Countering Trade Deficit vs Trust Deficit

Beneath Nepal’s headline improvements in exports lies a familiar paradox: a structurally weak export base propped up by remittances and other capital inflows that mask deeper vulnerabilities. While exports have grown in recent months, imports remain elevated, leaving the country with a persistent trade deficit that increased by 10.5 percent to NPR 649.68 billion during the five months of 2025/26, according to the central bank. That gap is offset, at least on paper, by a surge in remittance inflows, which rose to NPR 640.43 billion over the same period, cushioning the current account and bolstering foreign exchange reserves.

As Nepal Rastra Bank’s data show, this apparent stability rests on a fragile foundation: reliance on worker remittances is not a structural solution. What prevents firms from exporting? The answers are both technical and institutional. If exports are to replace (or at least complement) remittances as a reliable source of foreign exchange, the private sector must export more.

Here, the firm-level evidence is sobering: only about 11 percent of Nepali firms export directly (at least 10 percent of sales), and just 16.7 percent export either directly or indirectly, as shown by the World Bank’s 2023 Enterprise Survey for Nepal. This thin integration into global markets constrains Nepal’s prospects for rapid and diversified export growth. At the firm level, the obstacles are neither abstract nor marginal. Enterprise Survey data show that nearly 76 percent of Nepali firms experienced electrical outages, while the World Bank’s country profile reports that 75.8 percent of firms faced power disruptions and 11.9 percent identified access to finance as the single biggest obstacle to growth. These deficiencies translate directly into higher unit costs and weaker international competitiveness.

As highlighted in the ‘EU–Nepal Trade and Investment Diagnostic’ report by the Samriddhi Foundation, export competitiveness ultimately hinges on four to five core cost components: logistics, electricity, labor, taxation, and skilled manpower. When these are not adequately facilitated, the trade deficit widens. The resulting trust deficit follows a similar logic: it emerges when the state consistently fails to close these gaps, repeatedly highlighted by the private sector.

This is a long-term issue, but once addressed, the relationship between trust and trade deficits becomes inverse: stronger institutions lower costs, restore confidence, and enable sustained export expansion. Behind every trade statistic in Nepal lies a graver concern: the lost faith in the system. Beyond technical bottlenecks sits a deeper deficit of trust in public institutions and predictable governance.

Transparency International’s 2024 Corruption Perceptions Index captures this erosion of confidence, with Nepal scoring 34 out of 100 and ranking 107th among 180 countries, a signal to investors and trading partners that integrity risks remain high. The economic consequences of this perception are visible at the firm level. The ‘EU–Nepal Trade and Investment Diagnostic’ identifies corruption as a major barrier to attracting investment, noting that 20.2 percent of large firms expect to give gifts to tax officials. Governance frictions also consume managerial capacity: senior management in small firms spends 6.7 percent of its time dealing with government regulations, rising to 9.4 percent in medium-sized firms, while annual tax compliance alone absorbs 90 hours for small firms, 122 hours for medium firms, and 130 hours for large firms. These are not mere administrative inconveniences; they systematically divert time and capital away from productivity-enhancing investment and push firms toward short-term survival strategies rather than long-term growth.

Firm surveys reflect this governance problem in practical terms. While the headline incidence of outright bribery is not the dominant complaint (6.2 percent of firms reported at least one bribe request), other informal payment expectations remain present: roughly 6.9 percent of firms reported being expected to give gifts to obtain a construction permit, and corruption was named as the single biggest obstacle by 4.2 percent of firms, according to Enterprise Survey findings that document how everyday interactions with the state impose costs and uncertainty. Cumulatively, these frictions depress investment, skew public procurement, and stall the very reforms required to narrow the trade gap. Bridging Nepal’s trade deficit gap, therefore, requires a two-track strategy: conventional competitiveness measures alongside a concerted effort to rebuild public trust.

On the competitiveness front, the evidence points squarely to infrastructure and finance- reducing electricity interruptions, lowering trade logistics costs, and expanding trade finance lines to exporters. The World Bank’s November 2025 Development Update notes that export growth in FY25 was driven largely by re-exports and commodity flows, underlining how much of export dynamism remains ad hoc rather than driven by domestic value-added expansion.

On governance, reform must be real, fast, measurable, and visibly enforced. Public perceptions are decisive: when citizens and firms believe state actors operate transparently and that rules apply evenhandedly, private investment and formal trade activity expand. External rankings and indices help clarify priorities. Transparency International’s reporting shows widespread public concern about corruption across the region, reinforcing what Nepal’s modest CPI score already suggests about the scale of the legitimacy challenge. Institutional reforms should pursue a combination of “easy wins” and deeper structural fixes.

Easy wins include streamlining customs procedures. Enterprise Survey data show that import and export clearance times are already relatively short. However, implementation is uneven. This emphasizes the need to expand e-governance to reduce face-to-face discretion and to publish procurement and project execution data in machine-readable formats, enabling monitoring by civil society and markets. Structural fixes, however, require more sustained effort.

Measures such as upgrading regulatory quality, strengthening contract enforcement, and improving overall government effectiveness- areas tracked by global governance indicators- remain critical, even as the World Justice Project’s 2024 Rule of Law Index shows only incremental progress for Nepal. These priorities closely align with the EU-Nepal Trade and Investment Diagnostic, which identifies export diversification, high trade and logistics costs, regulatory bottlenecks, the impending loss of preferential access following LDC graduation, and a weak investment climate as the core constraints that reforms must address if both trust and trade deficits are to narrow simultaneously.

Finally, development partners should use conditional, results-based financing that supports both trade infrastructure and governance milestones. That approach preserves fiscal space while providing technical assistance to improve procurement, port operations, and export promotion. It also creates external anchors for domestic reformers: when reforms are tied to measurable disbursements and capacity building, private sector actors begin to perceive state commitments as credible.

Before Nepal can fix its trade imbalance, it must confront a far more uncomfortable imbalance. Nepal’s trade deficit is therefore not merely a ledger imbalance; it is a mirror reflecting a broader social contract problem, mainly trust. The technical levers- power, finance, and logistics- are necessary but not sufficient. The harder work is institutional: building predictable rules, measurable enforcement, and public signals that the state will act in the national interest rather than as a vehicle for capture.

If Nepal treats these twin tracks in parallel, the trade account can be improved not only by temporary inflows or commodity cycles but by a durable expansion of productive, tradable activity- and by the restored trust that drives any modern trading economy.