Trade deficit in Nepal

Preparad By:
Md. Sajid Ansari
 Introduction

 Background of the Study

Nepal is a small, landlocked country in South Asia, situated between India and
China. Its economy relies heavily on agriculture, tourism, and remittances from
Nepali workers abroad. Over the years, Nepal has faced significant economic
challenges, including a persistent trade deficit. A trade deficit occurs when a
country imports more goods and services than it exports. This imbalance has
become a major issue for Nepal, impacting its economic stability and growth.
 Statement of the Problem

 Nepal has been struggling with a persistent trade deficit for many years. A
trade deficit occurs when a country imports more goods and services than it
exports. In Nepal's case, the gap between imports and exports has been
increasing at an alarming rate. This problem poses a serious challenge to the
country’s economic stability and development.
 Research Questions

 What are the main factors contributing to Nepal's trade deficit?

 How does Nepal's trade deficit affect its economy and growth?
 What are the impacts of Nepal's trade deficit on employment and industries?
 What measures can Nepal take to reduce its trade deficit and improve trade
balance?
 Research Objectives

 The objective of this research is to understand the causes and consequences of

the trade deficit in Nepal, focusing on its impact on the economy and potential
solutions to mitigate it. A trade deficit occurs when a country imports more
goods and services than it exports, leading to an outflow of foreign currency
and a reliance on external sources to meet domestic demands. Nepal has been
experiencing a persistent trade deficit, and understanding the underlying
factors is crucial for formulating effective policies.
 Significance of the Study

 The significance of this study lies in its potential to provide valuable insights
into the ongoing issue of the trade deficit in Nepal, which has been a long-
standing challenge for the country’s economy. Understanding the causes,
effects, and potential solutions to Nepal’s trade deficit is essential for
policymakers, businesses, and other stakeholders to make informed decisions
that will shape the country's economic future.
 Limitation of the Study

 Data Availability and Reliability

 Time Constraints
 External Factors
 Scope of Analysis
 Economic Complexity
 Sector-Specific Limitations
 Research Bias
 Organization of the Study

 Chapter 1: Introduction
 Chapter 2: Literature Review
 Chapter 3: Research Design and Methodology
 Chapter 4: Data Analysis and Structure
 Chapter 5: Summary and Conclusions
 Literature Review

 Theoretical Review: The theoretical review of this study on the trade deficit
in Nepal explores key economic concepts and theories that help explain trade
imbalances and their impact on an economy
 Classical Trade Theory (Absolute and Comparative Advantage): Classical
trade theory, proposed by economists like Adam Smith and David Ricardo,
argues that trade is beneficial for countries when they specialize in producing
goods in which they have an absolute or comparative advantage
 The Heckscher-Ohlin Theory: The Heckscher-Ohlin theory suggests that a
country will export goods that use its abundant factors of production and
import goods that require factors that are scarce
 Empirical Review

International Context
 Trade Deficit and Economic Growth: Numerous studies have explored the
relationship between trade deficits and economic growth. A study by Rodrik
(2008) on emerging economies suggests that trade deficits, when financed by
foreign capital inflows, may not necessarily hinder long-term economic
growth
 Structural Causes of Trade Deficits: Several empirical studies have
identified structural factors as key drivers of trade deficits. A report by the
World Bank (2017) highlighted that developing countries like India and
Bangladesh experience trade deficits due to their reliance on imported goods,
particularly capital and intermediate goods needed for industrialization
 Remittances and Trade Deficits: Remittances play a critical role in financing
trade deficits in many developing countries. Research by Barajas et al. (2012)
on the relationship between remittances and trade imbalances in countries like
the Philippines and Mexico found that remittances helped reduce the negative
impacts of trade deficits by providing foreign exchange
 Policy Measures and Trade Deficit Reduction: Various empirical studies
have also explored the effectiveness of policy measures in reducing trade
deficits. A study by Aizenman and Jinjarak (2013) found that countries with
active export promotion policies, such as South Korea and Singapore, were
able to reduce their trade deficits and build competitive export sectors
 Empirical Review

National Context
 In the national context, Nepal has been grappling with a persistent trade deficit
for many years, which has become a major challenge for the country’s
economic stability. The trade deficit refers to the gap between the value of
imports and exports, where Nepal consistently imports more than it exports.
This imbalance is particularly evident in sectors such as petroleum, machinery,
and consumer goods, while Nepal’s exports largely consist of agricultural
products like tea, coffee, and spices.
 Research gap

 The research gap in the study of trade deficits in Nepal primarily stems from
the limited in-depth exploration of the specific causes and effects of the
country's persistent trade imbalance. While there are general studies on trade
deficits in developing economies, there is a lack of comprehensive, localized
research that examines the unique factors influencing Nepal's trade deficit.
 Research Design and Methodology

 Quantitative Approach
The research design for studying the trade deficit in Nepal, using a quantitative
approach, involves collecting and analyzing numerical data to examine the causes,
effects, and potential solutions to Nepal’s trade imbalance. The design will focus
on using statistical methods to identify relationships between variables, draw
conclusions, and test hypotheses related to the trade deficit
 Research Objectives

 To identify the key factors contributing to Nepal's trade deficit.

 To analyze the impact of trade deficit on Nepal’s economic growth, inflation,
and foreign exchange reserves.
 To explore the relationship between remittances, imports, and exports in the
context of Nepal’s trade deficit.
 To evaluate the effectiveness of trade policies in reducing the trade deficit.
 Population and Sample

 The population for this study includes all the trade data available for Nepal
over the past 10-20 years, including imports, exports, GDP, foreign exchange
reserves, remittance inflows, and sector-specific data.
 A stratified sampling technique will be used to select data from key sectors
(e.g., agriculture, manufacturing, services) that have a significant impact on
trade. The sample will cover a time period from 2000 to 2023 to understand
both short-term and long-term trends.
 Data Analysis and Structure

 Data Structure
Historically, Nepal has grappled with a substantial trade imbalance, even when it
comes to essential goods. In FY 2022/23, Nepal’s exports amounted to
NPR 157.140 billion in FY 2022/23, representing only a fraction of its imports
totaling NPR 1.611 trillion. This persistent pattern underscores the country’s
concerning reliance on imports. Nepal faced a daunting trade deficit of
NPR 1.454 trillion in FY 2022/23.
Figure 1: Nepal’s trade balance from FY 2010/11 to FY 2022/23
 Table 1: Top 5 trade commodities in FY 2022/23 (in
NPR million)
Top Exports Top Imports

Commodity Value Commodity Value

Carpet, knotted of wool or 11,506.6

High Speed Diesel 153,769.98
fine animal hair 2

Refined bleached 10,718.9

Motor Spirit (Petrol) 66,844.51
deodorized palm olein 5

Liquified Petroleum Gas

Soybean oil 8,475.99 58,154.11
(LPG)

Ferrous products obtained

Large Cardamon (Alaichi),
8,276.59 by direct reduction of iron 43,601.77
neither crushed nor ground
ore

Palm oil (excl. crude) and its

fractions, refined or not but 6,569.79 Crude soyabean oil 35,583.77
not chemically modified
 Data Analysis

 Exports: Nepal's total commodity exports amounted to NPR 157.14 billion in

the fiscal year 2022/2023, marking a decline of 21.4% compared to the
previous fiscal year.
 Imports: During the same period, Nepal's total imports were valued at NPR
1.611 trillion, reflecting a decrease of 1.16% from the previous fiscal year.
 Trade Deficit: The trade deficit stood at NPR 1.768 trillion, a slight
improvement of 0.96% compared to the previous fiscal year
 Trade Partners: India remained Nepal's largest trading partner, with a trade
deficit of NPR 893.17 billion
 Summary and Conclusion

 This study aims to explore the issue of the trade deficit in Nepal, focusing on
the factors contributing to the deficit, its impacts on the economy, and
potential measures for reducing it. Nepal has been experiencing a persistent
trade deficit for many years, where the value of imports exceeds exports,
leading to a negative balance of trade. The research will employ a quantitative
approach, analyzing statistical data to examine the key variables that influence
Nepal’s trade imbalance.
 Conclusion

 In conclusion, this study on Nepal's trade deficit provides a comprehensive

analysis of the factors contributing to the country's persistent trade imbalance,
its economic implications, and potential solutions for improvement. Nepal has
faced a long-standing trade deficit, primarily driven by the high demand for
imported goods, particularly machinery, petroleum, and consumer products,
while its exports are largely limited to agricultural commodities like tea,
coffee, and spices. This imbalance has placed significant pressure on Nepal’s
foreign exchange reserves and has contributed to macroeconomic challenges
such as inflation and exchange rate volatility.
Thank You!!