Nepal's foreign trade crossed Rs 2.41 trillion in fiscal year 2025/26, and on paper, the export side of that story looks genuinely good — export earnings rose to Rs 315.29 billion, up nearly 14% from the year before. Yet the trade deficit didn't shrink. It grew to Rs 1.78 trillion, the widest gap on record. If exports are growing, why does the hole in Nepal's trade balance keep getting deeper? The answer lies in what Nepal exports, what it can't stop importing, and how remittances quietly paper over the difference.
Nepal's FY 2025/26 Trade Snapshot
According to the Department of Customs, Nepal's total foreign trade (imports plus exports) rose 15.88% to Rs 2.411 trillion in FY 2025/26, up from Rs 2.081 trillion a year earlier. Imports climbed 16.2% to Rs 2.096 trillion, while exports rose 13.81% to Rs 315.29 billion. Because imports grew in both percentage and absolute terms faster than exports, the trade deficit widened by 16.63% to Rs 1.781 trillion, up from Rs 1.527 trillion in FY 2024/25.
| Indicator | FY 2024/25 | FY 2025/26 | Growth |
|---|---|---|---|
| Total foreign trade | Rs 2.081 trillion | Rs 2.411 trillion | +15.88% |
| Imports | Rs 1.804 trillion | Rs 2.096 trillion | +16.2% |
| Exports | Rs 277.03 billion | Rs 315.29 billion | +13.81% |
| Trade deficit | Rs 1.527 trillion | Rs 1.781 trillion | +16.63% |
Put another way, for every rupee Nepal earned from exports in FY 2025/26, it spent roughly six and a half rupees on imports. That ratio hasn't meaningfully improved in years, even during periods when export growth made headlines.
Why Imports Keep Outpacing Exports
The simplest explanation is structural: Nepal's economy runs on imported fuel, imported raw materials, and imported consumer goods, while its domestic production base for tradeable goods remains narrow. Two categories illustrate this better than any other.
Petroleum Dependency (Diesel, Petrol, LPG, ATF)
Petroleum products remained Nepal's single largest import in FY 2025/26, valued at Rs 172.43 billion. Nepal produces no crude oil or refined fuel domestically, so every litre of diesel that powers its trucks, every cylinder of LPG that fuels its kitchens, and every drop of aviation turbine fuel is paid for in foreign currency. Diesel alone has repeatedly been cited by customs data as one of the costliest single import items in recent years, alongside petrol and LPG. Because fuel demand is inelastic — households and transporters can't simply stop consuming it — this import bill barely responds to policy nudges and instead tracks global oil prices and domestic consumption growth.
The Soybean Oil "Re-Export" Paradox
Here's the twist that confuses a lot of readers: soybean oil is simultaneously one of Nepal's biggest imports and its single largest export. Nepal imported soybean oil and related raw material worth Rs 132.77 billion in FY 2025/26 — the second-largest import category after petroleum. That crude oil is refined domestically and then exported, mostly to India, generating Rs 128.74 billion in export earnings, the largest export category of the year.
This matters because it inflates Nepal's "export growth" headlines without reflecting genuine domestic manufacturing capacity. Strip out edible oil re-exports, and Nepal's underlying export base — cardamom, carpets, garments, jute, tea — looks considerably smaller and grows far more slowly. It's a real business and a real source of foreign currency earnings, but it is fundamentally an import-dependent processing margin, not organic export diversification.
Where Nepal's Exports Actually Go
India remains overwhelmingly Nepal's largest trading partner on both sides of the ledger, absorbing the bulk of soybean oil, cardamom, jute goods, and cement clinker exports. China is Nepal's second-largest trading partner but almost entirely on the import side — Nepal recorded goods worth several hundred billion rupees in imports from China against exports of only a small fraction of that value, making China the second-largest bilateral trade deficit after India. Beyond these two neighbours, Nepal maintains trade relationships with roughly 150 countries but runs a deficit with well over 100 of them; surpluses with the remaining minority are typically too small in absolute value to offset the overall gap. The product basket behind these exports also remains narrow: coffee, tea and spices (led by large cardamom) earned Rs 16.36 billion; carpets and floor coverings earned Rs 9.70 billion; apparel contributed several billion more. None of these come close to matching the scale of edible oil re-exports or the petroleum-driven import bill.
How Remittances Are Masking the Real Trade Gap
If the trade deficit is this large, why hasn't Nepal faced a balance-of-payments crisis? The short answer is remittances. Nepal Rastra Bank data for FY 2025/26 shows remittance inflows surging roughly 30–39% year-on-year depending on the period measured, reaching approximately USD 14.59 billion (Rs 1,659.41 billion for the first nine months alone) for the fiscal year. That inflow was large enough to push Nepal's current account into a substantial surplus — Rs 618.68 billion by mid-April 2026 — even with the trade deficit at record levels. In effect, money sent home by Nepali workers abroad is financing the country's import habit. It keeps the economy liquid and the currency peg stable, but it also means the trade gap is being solved by labour migration rather than by building competitive domestic industries.
Foreign Exchange Reserves — Why They're Still Healthy Despite the Deficit
Nepal's gross foreign exchange reserves reached approximately USD 23.55–24.68 billion through FY 2025/26, a record high and an increase of roughly 27–30% from mid-July 2025 levels. That reserve cushion is sufficient to cover an estimated 18–22 months of merchandise and services imports — well above the 7-month threshold Nepal Rastra Bank considers a safe minimum. Reserve-adequacy ratios also improved: reserves-to-GDP rose to around 57%, and reserves-to-imports climbed above 150%. This is the paradox at the heart of Nepal's trade story — a record-breaking deficit sitting alongside record-breaking reserves, both driven by the same underlying force: remittance income far outpacing what the trade account can generate on its own.
What Needs to Change: Diversification, Value Addition, New Markets
Economists and trade officials point to the same set of structural fixes, repeated year after year: reduce reliance on a handful of re-export commodities like edible oil and build genuine value-added manufacturing; diversify export markets beyond India and China into regions covered by preferential access; invest in quality certification and phytosanitary infrastructure so that agro-products and processed foods can clear stricter import requirements; and convert Nepal's growing hydropower surplus into a scalable export industry rather than a seasonal one. Electricity exports are one bright spot worth watching closely — Nepal earned a record Rs 29.32 billion from electricity exports to India and Bangladesh in FY 2025/26, a 68% jump from the previous year, resulting in a net electricity trade surplus of Rs 18.76 billion. If that trajectory continues, hydropower could become the first genuinely new, domestically produced export category to meaningfully narrow the deficit rather than simply refinancing it.
FAQs
What is Nepal's biggest export?
Refined soybean oil is currently Nepal's single largest export item by value, followed by electricity, carpets, and cardamom-led spices.
What is Nepal's biggest import?
Petroleum products (diesel, petrol, LPG, and aviation turbine fuel) are Nepal's largest import category, followed closely by soybean oil and other edible-oil raw materials.
Is Nepal's trade deficit sustainable?
In the near term, yes — record foreign exchange reserves and strong remittance inflows give Nepal a large cushion. Over the long term, most economists caution that a deficit this size, financed mainly by labour migration rather than domestic production, is a structural vulnerability rather than a stable equilibrium.
Why did the trade deficit grow even though exports grew too?
Because imports grew faster in both percentage and absolute rupee terms. An 18% rise on a small export base adds far fewer rupees than a 14–16% rise on an import base more than six times larger.
Discussion