Nepal’s Economic Strain Amid Rising Trade Costs
Nepal is experiencing a sharp increase in trade costs due to the ongoing conflict in West Asia, which is driving up prices of essential goods and industrial products. Analysts are warning that this situation could lead to deeper economic challenges if the conflict continues.
Industry insiders report that some product categories have already seen price increases of up to 50 percent. Further hikes are expected if the conflict escalates. This rise in costs affects everything from basic kitchen staples to high-value goods, creating significant pressure on both consumers and businesses.
Nepal’s economy is heavily dependent on imports, with goods and services accounting for around 30 to 35 percent of its gross domestic product. The country relies on foreign supplies for food, agricultural goods, raw materials, and finished products. Key imports include rice, edible oil, maize, fruits, fertilizers, crude oil, iron, automobiles, electronics, and branded goods.
The conflict in West Asia, home to major oil producers like Saudi Arabia, Iraq, and Iran, has far-reaching implications for Nepal. The most immediate impact is on fuel prices. Nepal imports all its petroleum products through the Nepal Oil Corporation, which depends on supplies from India. Any increase in global crude prices is passed down through India, leaving Nepal with limited ability to cushion the shock.
On Friday, the Nepal Oil Corporation raised petrol and diesel/kerosene prices by Rs15 per litre each, marking the third hike in less than a month. Petrol now costs Rs202 per litre in the Kathmandu Valley, while diesel is priced at Rs182 per litre. Despite these increases, the state monopoly continues to incur losses, although the monthly losses have narrowed to Rs11.71 billion.
Aviation turbine fuel prices also saw a sharp increase. International airlines faced a 77.63 percent surge to $1,716 per kilolitre in Kathmandu, while domestic carriers saw prices nearly double, rising 97.63 percent to Rs251 per litre.
Rajendra Sangraula, president of the Nepal Freight Forwarders Association, warned that freight charges have tripled, potentially leading to a 50 percent rise in market prices. If tensions escalate further, it could be a disaster.
Geopolitical risks, particularly involving the United States and Iran, have increased insurance premiums, adding more cost burdens for traders. These additional costs are ultimately passed on to consumers. Ocean and air freight costs have surged, and land transport costs are expected to follow. Transit times have increased by up to 15 days, with higher container charges compounding the pressure on importers.
“This has caused the price of all goods, both consumable and non-consumable, to rise sharply, making daily household expenses more expensive,” said Sangraula.
Higher fuel costs are directly feeding into inflation. Transport becomes more expensive, raising the cost of everything from food to construction materials. In Nepal, where difficult terrain already inflates logistics costs, even modest fuel price increases can have an outsized impact. Low- and middle-income households are expected to bear the brunt as rising prices erode purchasing power and deepen economic hardship.
Remittances, another pillar of Nepal’s economy, also face uncertainty. Millions of Nepali workers are employed in Gulf countries such as Qatar, UAE, and Saudi Arabia, with remittances contributing over a quarter of GDP. While higher oil prices may initially boost revenues, prolonged instability could disrupt sectors like construction and services, reducing job opportunities and remittance inflows.
Tourism is another sector at risk. Rising aviation fuel costs are increasing airfares, making travel to Nepal more expensive and potentially deterring visitors. Airlines operating to Kathmandu are facing higher operating costs, which could affect flight frequency and passenger demand, especially from long-haul markets.
Trade and logistics expert Rajan Sharma highlighted Nepal’s vulnerability due to its limited export base and fragile logistics systems. “Being an import-dependent country with weak export diversification, Nepal has little capacity to offset rising trade costs,” he said. “Export competitiveness, already low, will deteriorate further.”
Government data shows that Nepal’s imports rose by 13.25 percent to Rs1.8 trillion in the last fiscal year, while exports increased by 81.80 percent to Rs277 billion—largely driven by re-exports of refined soybean, palm, and sunflower oil. However, exports to China dropped sharply by 53.7 percent.
Sharma warned that supply chains for fuel, machinery, raw materials, and pharmaceuticals are likely to face delays, adding further pressure on domestic markets. A strong US dollar, rising fuel costs, and supply chain disruptions are expected to strain foreign exchange reserves, push up inflation, and widen the trade deficit.
Demand for Nepali exports such as garments, carpets, and handicrafts could decline due to higher costs and delivery delays, potentially causing long-term damage to the country’s export sector.
“If the conflict persists, prices of finished and unfinished goods could rise by 20 to 25 percent,” said Sharma.
A recent report by the United Nations Conference on Trade and Development highlights the global scale of the disruption. The Strait of Hormuz, a critical artery for global energy trade, has seen a dramatic drop in activity, with daily ship transits falling from around 130 in February to just six in March—a decline of about 95 percent.
This disruption is affecting a significant share of global oil and gas supplies, with cascading effects on production, trade, and consumption. It is also spilling over into transport systems, including maritime routes, air cargo, and port logistics.
Global merchandise trade growth is now projected to slow from around 4.7 percent in 2025 to between 1.5 percent and 2.5 percent in 2026, as demand weakens and uncertainty rises—adding to the challenges facing economies like Nepal that are heavily reliant on imports.
