IMAGE: DIMITRIS TAMVAKOS
WHEN NEPAL’S politicians thump the podium and declare that the country must learn to stand on its own feet, they mean it. Import substitution is official policy. Successive five-year plans have promised to nurture domestic industry; reduce dependence on foreign goods; and turn Nepal into a net exporter. The March election brought a wave of young MPs to Kathmandu promising to break with the old ways. Many of them spoke of building a Nepal that makes things, not one that only consumes what others produce.
But the budget suggests otherwise. Last year the government collected Rs1.196trn ($8.1bn) in revenue. Roughly 40% of that came from taxes levied at the border—customs duties, value-added tax on imports and excise on foreign goods. Customs alone brought in Rs231bn, up nearly 15% on the year. VAT, the single biggest contributor to the exchequer at Rs342bn, is collected mostly at the border too, because Nepal’s manufacturing sector is too small to generate much of it domestically. The state is built on things that come from elsewhere.
That dependence is not accidental. Nepal’s tax system is administratively simple by necessity. A big informal economy, weak business registration and limited audit capacity make income and corporate taxes hard to collect. The border, by contrast, is a choke point. Every container that crosses from India or China can be counted and taxed. The result is a tax structure that depends on the flow of goods. The more that comes in, the more the government collects.
The human chain that feeds this machine runs through the Gulf. Remittances from the 4m or so Nepalis working abroad reached Rs1.72trn last year, more than a quarter of GDP. That money flows into household consumption, which drives demand for imported goods, which generates tax revenue. The 505,957 workers who left for foreign jobs last fiscal year, up 10% on the year, are in effect the most important contributors to government revenue, though no official document would put it that way. Labour export is fiscal policy by other means.
The problem goes deeper than rhetoric. When Nepal’s cement and steel industries replaced imports over the past decade, customs revenue from those products fell. The Ministry of Finance had no way to model that trade-off. As a result the government kept announcing industrial promotion schemes even while the fiscal system created incentives in the opposite direction. As one analyst at Katmandu Macro Advisory, our research arm, put it: “The system rewards failure in industrial policy and penalises success. When imports are replaced by local production, government revenue falls in the short term.”
The political economy reinforces the trap. Import traders, many linked to established parties, benefit from tariff structures that protect their supply chains. Customs officials collect rents tied to the volume and complexity of imports. The political class then distributes the revenue through patronage networks that cut across party lines. A simpler tariff system that reduced duties on industrial inputs would help manufacturers. But it would also reduce customs revenue. As a result, it rarely happens.
The exceptions prove the rule. Hydropower exports, which reached Rs17.5bn last year as Nepal became a net electricity exporter for the first time, are structurally different: they generate foreign exchange without requiring imports. Once the dams are built, the revenue comes from selling power, not from taxing goods at the border. That is why the government’s export ambitions focus on electricity. It is the one sector where success does not cannibalise the tax base.
But even here the fiscal logic is tangled. During the construction phase, hydropower projects generate substantial import revenue—turbines, transformers, steel, cement. When they go operational, that revenue stops. The Ministry of Finance has no published plan for managing that transition, nor for developing the domestic tax instruments that would need to replace border revenues over the next decade.
For the moment the government cannot afford to let imports fall. So it taxes them, spends the proceeds and postpones the investment in domestic productive capacity that would eventually reduce the country’s dependence on both. The politicians who thump the podium know this. They also know that the alternative—building a state that can fund itself from what it produces—would require years of institutional investment with no guarantee of electoral payoff. So the imports keep coming. The revenue keeps flowing. And the speeches keep promising something else. ■
