Growth, Composition and Direction of Nepalese Foreign Trade

Growth of Nepalese Foreign Trade

Nepal's ancient trade history dates back to the beginning of the Malla and Lichchhavi regimes, with trade categorized into three separate countries. With Tibet, Nepal's trade has been influenced by the commercial policy of the Malla rulers, who opened new Trans-Himalayan trading routes between Gangetic plains and Chinese cities. However, the Tibetans, enchanted by business speculation, closed trade routes to Nepal in 1770. To promote trade, treaties were signed with Tibet and India, but the number of Nepalese merchants in Lhasa dropped. With India, trade relations between Nepal and India have been connected since the ancient period, but due to cultural and social similarities and geographical conditions, trade activities have been limited. Nepal's main exports to India include metals, precious stones, species, tobacco, rice, timber, hides, honey, ghee, and artistic metal. With overseas countries, Nepal's trade has been limited due to its backwardness and political and physical isolation. Before 1951, Nepal's foreign trade was limited to the UK, USA, and France. The Indo-Nepal Trade Treaty of 1950 required Nepal to follow a common traffic policy with India and other countries. To promote exports, Nepal must increase the production of traditional oilseeds and raw jute, which are the major traditional exports.

Traditionally, Nepal's foreign trade was limited to Tibet and India. The trade relations of Nepal expanded with many other countries after the end of the Rana regime. Nepal started to liberalize its trade and investment regime unilaterally in 1992 and became the first least developed country (LDC) to join the World Trade Organization (WTO) through the full accession process in April 2004. Nepal is also a member of BIMSTEC and SAFTA. Nowadays, the foreign trade of Nepal has expanded rapidly to many countries of the world, and the volume of trade has also increased.

During the fiscal year 1956/57, the total volume of trade was equivalent to Rs. 26.5 crore. The share of total exports in the total transactions in that fiscal year was Rs. 9.5 crore, while the share of total imports was Rs. 17 crore. The table below shows the growth trend of the Nepalese foreign trade in recent years.

Table 1: Growth of Nepalese Foreign Trade (Rs. In billion)

Fiscal Year	Export	Import	Volume of Trade	Trade Balance	Export-Import Ratio
1990/91	13.70	31.94	45.64	-18.24	1:2.3
2000/01	55.56	115.68	171.24	-60.12	1:2.1
2015/16	70.11	773.59	843.7	-703.48	1:11.0
2016/17	73.04	990.11	1063.15	-1161.19	1:13.6
2017/18	81.63	1242.82	1324.45	-1161.19	1:15.2
2018/19	97.11	1418.53	1515.65	-1321.42	1:14.6
2019/20	97.70	1196.79	1294.49	-1099.09	1:12.2
2020/21	141.12	1539.84	1680.96	-1398.72	1:10.9
2021/22	200.03	1920.45	2120.28	-1720.42	1:9.6
2022/23	157.14	1611.73	1768.87	-1454.59	1:10.3

Source: Various Economic Survey, 1992.93, 2002/02, and 2022/23

Nepal's foreign trade has seen significant growth since 1990/91, but it consistently faces a negative trade balance with imports exceeding exports. This imbalance highlights potential vulnerabilities in the economy, such as dependence on foreign goods and strain on foreign currency reserves. The export-import ratio fluctuates, suggesting sensitivity to global economic conditions and domestic policy changes. Addressing the deficit requires diversifying export sectors, improving trade infrastructure, and fostering a conducive environment for trade and investment.

 Composition of Nepalese Foreign Trade

Foreign trade is the breakdown of a country's imports and exports into various categories, such as goods, services, primary commodities, manufactured goods, machinery, electronics, and agricultural products. A composition of foreign trade helps to analyze the economic progress of a country. For example, if the import of manufacturing goods is declining and the export of these goods is increasing, it is considered a better speed of economic development. Similarly, most of the countries that import capital goods and export consumer goods grow faster than countries that export only capital goods. The composition of Nepal's foreign trade is influenced by factors like comparative advantages, natural resources, industrial capabilities, trade agreements, and market demands.

The below table shows the composition of the Nepalese foreign trade in the fiscal year 2022/23. In Nepal, commodities traded with foreign countries are classified according to the Standardized International Trade Classification (SITC). The SITC is a statistical classification system developed by the United Nations Statistical Commission (UNSC) and first established in 1950 to categorize commodities traded internationally. The SITC includes goods traded in the ten headings.

Table 2: Commodity Trade by SITC (FY 2021/22)

Section	SITC	Export		Import
		Rs. In Billion	In Percentage	Rs. In Billion	In Percentage
0	Food and live animals	28.92	14.46	217.25	11.31
1	Tobacco and beverage	0.56	0.28	6.98	0.36
2	Crude materials and inedible	2.90	1.45	70.04	3.65
3	Minerals, fuels, and lubricants	0.001	0.0005	383.92	20.00
4	Animals and vegetable oil and fats	93.74	46.86	118.93	6.19
5	Chemical and drugs	6.53	3.26	230.54	12.00
6	Classified by materials	50.87	25.43	362.05	18.85
7	Machinery and transport equipment	0.43	0.22	374.59	19.51
8	Misc. Manufactured articles	16.08	8.01	113.13	5.89
9	Not classified	0.004	0.002	43.02	2.24
Total		200.03	100	1920.45	100

Source: Economic Survey, 2022/23

 The provided data presents the commodity trade of Nepal for the fiscal year 2021/22 categorized by the Standard International Trade Classification (SITC). The analysis reveals several key insights into Nepal's trade patterns and the composition of its exports and imports. Nepal's exports amounted to Rs. 200.03 billion. The largest export categories were "Animals and vegetable oil and fats" (46.86%) and "Classified by materials" (25.43%), which together accounted for the majority of exports. Other significant export categories included "Food and live animals" (14.46%) and "Chemical and drugs" (3.26%). These figures suggest that Nepal's exports are dominated by agricultural products, manufactured goods, and some chemical products. On the other hand, Nepal's imports totaled Rs. 1920.45 billion. The largest import category was "Minerals, fuels, and lubricants," which accounted for a substantial portion (20.00%) of imports. This was followed by "Machinery and transport equipment" (19.51%) and "Classified by materials" (18.85%). These figures indicate a heavy reliance on imported fuels, machinery, and raw materials for industrial production and infrastructure development. The trade deficit highlights the country's dependency on imports to meet domestic demand and fulfill industrial requirements, which could pose challenges to its balance of payments and foreign exchange reserves. The high proportion of imports in the category of "Minerals, fuels, and lubricants" underscores Nepal's reliance on imported energy resources to meet its energy needs. This dependency on fuel imports could make the economy vulnerable to fluctuations in global oil prices and supply disruptions. While Nepal's exports are diverse, there may be opportunities to further develop and promote certain sectors, such as agriculture, manufacturing, and chemicals, to enhance export earnings and reduce the trade deficit. Improving productivity, quality standards, and market access for Nepalese products could help capitalize on these opportunities.

In summary, the analysis of Nepal's commodity trade by SITC underscores both the strengths and vulnerabilities in the country's trade profile. Diversifying export sectors, reducing dependency on imports, and addressing the trade imbalance could be critical priorities for Nepal's economic development and resilience.

Direction of Nepalese Foreign Trade

Nepal's foreign trade history is influenced by factors like its landlocked position, political instability, and evolving economic policies. India has been Nepal's largest trading partner, with significant imports and exports of essential goods. However, this dependency has led to challenges like trade disputes and interruptions. Nepal has sought to diversify its trade partners, increasing engagement with countries like China, the United States, and the United Arab Emirates. However, infrastructure constraints, bureaucratic hurdles, and regulatory issues still hinder the smooth flow of goods across borders. Nepal's limited manufacturing base and agrarian economy pose challenges to export diversification and value addition. The country is balancing traditional partners with emerging markets like China and the Gulf countries, focusing on improving trade facilitation measures, enhancing infrastructure, and fostering a more conducive business environment.

In the fiscal year 2022/23, Nepal's foreign trade was characterized by engagements with several major trading partners across the globe. India, China, Indonesia, the United States, the United Arab Emirates, Argentina, Malaysia, Australia, Ukraine, Qatar, and Thailand emerged as significant players in Nepal's trade dynamics, both in terms of imports and exports. India stood out as the primary partner for both imports and exports, reflecting the historical and geographical ties between the two nations. Nepal's export destinations were diverse, with countries such as the United States, Germany, the United Kingdom, and China among the top recipients of Nepalese goods. Conversely, Nepal's imports were also diversified, with countries like China, Indonesia, and the United Arab Emirates being major sources of imported goods. This data underscores Nepal's engagement in global trade networks and highlights the importance of fostering relationships with a variety of trading partners to sustain and enhance its economic growth (Nepal Foreign Trade Statistics, 2022/23).

The direction of the Nepalese foreign trade is presented in Table 3.

Table 3: Direction of Nepalese Foreign Trade

(Rs. In Billion)

Description	2017/18	2018/19	2019/20	2020/21	2021/22	2022/23
Export	81.63	97.11	97.71	141.12	200.03	157.14
India	46.61	62.73	70.11	106.37	155.22	106.67
China	2.88	2.11	1.20	1.02	0.81	17.66
Other Countries	32.15	23.27	26.41	33.74	44.00	48.69
Import	1242.83	1418.54	1196.80	1539.84	1920.45	1611.73
India	809.81	917.91	735.30	971.60	1200.15	1027.85
China	159.64	201.53	181.92	233.92	264.78	222.72
Other Countries	273.38	295.10	279.59	334.31	455.51	361.17
Total Trade	1324.45	1515.65	1294.51	1680.96	2120.48	1768.87
India	856.42	980.4	805.40	1077.98	1355.38	1134.53
China	162.52	207.64	183.11	234.94	265.59	224.48
Other Countries	305.53	327.37	306.00	368.05	499.51	409.86
Total Trade Share (%)	100	100	100	100	100	100
India	64.66	64.7	62.2	64.1	63.9	64.1
China	12.27	13.7	14.2	14.0	12.5	12.7
Other Countries	23.07	21.6	23.6	21.9	23.6	23.2

Source: Economic Survey, 2022/23

Nepal's foreign trade has shown steady growth from 2017/18 to 2021/22, with India being the largest trading partner. Imports have also shown upward trends (Rs. 1488.37 billion on average), with India remaining the largest trading partner. The trade balance between Nepal and its trading partners has consistently been in favor of importing countries, leading to a trade deficit. Total trade (Rs. 1617.49 billion on average) has increased over the years, reflecting the expansion of Nepal's trade activities. India maintains the largest share (fluctuating between 62.2% to 64.1%) of Nepal's total trade, with China (ranging from 12.5% to 14.2%) following closely. Diversification of trade partners and improving trade balance could enhance Nepal's economic resilience and sustainability.