Nepal’s export potential—held back by poor logistics and infrastructure

Nepal's exports have struggled to gain momentum over the past two decades, or more, if one considers its trade data. A World Bank reports says that the country has untapped exports potential amounting to 9.2 billion dollars. But the country’s export-driven growth is constrained by its landlockedness and its inadequate domestic logistics and infrastructures, which pose a severe challenge to its export supply chain. They hinder trade and efficiency, increase costs and reduce competitiveness in global markets.

Limited road connectivity
Despite a history of focus on road infrastructure which stands as the backbone of its export supply chain, the country’s road infrastructure is highly underdeveloped. Whether for imports or exports, goods must be efficiently transferred to road transport to reach their final destination. The Department of Road (2022) reports that Nepal has around 13,000 km of blacktopped roads. But many key trade routes remain in extremely poor condition and lack sophistication.

This leads to longer transit times, with a truck carrying goods from Kathmandu to the Indian border (Birgunj) taking 8-10 hours for a journey that should ideally take 4-5 hours. 

Due to poor roads and frequent vehicle breakdowns, transportation costs can be up to 35% of total export expenses, compared to 8-10% in developed countries.

The roads leading to the China border points are also in notably poor conditions.

Seasonal disruptions such as landslides and floods during monsoons further exacerbate uncertainties, delays and losses in all trade routes.

Lack of alternative transport modes
Nepal has barely explored alternative transportation options. With no domestic railway network for cargo transport, the country is missing a crucial link in its logistics infrastructure. The only functional railway, the Jogbani-Biratnagar and Jayanagar-Kurtha railways, is limited in capacity and connectivity.

Air freight, on the other hand, is costly and used mainly for light and perishable goods like tea and handicrafts. 

During my consulting services to NP Rugs — a leading handmade rug manufacturer in the country that exports high-quality rugs to countries like the US, UK, and Canada, I gained firsthand insight into how export-driven businesses facing these logistical challenges are limited in their growth potential. I observed that enhancing logistics and optimising transportation costs would have reinforced its ability to meet international demand efficiently.

Cumbersome customs processes
Nepali exporters frequently face delays at the country’s major trade points like Birgunj and Bhairahawa, which altogether handle half of the country’s foreign trade according to the estimates of fiscal year 2023/24.

According to the ‘Trading across borders’ index of the World Bank’s Doing Business 2020, it takes 11 hours and 103 dollars for border compliance and 43 hours and 110 dollars for documentary compliance for Nepal’s exporters.

According to the Trading Across the Border Index of Doing Business 2020, it costs Nepal US$ 330 per container in domestic transport to export to India, takes 11 hours for cargo clearance at the border for Customs and other related agencies, and requires 10 types of documents for export.

Earlier, Nepal ranked 121 out of 167 in 2018 in the World Bank’s Logistics Performance Index. The index used six key dimensions to assess countries' logistics performance — i) efficiency of customs and border clearance processes, ii) quality of trade and transport infrastructure, iii) ease of arranging competitively priced shipments, iv) competence and quality of logistics services, v) ability to track and trace consignments and vi) timeliness of shipments.

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Both assessments highlighted excessive paperwork, which remains a major issue, requiring multiple clearances, some still relying on manual verification.

Lack of digital integration further adds to the delays. Although the ASYCUDA (Automated System for Customs Data) system is in place, it is yet to be fully implemented across all borders.

Corruption and informal payments create additional obstacles, as exporters often face unofficial fees to expedite customs clearance, which increase the overall cost of doing business and prevent fair competition, particularly harming new and medium-sized entreprises.

In a study, the export stakeholders claimed that the country’s logistic cost is over 25% of the total cost.

Port dependency on India
Lack of direct sea access is a well-known challenge. The country as a result relies on Kolkata and Visakhapatnam Ports in India for shipments, where it faces higher transit times, with goods taking 35-40 days to reach Europe due to multiple handling points. On the other hand, India allows only a limited number of land and sea routes to do trade with other countries, shows a report, due to which its shipment days are much longer. 

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Storage constraints also contribute to delays, leading to extra port charges. Given these complications, businesses often require legal assistance to navigate customs regulations and trade laws. 

Limited warehousing and cold storage facilities
Additionally, the country lacks warehousing and cold storage facilities, particularly for perishable goods like tea, cardamom, and medicinal herbs. 

Several studies show that the country’s agriculture production continues to suffer significant post-harvest losses due to poor storage, which also limits export opportunities. Swisscontact, which works towards supporting agribusinesses in the country reports that multiple studies estimate post-harvest loss in fruits and vegetables range from 20 to 30 percent and could even exceed more than 50% under adverse conditions, with losses potentially exceeding 50% under unfavorable conditions.

While there are limited cold storage facilities across the country, with numbers gradually increasing, the other problem is that farmers are not embracing the concept of the existing facilities, forcing exporters to rely on expensive third-party services in India. 

Without proper storage, exporters lose both quality and value, reducing competitiveness in global markets.

Unreliable energy supply and high costs
While the country’s abundant hydropower potential is often highlighted and regular load shedding is a thing of the past now, there are erratic power cuts, which disrupt manufacturing and cold storage operations. While electricity tariffs are higher compared to neighboring countries, driving up production costs and reducing competitiveness.

For instance, garment manufacturers and tea exporters often have to resort to diesel generators, increasing overheads by over 15%.

Limited access to finance for exporters
Small and medium-sized exporters struggle to secure affordable financing. While interest rates have gone down presently, it wasn’t long ago that rates ranged from 9 to 14 percent , which made it difficult for businesses to expand.

Another challenge is inadequate export credit insurance facility, which protects exporters from defaults by importers. This shortcoming discourages exporters from risk-taking in international markets. Without financial support, many businesses remain stuck in low-volume trade, unable to scale up.

Overcoming these bottlenecks?
Nepal has tremendous export potential, especially in sectors like tea, handicrafts, herbs, and textiles and many other products as identified in the Nepal Trade Integration Strategy 2023, which has enlisted 32 such items including services. However, infrastructure and logistics challenges make it expensive and time-consuming to compete in global markets. 

To address these challenges, the country needs significant investment in infrastructure development, including accelerating road upgrades and envisioning railway networks. It must improve inland container depots to reduce reliance on Indian ports, and encourage development and utilisation of warehousing and cold storage facilities across key export hubs.

Streamlining customs and border operations through full implementation of digital customs clearance systems, reducing paperwork, and adopting single-window processing will help expedite trade operations. Border logistics also need to be optimised to minimise waiting times.

Stronger trade agreements can enhance Nepal’s export potential by negotiating better port access with India and establishing third-country transit agreements. Forging regional partnerships will facilitate trade growth.

Additionally, it must focus on promoting low-cost export financing  and introducing credit guarantees for exporters. Attracting foreign investment in logistics and supply chain management can also transform the export landscape, unlocking new efficiencies.