority of raw materials are imported from other countries, which incurs transportation, customs, insurance, incidental fees, and other costs.

The cost of electricity for businesses can reach Rs 30 per unit. Similar to this, industries with taxable income over Rs 2,000,000 are subject to a 36% tax.

The issue has been made worse by the industries’ lack of effective labor. The small size of Nepal’s economy makes applying economies of scale difficult.

Even though trade is regarded as the main driver of economic growth, there does not lie connection between Nepal’s vision and its goals. Nepal must therefore be able to create and put into effect effective regulations to work toward becoming self-sufficient.

This has caused a number of issues, including the closure of several capital-intensive projects due to the generation of less revenue than the break-even point. While this is going on, Nepal has been experiencing political instability that makes it difficult to get the trade deficit back to normal.

Everyone in Nepal is concerned about the trade deficit, which has led to higher interest rates, suppressed inflation, and a decline in GDP.

However, some adjustments can lessen the effects and restore normalcy to the market. Nepal must focus on those areas where it can gain a competitive edge.

Nepal needs to take action concerning hydropower, small and cottage industries, and agriculture. Controlling the import of goods that can be produced in Nepal, such as rice, grains, fruits, vegetables, etc., should be a top priority.

The government must enforce necessary regulations, such as non-tariff barriers and other legalities at the border, and maintain a flexible and long-lasting trade policy.

A sufficient amount of work should be put into reducing the export concentration ratio or expanding the types of goods and services that can be exported to other markets.

Even though trade is regarded as the main driver of economic growth, there does not lie connection between Nepal’s vision and its goals. Nepal must therefore be able to create and put into effect effective regulations to work toward becoming self-sufficient.