The trade agreements Nepal has with India, in particular, allow for duty-free access of agricultural products, which leads to reliance on imports since they are cheaper than local produce
Nepal's total exports surged by 46.5 per cent to Rs 127.20 billion in the first seven months of the current fiscal year. This surge was led by the prodigious nature of soybean oil exports, which reached Rs 18.91 billion during the first six months of the current fiscal year. However, despite the surge in exports, Nepal's dependence on imports to meet nationwide demands fuels its huge trade deficit. The total imports during the first seven months of the fiscal year reached almost Rs 990 billion, which is up 10 per cent over the same period the previous year. For a nation that has inherited a climate to produce luxurious exports such as cardamom and tea, why must it import on such a substantial scale?
Soybean oil is Nepal's largest export, and it isn't even produced in the country commercially. Nepal's exports to India enjoy zero-duty benefits under the South Asian Free Trade Area (SAFTA) and the India-Nepal Trade Treaty, while countries outside South Asia face a 45 per cent tariff on soybean oil exports to India. Nepalese traders have therefore been importing soybean oil from countries such as Argentina, Benin, Paraguay and Thailand, then using the financial strategy of arbitrage to make a profit.
Much of the soybean oil exports by the given arbitrage flows into India. However, in 2022, India allocated a tariff-rate quota (TRQ) of 2 million metric tons (MMT) each for crude soybean oil and crude sunflower oil for the fiscal years 2022-23 and 2023-24. This allowed duty-free imports within that volume and was conducted to address the high domestic prices of edible oils and to curb rising food inflation. This initially led to a 62 per cent decline in Nepal's overall edible oil exports to India, which included palm oil as well.
Refined palm oil like soybean oil is not produced commercially in the country, and crude palm oil is imported from countries such as Malaysia, Indonesia and the Philippines. Refined palm oil was the top export commodity in the previous fiscal year, with India being the top destination. Soybean oil and palm oil are refined in the country, and due to the SAFTA agreement, it allows Nepal to export these commodities to India with zero or low tariffs, making them our highest export commodities.
Nepal, apart from these two oils, is a major exporter of large cardamom, accounting for a significant amount of the global production. In the current fiscal year, Nepal exported cardamom worth Rs 628 crores. Due to the comparative advantage held by Nepal due to its unique climate, soil and topography, it has a distinctive flavour and aroma. Nepal exhibits a high Revealed Comparative Advantage (RCA) in the international cardamom markets, which indicates its strong competitive position. The cultivation of large cardamom in Nepal is essential for the framework of the economy whilst also providing a livelihood for around 60,000 families.
However, Nepal hasn't been able to capitalise completely on this commodity due to its landlocked nature. With limited access to Indian transport infrastructure, and complexities in customs clearance procedures, most exports of large cardamom flow into India.
The reason for the hefty trade deficit of Nepal is due to its substantial number of imports. Data show total imports of Nepal were recorded at Rs 988 billion, which was a 10 per cent increase from the previous year. Agricultural products worth more than Rs 203 billion were brought in during the first seven months of the current fiscal year, making up 81 per cent of the total import value of agro products during the entire period of last fiscal year. Over the years, animal fat and vegetable oil have been the largest imported commodity, making up Rs 66.20 billion in 2023-24.
Mineral fuels, oils, and distillation products accounted for a substantial 23 per cent of Nepal's total imports in the first seven months of the 2024-25 fiscal year. However, the imports of petroleum products have decreased from the previous fiscal years due to the slower economic activity in the country coupled with the rise in electric vehicles (EV) imports.
Nepal is importing significant amounts of agricultural products due to a combination of factors that include low productivity, limited fertile land and the lack of technology and infrastructure in the nation. The trade agreements Nepal has with India, in particular, allow for duty-free access of agricultural products, which leads to reliance on imports since they are cheaper than local produce.
Additionally, the susceptibility of the country to climate change and natural disasters hinders agriculture production. Floods and landslides in Nepal last September inflicted devastating economic repercussions, with estimates indicating a staggering loss of Rs 6 billion in agriculture and livestock.
Nepal's landlocked geography and a lack of substantial natural resources for economic development contribute to its dependence on imports for meeting its basic needs. Over 1 million hectares of agricultural land in Nepal remains unused, which could potentially feed more than 257,500 households. Land in Nepal is concentrated in the hands of the richest 7 per cent who own 31 per cent of the agricultural land, while 29 per cent of the households do not own any land. Therefore, farmers do not have access or support to use arable land where applicable. We are a country of farmers who have failed to capitalise on this factor, which we can observe from the food import bill, which has grown nearly 80 times over the past two decades.
