Uncertainty over export cash subsidies as government shifts focus to production-based incentives


Kathmandu: Nepal’s long-running export cash subsidy programme, which has supported more than three dozen export items for over a decade, is now clouded in uncertainty after the government omitted it from the current fiscal year’s budget.

While exporters warn that this will erode competitiveness and discourage exports, the government insists it will still provide payments to those who have already applied.

Former Finance Minister Bishnu Prasad Paudel had removed the cash subsidy provision from the budget for the ongoing fiscal year 2025/26. The budget instead introduced a new “Export Promotion Programme,” allocating Rs 900 million (around US$ 6.8 million) in place of the previous direct cash grants. The government also announced plans to create a unified “National Subsidy Policy” to streamline grants at all three tiers of government and eliminate duplication.

The original cash subsidy scheme, introduced in 2018 and amended twice in subsequent years, provided exporters up to 8 percent of their export value in cash after verifying local value addition and export certification. However, officials from the Ministry of Industry, Commerce and Supplies (MoICS) admit that without a dedicated budget and clear procedural guidelines, distributing the subsidies under the old system has become impossible.

The Ministry of Finance has assured exporters who have already submitted applications that they will still receive their due subsidies through “resource management.” As per existing rules, exporters can apply for value addition certification within three months of the end of the fiscal year. However, due to the budget changes, officials say the approval of new applications has been temporarily halted until a new working procedure is finalized.

Jitendra Basnet, spokesperson for the Ministry of Industry, Commerce and Supplies, said the ministry is drafting a new set of procedures that will determine how the new incentive scheme will operate.

“The previous budget allocated only Rs 90 million for export promotion—an amount far below the requirement. We are facing moral and procedural complications since the basis for distribution under the new programme has not yet been defined,” he told Clickmandu.

According to ministry data, about Rs 5 billion (US$ 38 million) in export subsidy payments remain pending from previous fiscal years, as the government has historically allocated far less than requested by exporters. In FY 2024/25 alone, Rs 1.19 billion was allocated for cash subsidies, but only partial payments were made before the fiscal year ended.

While the Finance Ministry has pledged to clear the arrears by mobilizing funds, the Industry Ministry says there is currently no provision in the new budget to cover the backlog. Officials are discussing with the finance ministry how to settle the pending payments while transitioning to the new production-based incentive framework.

Exporters are alarmed by the government’s decision to halt new subsidy applications. The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) estimates that around Rs 5 billion is still owed to exporters. The FNCCI’s Export Promotion Committee is preparing to submit a memorandum to the Prime Minister, Finance Minister, and Industry Minister, urging the government to reinstate the cash subsidy scheme.

“The decision to suspend export subsidies will have a severe impact on investment, exports, and employment,” FNCCI said in a statement, calling for the immediate continuation of the subsidy.

The government’s policy shift marks the beginning of a structural change in Nepal’s export strategy. With Nepal set to graduate from Least Developed Country (LDC) status to a developing country by 2026, the government says it will no longer be able to legally provide export incentives under World Trade Organization (WTO) rules.

“We will gradually phase out export-based subsidies and introduce production-based incentive programmes instead,” said spokesperson Basnet. “Once Nepal becomes a developing country, direct export subsidies will not be permissible, so we are restructuring the scheme accordingly.”

The ministry plans to repeal the existing 2022 directive on export subsidies and introduce a new framework focused on production-linked incentives. The maximum grant under the new system will be capped at 50 percent of production costs.

Exporters argue that removing cash subsidies will weaken Nepal’s already fragile export sector. Despite growth in export value—from Rs 74 billion in FY 2011/12 to Rs 277 billion in FY 2024/25—the trade deficit remains massive at Rs 1.52 trillion, with exports covering only one-sixth of imports. In the first two months of the current fiscal year, the export-import ratio has further deteriorated to 1:10.5.

Nepal’s high transportation costs—25 to 30 percent higher than in neighbouring countries—further erode competitiveness in international markets. Exporters say cash subsidies helped offset this disadvantage, especially for small and medium-sized industries.

Until recently, Nepal offered cash incentives ranging from 5 to 8 percent for various export items, including clinker, cement, steel, catechu, rosin and turpentine, plywood, casemakers, pashmina, and zinc sheets. Processed tea, coffee, handicrafts, leather goods, handmade paper, herbs and essential oils, bottled water, and dairy and fruit exports also received a 5 percent cash grant when exported to third countries in convertible currencies.

Following the recent political transition and formation of an interim government after the Gen-Z movement in September, the Finance Ministry has begun releasing funds to clear overdue subsidies. Officials confirmed that the ministry has instructed the Industry Ministry to proceed with payments after securing necessary resources.

A senior Finance Ministry official said, “The Finance Minister has assured that pending payments will be cleared through internal resource mobilization.”

While exporters welcome this move, they warn that without a clear long-term policy, Nepal’s export sector could face further stagnation.