Foreign Trade of Nepal

An overview

Suraksha Koirala
8/29/2014

Submitted to:
Nirajan Basnet Sir

Overview of Foreign Trade of Nepal

Nepal signed first trade and transit treaty with India, the largest trade partner, in 1950, then
after the treaty has been renewed several times and in March 2007, Nepal and India entered
into bilateral trade treaty. After adopting liberalization policy since mid-1980s Nepal opened
up border for international trade and moved forward form inward-looking strategy to
outward-looking strategy. As a result of open economic policy, Nepal has entered into several
bilateral, regional and multilateral trade agreements. Nepal is member of two major regional
trade agreements- South Asian Free Trade Area (SAFTA) since 2004 and Bay of Bengal
Initiative for multi-sectoral trade and economic cooperation (BIMSTEC) since 2004.
Similarly, Nepal is the first least developed country (LDC) to become member of World
Trade Organization (WTO) in 2004 by negotiation. All these initiations indicate Nepals
move towards open economic policy and commitment towards international trade and global
competition.
Nepal's traditional trade was with India. In the 1950s, over 90 percent of its foreign trade was
conducted with India. Goods moved by land for at least a few hundred kilometers through
India, and a good relationship with India was essential for the smooth transport of goods to
and from foreign countries. Most of Nepal's basic consumer goods were imported from India,
and most of its agricultural exports went to India. India also met the basic needs of Nepal's
industries with supplies of coal, cement, machines, trucks, and spare parts.
The March 1989 impasse in negotiations for trade and transit treaties with India seriously
damaged Nepal's economy. The transit treaty had allowed goods from third countries entering
at Calcutta to pass through to Nepal and exempted them from customs and transit duties. The
treaty allowed trade to transit at twenty-one border points, and primary commodities were
essentially duty-free in both directions. Imports from India had no quantitative restrictions
and low tariffs.
As a result of the breakdown in negotiations, only two trade and transit points remained open-both in eastern Nepal. Nepal's exports to India were subjected to high tariffs, and imports
from India also carried increased costs. The dispute was not solved until June 1990 when
Kathmandu and New Delhi agreed to restore economic relations to the status quo ante of
April 1, 1987.
Although India remained an important trade partner in 1991, foreign trade with India has
been on the decline vis--vis other countries since 1960. Trade with India decreased from
more than 70 percent in 1975 to about 27 percent of total trade in 1989. However, the trade
deficit with India in this period increased at an annual rate of about 11 percent.
To increase exports, Kathmandu introduced some fiscal and monetary measures, including
the Export Entitlement Program and the Dual Foreign Exchange rate, along with cash grants,
income tax rebates, and low tariffs. Until the trade and transit dispute of 1989, exports had
increased by 11 percent or more per year since 1975. Nepal's major exports were clothing,
carpets, grain, and leather goods. In 1989-90 the carpet industry was responsible for

producing 54 percent of Nepal's exports. In FY 1988, India received 38 percent of Nepal's

exports; the United States 23 percent, Britain 6 percent, and other European countries 9
percent.
Imports increased at a faster rate than exports. Since the 1970s, the foreign trade deficit had
increased in most years. Nepal's primary imports were petroleum products, fertilizer, and
machinery; boots and shoes, cement, cigarettes, iron and steel, medicines, salt, sugar, tea, and
textiles were the other chief imports. India supplied 36 percent of imports, Japan 13 percent,
European countries 4 percent, and the United States 1 percent in FY 1988. Receipts from
service and transfer payments were insufficient to finance trade deficits. This imbalance has
resulted in an increase in the current account deficit.
In March 1989, the government introduced the Open General License as a step to support the
Structural Adjustment Program. It included inputs for existing industries--raw wool, cotton
yarn, and cotton fabrics. The program also allowed supports for petroleum products, coal,
tractors, buses, and trucks, as well as for some household items, such as ovens and toasters.
In May 1990, however, Kathmandu deleted all goods except raw wool, cotton yarn,
petroleum products, coal, and newsprint from Open General License imports.
The government also introduced an auction system for the import of goods. The goods were
classified in three categories: industrial raw materials, semiluxury items, and luxury items.
Premiums were assigned and foreign exchange quotas allocated for each category. The
premium for raw materials was lower than that for luxury items.

Foreign Trade
600000
60895.6
400000

51007.9
48562.6

Axis Title

200000

295242

360562.7

457853

0
-246679.4
-200000

-309554.8

-396957.4

-400000
-600000

2011/12

2012/13

2013/2014

-246679.4

-309554.8

-396957.4

Export

48562.6

51007.9

60895.6

Import

295242

360562.7

457853

Total Trade Balance

Nepals trade performance

Import & Export Ratio

Export

2011/2012

88.3

87.6

85.9

14.1

Import

12.4

2012/13

11.7

2013/14

The role of trade in economic growth and development is an issue that has received
considerable examination. In the context of developing countries, policies regarding trade
orientation have been an important part of the debate. Recognizing the growth in the
industrial sector as an important component of economic development, policy makers in
developing countries have leaned towards inward- or outward-oriented trade policies at
different times. An inward orientation has been thought to hinder export in various ways.
Nonetheless, many countries, especially in Latin America, have shown considerable progress
in industrialization, if only for a certain period of time, under such a policy. In contrast,
policies promoting outward orientation seek to eliminate the biases against export. In some
cases, this has been done by explicitly promoting export in particular sectors or components
of those sectors. Many countries, most notably the East Asian economies, that adopted such
policies have undergone substantial and sustained industrialization themselves. Inwardoriented trade policies are part of an Import-Substitution development strategy.
The theory of import substitution holds that the production structure of developing countries
is dominated by the primary commodities agricultural and mineral goods sector. Further,
it assumes that these countries do not benefit from international trade because the terms of
trade has permanently favored non-primary goods. Thus, to achieve development, the
production structure of these countries has to change these countries need to industrialize.
As developed countries are already industrialized, developing countries need to protect their
economies from imports and efforts should be made to establish and protect importsubstituting industries. These industries would enable domestic production of goods that
would otherwise have to be imported.

In the long run, these industries will be able to gain international competitiveness and will
emerge as a healthy export sector.
Import Substitution contrasts with an outward-oriented development strategy often referred
to as an Export Promotion strategy. This strategy gives attention to the advantages of
international trade in general and exports in particular. Under the export promotion approach,
the domestic economies of developing countries are kept open to foreign competition and
foreign capital. A fundamental assumption of the export promotion strategy is that as
domestic industries are made to face international competition, these industries will use the
resources available to them more efficiently en route to becoming truly competitive
internationally. Thus, this policy advocates a more liberal trade sector, which includes
reduction or total elimination of import duties and tariffs in addition to elimination of export
controls.
Securing better market access conditions for its exports, achieving product-wise and
destination-wise export diversification and reducing trade deficit are key motivations behind
Nepals pursuit of negotiating trade agreements.3 Having applied for World Trade
Organization (WTO) membership in 1995, it obtained the same in 2004. It has been party to
regional trade liberalization initiatives in South Asia: it was a member of the positive-listbased SAARC Preferential Trading Arrangement (SAPTA), which was signed in 1993 and
came into force in 1995, and is a member of SAFTA, which has replaced SAPTA and is in
force since July 2006. At the trans-regional level, it is a member of the Bay of Bengal MultiSectoral Technical and Economic Cooperation (BIMSTEC) Free Trade Agreement (FTA),
which is yet to come into operation. At the same time, Nepal has applied for the membership
of the Asia Pacific Trade Agreement (APTA), also known as the Bangkok Agreement.
However, Nepals foreign trade continues to be concentrated with India, with which it has
had a bilateral preferential trade agreement since 1950. Trade dependence on India has
increased over time, and, more alarmingly, so has the merchandise trade deficit, which is
being largely financed by remittances. From 24.5 percent in the mid- 1990s, the share of
merchandise exports to India increased to an average of64 percent during 2007/08-2009/10.
Likewise, the share of merchandise imports from India increased from 30 percent to 59.6
percent during the same period (Figure 1). If informal trade is taken into account, the
dependence is even higher, with a study showing informal trade to be 38 percent-103 percent
of formal trade in 2000-2001.
The Nepali governments official trade policy has experienced a distinct shift in the last three
decades. Until the early 1980s, Nepal had adopted a closed, protectionist trade regime heavily
influenced by the doctrine of import-substitution. It was an effort, and an experiment, in
adopting a strategy that was in vogue among the developing countries at the time. However, a
marked shift in policy occurred in the early part of the 1980s when the Nepali government
initiated a movement towards a more open and liberal trade regime. These changes were, in
turn, directly modeled after the dictates of an export promotion strategy Exports came to be
regarded as the vehicle of development. The governments emphasis on exports in this era is
reflected in the establishment of the Nikaasi Prabardhan Saakhaa (Export Promotion

Department) under the Ministry of Industries, Commerce and Supplies at the time. Export
incentives were provided to a number of different industries and several sectors were
gradually opened to foreign investment.
Consistent with the objective of introducing foreign competition, reductions of import duties
and tariffs were undertaken. Thus, the shift in trade policy orientation from import
substitution to export promotion influenced factors like export incentives provided to
domestic industries, import duties/tariffs and foreign investment.
NEPAL'S TOTAL TRADE
Billion Rs.
F.Y. 2012/13
F.Y. 2013/14
(2069/70)
(2070/71)
Shrawan-Falgun
Shrawan-Falgun
Total Trade

Change %

18.4
439.65

520.48

50.70

60.98

Total Exports

20.3

18.1
Total Imports

388.95

459.50

Trade Deficit

17.8
338.25

398.52

NEPAL'S EXPORT
Commodities

Iron and Steel products

Woolen Carpet
Yarns ( Polyester, Cotton and
others)
Textiles
Readymade Garments
Others
Total

Billion Rs.
F.Y. 2012/13
F.Y. 2013/14
Change %
(2069/70)
(2070/71)
Shrawan-Falgun
Shrawan-Falgun
3.9
8.04
8.36
36.1
3.53
4.80
6.1
3.80
4.03
5.9
3.55
3.76
52.8
2.37
3.62
23.8
29.42
36.41
20.3
50.70
60.98

NEPAL'S IMPORT
Billion Rs.
Commodities
F.Y. 2012/13
F.Y. 2013/14
Change %
(2069/70)
(2070/71)
Shrawan-Falgun
Shrawan-Falgun
Petroleum Products
24.8
70.42
87.88
Iron & Steel and products thereof
5.4
38.02
40.09
Transport Vehicles and parts thereof
18.6
22.44
26.61
Machinery and parts
20.6
21.15
25.52
Electronic and Electrical
17.2
Equipments
16.09
18.85
Others
18.0
220.83
260.56
Total
18.1
388.95
459.50

Exports, Countries
In Billion
Rs.
F.Y. 2012/13
(2069/70)
Shrawan- Falgun

F.Y. 2013/14
(2070/71)
Shrawan- Falgun

33.55

40.48

U.S.A.

3.48

4.59

Germany

1.73

2.21

China P. R.

1.62

1.86

Bangladesh

2.41

1.40

Countries

India

Others

7.92

10.43

Total Exports

50.70

60.98

Change %
20.7
32.1
28.0
14.7
-42.0
31.8
20.3

Imports, Countries
In Billion
Rs.
F.Y. 2012/13
(2069/70)
Shrawan- Falgun

Countries

India

F.Y. 2013/14
(2070/71)
Shrawan- Falgun

Change %
18.9

257.55 306.31

China P. R.

46.14 51.15

U.A.E.

23.85 25.61

Indonesia

5.56 10.45

Brazil

2.68 6.51

Others

53.17

59.47

Total Imports

388.95

459.50

10.9
7.4
87.8
143.2
11.8
18.1

Direction of Foreign Trade*

Eight Months

2011/12

(Rs. In
million)
Percent Change
2012/13R 2013/14P
2012/13
2013/14

TOTAL EXPORTS

48562.6

51007.9

60895.6

5.0

19.4

To India
To Other Countries

32592.7
15969.9

33254.2
17753.7

40524.1
20371.5

2.0
11.2

21.9
14.7

TOTAL IMPORTS

295242.0

360562.7 457853.0

22.1

27.0

From India
From Other Countries

191274.8
103967.2

237643.9 304412.3
122918.8 153440.7

24.2
18.2

28.1
24.8

TOTAL TRADE
BALANCE

246679.4

309554.8 396957.4

25.5

28.2

28.8

29.1

With India

158682.1
-87997.3

204389.7 263888.2
105165.1 133069.2

19.5

26.5

TOTAL FOREIGN TRADE 343804.6

411570.5 518748.6

19.7

26.0

With India
With Other Countries

270898.1 344936.4
140672.5 173812.2

21.0
17.3

27.3
23.6

With Other Countries

223867.5
119937.1

16.4
1. Ratio of export to import
India
17.0
Other Countries
15.4
2. Share in total export
India
67.1
Other Countries
32.9
3. Share in total import
India
64.8
Other Countries
35.2
4. Share in trade balance
India
64.3
Other Countries
35.7
5. Share in total trade
India
65.1
Other Countries
34.9
6. Share of export and import in total trade
Export
14.1
Import
85.9
* Based on customs data
R= Revised
P=Provisional

14.1
14.0
14.4

13.3
13.3
13.3

65.2
34.8

66.5
33.5

65.9
34.1

66.5
33.5

66.0
34.0

66.5
33.5

65.8
34.2

66.5
33.5

12.4
87.6

11.7
88.3

Trading Partners of Nepal

( First Eight Months Provisional)
In Billion
Rs.

Exports
F.Y. 2012/13
(2069/70)
Shrawan- Falgun

F.Y. 2013/14
(2070/71)
Shrawan- Falgun

33.55

40.48

U.S.A.

3.48

4.59

Germany

1.73

2.21

China P. R.

1.62

1.86

Bangladesh

2.41

1.40

U.K.

0.98

1.39

Afghanistan

0.39

1.16

France

0.69

0.85

Japan

0.65

0.70

Turkey

0.66

0.67

Italy

0.45

0.62

Canada

0.36

0.56

Thailand

0.38

0.37

Australia

0.23

0.35

Others
Total
Exports

3.12

3.76

50.70

60.98

India

Change %
20.7
32.1
28.0
14.7
-42.0
42.0
197.2
23.4
7.3
2.0
37.3
52.5
-1.3
54.7
20.3
20.3

In Billion
Rs.

Imports
F.Y. 2012/13
(2069/70)
Shrawan- Falgun
India

F.Y. 2013/14
(2070/71)
Shrawan- Falgun

18.9

257.55 306.31

China P. R.

46.14 51.15

U.A.E.

23.85 25.61

Indonesia

5.56 10.45

Brazil

2.68 6.51

Thailand

5.99 5.96

Argentina

4.77 4.57

Germany

2.18 4.34

Malaysia

3.87 4.15

Saudi Arabia

2.34 3.87

U.S.A.

2.95 3.55

Japan

3.03 3.07

Change %

10.9
7.4
87.8
143.2
-0.4
-4.2
98.9
7.2
65.1
20.4
1.3

U.K.

1.03

2.60

Korea R

2.81

2.44

Others
Total
Imports

24.18

24.90

388.95

459.50

152.7
-13.1
2.9
18.1

Trade Balance
6.9 Total trade deficit in the first eight months of the current fiscal year has grown up by
25.5 percent totaling Rs. 309.55 billion. Such trade deficit had recorded an increase of 17.1
percent in the same period of the previous year. Of the total trade deficit, deficit with India in
review period has risen by 28.8 percent as compared to 11.5 percent increase in the same
period of previous year.
Likewise, trade deficit with other countries in the review period has increased by 19.5
percent as compared to 28.9 percent growth in the same period of previous year. Due to high
growth rate of import the export/import ratio in first eight months of the review period has
fallen to 14.1 percent.

Conclusion
The GDP growth rate of Nepal has never been consistent since last decades. Nepal secured
highest growth of 8.2 percent in 1994 and lowest growth of 0.12 percent in 2002. The shares
of agriculture and non-agriculture sectors to GDP in FY 2011/12 are estimated at 35.1
percent and 64.9 percent respectively. The low growth of Nepal is said to be because of high
dependency of agriculture output on monsoon; and poor industrial base. Basic infrastructure
development is therefore essential for sustainable economic growth of Nepal. It is important
to attract domestic and foreign investment and increase employment opportunity for overall
economic welfare.
This study is to identify the effectiveness of existing trade policy on foreign trade of Nepal
realizing the fact that foreign trade as an appropriate means for rapid economic development.
The study concludes that Nepal's external sector policy should focus on rapid development in
infrastructure establishment of industries that utilizes local resources and fulfill local needs as
well as can have production surplus to export, creation of tourism friendly environment and
massive promotional activities of tourism etc.
External Sector of Nepal is historically weak with perpetually increasing trade deficit. In the
external sector, exports continued to surge in the recent years and imports remained volatile.
Although the growth rate of exports outplaced that of imports, trade deficit widened mainly
due to relative larger volume of imports (Khatiwada and Sharma, 2002). The import
substitution industries and export-oriented industries may help the country to come out of the
continuous unbalanced trade. The trade deficit has been mainly financed by remittance
inflows, therefore the volume and sign of current account is largely determined by volumes
of imports and remittance from abroad.
Nepals foreign trade has tremendously been suffering from successive deficit which can
have negative effect on foreign currency reserve of the country and thereby invite macro
economic instability. Inefficient management of the growing population may invite disaster
to the economic growth of country in long run. The import substitution policy demands an
overall evaluation so that industries only competitive in the international markets are selected
for promotion. Therefore, government should encourage the policy of adequate investment in
export oriented industries that embodies a proper mix of export promotion and import
substitutions.
Nepal's trade policies are generally sound, and the country is competitive in a variety of
products. However, these positive factors are tempered by constraints that make Nepal's
productivity among the lowest in the region, create an inhospitable business climate, and
discourage foreign direct investment-a key conduit for export-market access and technology
transfer. The most critical constraints are: 1) delays in customs and transshipment to India's
port; 2) high infrastructure costs, especially transport and power; 3) a rigid, formal labor
market; and, 4) weak policy and institutions in the areas of taxation, investment and trade
promotion.

REFRENCES
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Karobar Dainik
The Himalayan Times
Juornals:
Mattoo, Aditya. (2009). Analyzing Services Trade and Policy: Overcoming
Limitations of the Data, WTO Data Day, 18 May, Geneva.
McKinsey & co. (2001). India the Growth Imperative: Understanding the Barriers to
Rapid Growth and Employment Creation, New Delhi: McKinsey and Company, V. 3
Adhikari, Ratnakar. 2010b. LDC Integration Fund. Trade Insight (special brief) 6 (1),
March.
Agrawal, J.P. 2008. Nepal-India Trade and Investment: Suggested New Package.
New Business Age, January, pp 56-58.
Asian Development Bank (ADB), Department for International Development (DFID),
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Mandaluyong City, Philippines: Asian Development Bank.
Websites:
www.nrb.org.np
www.tepc.gov.np