Indo–Pak tensions may cast economic blight on Nepal !

KATHMANDU, MAY 8: The escalating tensions between India and Pakistan are emerging as a significant economic concern for Nepal, a nation whose economy is deeply interconnected with regional trade and security dynamics.

While Nepal strives to maintain a neutral stance, the geopolitical instability in its neighbouring countries could have far-reaching consequences, both directly and indirectly.

Heavy Reliance on Indian Trade Routes

India remains Nepal’s largest trading partner, constituting nearly 64.1% of Nepal’s total trade in fiscal year 2022/23, valued at approximately NPR 1.15 trillion (USD 8.66 billion). In 2024, Nepal’s imports from India amounted to USD 6.95 billion (NPR 931 billion).

This overwhelming reliance on Indian trade routes means that any disruption to cross-border trade, such as a closure of borders or severe logistical delays due to regional conflict, could severely affect Nepal’s access to essential goods, including fuel, food products, raw materials, and manufactured goods.

Such disruptions would undoubtedly lead to inflationary pressures and cause supply-side bottlenecks, increasing the cost of living and slowing economic activity.

Minimal Direct Trade Exposure to Pakistan

Nepal’s direct trade with Pakistan is considerably smaller in scale, amounting to just USD 2.09 million (approximately NPR 278 million) in imports in 2024. However, despite the small trade volume, the potential impact of a prolonged India-Pakistan conflict could ripple across Nepal’s economic landscape.

Indirect consequences such as disruptions to regional cooperation mechanisms, a decline in investor confidence, and potential security risks could destabilize Nepal’s economic environment. The limited scope of Nepal’s trade with Pakistan does not shield it entirely from these regional developments.

Weak Capital Spending Undermines Economic Resilience

Nepal’s internal economic resilience is already under pressure, as evidenced by its underperformance in capital expenditure utilization. For FY 2023/24, the government allocated NPR 302 billion for capital projects, but it only utilized 61% of this budget by mid-year.

This underperformance in capital spending limits Nepal’s ability to expand infrastructure, generate employment, and improve overall economic competitiveness. If regional tensions were to escalate, these existing fiscal vulnerabilities could become even more pronounced, further hindering economic stability and growth.

Policy Imperatives for Resilience

The threat posed by India–Pakistan tensions highlights the need for Nepal to diversify its trade routes and reduce its heavy reliance on India. Greater engagement with alternative partners, particularly China and other regional economies, could help mitigate the risks posed by potential disruptions.

Furthermore, improving capital expenditure efficiency, ensuring greater fiscal discipline, and building strategic reserves for essential commodities like fuel and food are critical steps that can safeguard Nepal from external shocks in times of geopolitical instability.

Conclusion

While Nepal may not be directly involved in the India–Pakistan conflict, the economic fallout from heightened regional tensions could still deeply impact the country. From supply chain disruptions to diminished investor confidence, the potential consequences are far-reaching.

To navigate these uncertainties, Nepal must adopt a more diversified approach to its trade and economic strategy, fortify its internal systems, and focus on resilience-building measures to safeguard its economy.