Nepal’s economy is experiencing robust export growth and rising remittances, but its heavy dependence on India for trade and investment leaves it acutely exposed to the fallout from escalating India-Pakistan tensions. This article explores how regional instability threatens Nepal’s economic stability, development goals, and diplomatic balance-potentially derailing its LDC graduation and progress toward the SDGs. Discover how Nepal’s future hinges on its ability to navigate trade disruptions, security risks, and global financial pressures in a volatile South Asian landscape.
Nepal’s economy is currently showing signs of growth with exports increasing by 46.5% and imports rising by 10.09% during the first seven months of fiscal year 2024/25. Despite this growth, the landlocked nation continues to face significant challenges, including a trade deficit of Rs 861.38 billion out of a total foreign trade of Rs 1,115.79 billion during this period[1]. The potential escalation of tensions between India and Pakistan poses serious risks to Nepal’s economic stability, development trajectory, and international standing.
Economic vulnerability and immediate risks
Nepal is heavily reliant on India for trade, with India remaining Nepal’s largest trade partner, accounting for a bilateral trade volume of over NRS 1134.53 billion (US$8.36 billion) during fiscal year 2022-23[2]. This dependency results in a persistent trade deficit-recently reaching Rs 498.34 billion (US$3.67 billion) with India over the last seven months of the current fiscal year – and leaves Nepal acutely exposed to disruptions in the region.
India continues to be the principal trade and investment partner for Nepal, with India’s exports to Nepal reaching US$6.95 billion during 2024[3] [4]. Notably, Nepal has improved its position as India’s export destination, moving up from 28th position in 2014 to 17th position in 2024[5]. This close economic relationship makes Nepal particularly vulnerable to any regional instability.
Remittances from Nepali workers abroad are a crucial economic lifeline, with Nepal receiving remittances worth US$3.87 billion in the first four months of the 2024-25 fiscal year, an increase of 9.1% compared to the same period in the previous fiscal year[6]. For the full fiscal year 2023/24, remittance inflows increased by 16.5% to Rs 1445.32 billion (US$10.65 billion)[7]. Any disruption to these flows due to regional conflict could have severe economic consequences.
Diplomatically, Nepal faces a delicate balancing act. The recent military operation, “Operation Sindoor,” conducted by Indian armed forces against nine sites in Pakistan and Pakistan-occupied Kashmir has heightened tensions between the two nuclear-armed neighbors[8]. This escalation poses significant risks to Nepal’s security, diplomatic neutrality, and foreign policy.
Nepal’s Trade Relations with India and Pakistan
India continues to be Nepal’s principal trade and investment partner, significantly contributing to both Nepali imports and exports. The trade relationship is characterized by a significant imbalance, with Nepal’s imports from India amounting to NPR 1027.84 billion (US$7.58 billion) and exports to India standing at NPR 106.69 billion (US$786 million) in fiscal year 2022-23. Key import items from India include mineral fuels and oils ($2.19 billion), iron and steel ($700.57 million), and machinery ($429.17 million)[9].
In contrast, Nepal’s trade relations with Pakistan remain relatively minimal, with Pakistan’s exports to Nepal at just US$2.09 million and imports from Nepal at US$4.27 million during 2024[10] [11]. Pakistan’s main exports to Nepal include optical and medical apparatus ($736.36K), coffee and tea ($478.19K), and seeds and fruits ($352.18K), while it primarily imports seeds and fruits ($2.19M) and coffee and tea ($1.36M) from Nepal. Despite historical trade agreements dating back to 1962, bilateral trade between the two countries has remained stagnant at less than five million dollars, with Pakistani exports to Nepal growing by a mere 0.45% annually since 1998[12].
Potential Impacts of the Current India-Pakistan Conflict
The current tensions between India and Pakistan, marked by India’s “Operation Sindoor” and Pakistan’s counterattacks[13], create immediate challenges for Nepal:
- Trade disruptions: The conflict could affect supply chains and cross-border trade, particularly impacting Nepal’s trade with India, which accounts for 88.60% of Nepal’s foreign trade[14].
- Diplomatic pressure: Nepal’s strategic location between India and China exposes it to heightened diplomatic pressures during regional crises, often compelling the country to carefully navigate demands from both neighbors and increasing the risk of being pushed to align with one side over the other.
- Economic uncertainty: Investor confidence may weaken, affecting Nepal’s projected economic growth of 4.4% in 2025 as forecasted by the Asian Development Bank[15].
- Security concerns: Nepal’s open borders with India heighten its exposure to regional instability, making it susceptible to cross-border security challenges such as unauthorized migration, potential influxes of refugees, and increased risks of militant infiltration or other illicit activities in times of heightened tension.
Potential Impacts of Full-Scale Conflict
If the India-Pakistan crisis escalates into open war, the consequences for Nepal would intensify:
- Trade blockade threats: India has previously used trade restrictions during disputes (1969, 1989, 2015), resulting in severe shortages and economic hardship. The 2015 blockade had devastating socio-economic impacts on Nepal, estimated at approximately Nepali Rupee 200 billion in losses[16].
- Refugee influx: Past South Asian conflicts triggered massive refugee movements. Nepal could face a similar influx, straining already limited resources.
- Economic slowdown: Regional conflict could sharply reduce Nepal’s economic growth, currently projected at 4.5% for FY25 by the World Bank[17] and 4.4% for 2025 by the ADB[18]. Full-scale war would likely result in significant downward revisions of these forecasts.
- Strategic and security risks: Nepal’s efforts to balance relations with India and China become more precarious during conflict, with any perceived tilt risking increased diplomatic and economic pressure.
Summary of potential impacts
| Impact area | Current tension | Full-scale war scenario |
| Trade | Supply chain disruptions | Severe shortages, possible blockade |
| Remittances | At risk | Sharp decline |
| Tourism | Reduced flows | Collapse of Indian/foreign arrivals |
| Refugees | Not significant yet | Potential influx, resource strain |
| Growth | 4.4% | Likely revised downward |
| Diplomacy | Balancing act | Intense pressure, risk of isolation |
Impact on Nepal’s Development Goals and LDC Graduation
Nepal’s progress toward the Sustainable Development Goals (SDGs) is already challenged by a $585 million annual funding gap,[19] with only 41% of targets achieved so far and projections indicating Nepal will attain about 60% of SDGs by 2030[20]. A full-scale conflict could derail these efforts further.
Nepal is poised to graduate from Least Developed Country (LDC) status in 2026. The loss of LDC trade preferences is projected to cause a 4.3% decrease in exports due to tariff changes[21]. Aid dependency may increase, with $500 million in Millennium Challenge Corporation (MCC) funding suspended[22] and $2.5 billion in Belt and Road Initiative (BRI) pledges stalled.[23] War-induced border closures could further threaten Nepal’s trade capabilities and economic stability.
Energy security would also be at risk. Nepal and India signed a long-term power trade agreement in January 2024, aiming to export 10,000 megawatts of electricity to India in the next ten years[24]. Disruption of this agreement due to conflict would have significant economic implications for Nepal.
AML/CFT Compliance and Financial Integrity
Nepal has been placed on the Financial Action Task Force (FATF) grey list in February 2025 for the second time, after previously being on the list from 2008 to 2014[25]. Nepal’s placement on the Financial Action Task Force (FATF) grey list (meeting only 21 of 40 recommendations) raises compliance costs for remittances ($10.5 billion/year) and foreign direct investment ($470 million in 2023).[26] Regional instability could drive more financial activities underground, worsening money laundering risks. Post-war capital flight may deepen Nepal’s $1.8 billion trade deficit, complicating anti-money laundering (AML) reforms. Failure to address FATF gaps by 2025 risks blacklisting, which could cost Nepal over $600 million in sanctions.
Summary of impact in the amount
| Category | Current impact | Full-scale war impact (4 weeks) |
| SDG funding gap | $585M/year | $1.2B GDP loss |
| LDC trade loss | $230M/year | $1.8B deficit |
| AML/CFT costs | $470M FDI at risk | $600M+ sanctions |
Conclusion
Nepal’s development trajectory and economic stability are closely tied to peace and stability in South Asia. The India-Pakistan crisis exposes Nepal to immediate economic shocks and diplomatic pressure, while a full-scale conflict would amplify these risks, threatening trade, remittances, growth, and internal stability.
The ongoing conflict jeopardizes Nepal’s progress toward the SDGs, its LDC graduation, and its standing in the global financial system. With exports surging by 46.5% to Rs. 127.20 billion (US$928 million)[27] and the country working to address its persistent trade deficit, regional stability remains crucial for Nepal’s sustainable development and international credibility.
As Nepal navigates these challenging waters, strengthening economic resilience, diversifying trade partnerships, and maintaining diplomatic neutrality will be essential strategies to mitigate the adverse effects of regional conflicts.
A simplified/edited version of this article in the Nepali language was published in Onlinekhabar on May 9, 2025.
[1] B360 Nepal. (2025a, May 6). Nepal records Rs 861.38bn trade deficit in seven months. B360 Nepal. https://www.b360nepal.com/detail/24593/nepal-records-rs-86138bn-trade-deficit-in-seven-months
[2] Embassy of Nepal in India. (n.d.). Trade and commerce. https://in.nepalembassy.gov.np/trade-and-commerce/
[3] Trading Economics. (n.d.). India exports to Nepal. Trading Economics. https://tradingeconomics.com/india/exports/nepal
[4] Embassy of India, Kathmandu. (n.d.). Media detail. https://www.indembkathmandu.gov.in/media-detail/148
[5] Ministry of External Affairs, Government of India. (2024, June 20). Open bilateral brief. https://www.mea.gov.in/Portal/ForeignRelation/Open-bilateral-brief-20-June-2024.pdf
[6] Xinhua News Agency. (2024, December 12). Nepal–China trade growth. Xinhua News. https://english.news.cn/asiapacific/20241212/c110dd15326e4e2599569b5fcb719a73/c.html
[7] New Business Age. (2024, May 5). Nepal receives Rs 144.532 billion in remittance in the last fiscal year. New Business Age. https://newbusinessage.com/article/nepal-receives-rs-144532-billion-in-remittance-in-the-last-fiscal-year
[8] Nepal News. (2025a, April 10). The India-Pakistan conflict escalates: What it means for Nepal. Nepal News. https://nepalnews.com/s/analysis/the-india-pakistan-conflict-escalates-what-it-means-for-nepal/
[9] Trading Economics. (n.d.). India exports to Nepal. Trading Economics. https://tradingeconomics.com/india/exports/nepal
[10] Trading Economics. (n.d.). Pakistan exports to Nepal. Trading Economics. https://tradingeconomics.com/pakistan/exports/nepal
[11] Trading Economics. (n.d.). Pakistan imports from Nepal. Trading Economics. https://tradingeconomics.com/pakistan/imports/nepal
[12] Nepal Desk. (2024, May 3). Nepal Expo 2024. Nepal Desk. https://nepaldesk.com/news/nepal-expo-2024
[13] Nepal News. (2025b, April 10).
[14] B360 Nepal. (2025b, May 6).
[15] Pardafas. (2024a, May 3). ADB projects 4.4% economic growth for Nepal in 2025. Pardafas. https://english.pardafas.com/adb-projects-4-4-economic-growth-for-nepal-in-2025/
[16] Pant, B. (2018). Socio Economic Impact of Undeclared Blockade of India on Nepal. Research Nepal Journal of Development Studies, 1(1). https://www.nepjol.info/index.php/rnjds/article/view/21270/17411
[17] World Bank. (2024). Nepal development update. World Bank. https://www.worldbank.org/en/country/nepal/publication/nepaldevelopmentupdate
[18] Pardafas. (2024b, May 3).
[19] MyRepublica. (2024, August 8). Nepal achieves only 41.7 percent progress in SDGs. https://myrepublica.nagariknetwork.com/news/nepal-achieves-only-417-percent-progress-in-sdgs-679287026373d.html
[20] United Nations High-Level Political Forum. (2024). Voluntary national reviews 2024: Nepal. https://hlpf.un.org/countries/nepal/voluntary-national-reviews-2024
[21] Nepal Economic Forum. (2024, April 15). Nepal’s graduation challenges and way forward. Nepal Economic Forum. https://nepaleconomicforum.org/nepals-graduation-challenges-and-way-forward/
[22] The Kathmandu Post. (2025, February 18). MCC funds for Nepal suspended. https://kathmandupost.com/national/2025/02/18/mcc-funds-for-nepal-suspended
[23] DW. (2024, December 2). Nepal looks to kick start stalled China-funded projects. Deutsche Welle. https://www.dw.com/en/nepal-looks-to-kick-start-stalled-china-funded-projects/a-70935412
[24] South Asia Subregional Economic Cooperation. (2024, May 1). India-Nepal sign long-term energy deal. SASEC. https://www.sasec.asia/index.php?page=news&nid=1565&url=ind-nep-sign-long-term-energy-deal
[25] Kathmandu Post. (2025, April 9). Nepal starts groundwork to exit FATF grey list. Kathmandu Post. https://kathmandupost.com/national/2025/04/09/nepal-starts-groundwork-to-exit-fatf-grey-list
[26] Nepal News. (2025, February 28). Nepal placed on FATF grey list again as Oli govt faces backlash. https://nepalnews.com/s/explainers/nepal-placed-on-fatf-grey-list-again-as-oli-govt-faces-backlash/
[27] Rising Nepal. (2025, May 6). Nepal’s foreign trade analysis. Rising Nepal Daily. https://risingnepaldaily.com/news/57484
Rakesh Karna 