The government is preparing to revise its long-standing export subsidy policy by shifting the focus toward production-based incentives. This change comes as Nepal prepares to graduate from the United Nations' list of Least Developed Countries (LDCs) to a Developing Country status by 2026.

Currently, the government provides export subsidies ranging from 3% to 8% of the sale value, depending on the category of goods. These subsidies are meant to promote the export of Nepali products. However, according to World Trade Organization (WTO) rules, once Nepal transitions out of LDC status, it will no longer be eligible to provide export subsidies for non-agricultural goods.

As a result, the government is working on a new subsidy framework aimed at enhancing domestic production rather than exports. Jitendra Basnet, spokesperson for the Ministry of Industry, Commerce, and Supplies, said the new policy will prioritize goods listed in the Nepal Trade Integration Strategy (NTIS) 2022, which identifies products with high export potential.

"Such goods and services must be exportable and capable of import substitution," Basnet said. "With Nepal’s LDC graduation, direct cash subsidies on exports will no longer be allowed, so we plan to support producers instead."

According to Basnet, the government has held discussions to promote NTIS-listed products and included the program within its budget ceiling for the upcoming fiscal year. “From the next fiscal year, we aim to formally launch production-based subsidies,” he added.

The NTIS includes a wide range of products under different categories. In agriculture, the list includes cardamom, ginger, pulses, jute, and tea. Forest-based products include medicinal and aromatic plants, handmade paper from lokta (Daphne shrub), rosin, and turpentine. Iron and steel, yarn and textiles, footwear, and ready-made garments fall under this category from large industries.

Small and cottage industries contribute products such as carpets, jewelry, pashmina, pasta, and woollen goods including felt. Emerging products include essential oils, Himalayan spring water, processed vegetables and fruits, and spices such as cinnamon, turmeric, garlic, saffron, cumin, pepper, and bay leaf. Handicrafts, long-fiber fabrics from allo (Himalayan giant nettle)  and hemp, coffee, PPC cement, churpi (hardened cheese), and honey are also listed. Additionally, the NTIS identifies new and future potential products such as hydrogen energy, precious stones, and mineral, riverine, and forest products that do not adversely affect the environment or local communities.

Basnet noted that discussions on the new subsidy model had begun prior to the announcement of the budget for the fiscal year 2025/26. “While this specific policy hasn’t been officially announced in the budget yet, we are moving forward to replace the current export subsidy scheme,” he said.

According to the Department of Industry, the government disbursed cash subsidies totaling Rs 7.89 billion to exporters from fiscal year 2012/13 to 2023/24. However, payments have not been made to all beneficiaries. By mid-April 2025, outstanding claims had reached Rs 5.57 billion, based on applications submitted to Nepal Rastra Bank under the current “Export Subsidy Procedure (Second Amendment), 2022.”

The FY 2022/23 budget introduced cash subsidies of up to 8% for high-potential products such as clinker, cement, steel, footwear, and processed water. Currently, 36 types of export goods are eligible for cash subsidies. Items like processed tea, handicrafts, and handmade paper receive a 5% subsidy, while textiles, garments, jewelry, carpets, and woolen products receive 3%.

If the new production-based subsidy model is implemented, the current system of post-export cash incentives will be phased out. Basnet stated that the government would settle all pending obligations under the current system, which will likely remain in place until Nepal officially graduates from LDC status.

“Once Nepal is officially recognized as a developing country, this export subsidy facility will be automatically discontinued,” he said, adding that a production-based incentive policy will then be implemented in its place.

In April 2022, the government launched an ambitious NTIS plan targeting exports of goods and services worth Rs 1.6 trillion over five years. Achieving this target was estimated to require investment of Rs 463 billion. To support this, the Ministry of Industry, Commerce, and Supplies has already rolled out the “National Action Plan for Trade Deficit Reduction 2079” and the “NTIS 2084/85 – 2023.”

The NTIS estimates that over Rs 40 billion would be spent on subsidies during the implementation period, with 15 government agencies involved in meeting export targets. First introduced in 2010 and updated in 2016, the NTIS was revised again and approved by the Cabinet on May 9, 2022. With the inclusion of 24 new goods and services, the current NTIS now identifies a total of 32 exportable products and services.