Nepal's Garment Industry Faces Existential Crisis Ahead of LDC Graduation

Biratnagar. At a program held in Biratnagar, garment entrepreneurs and business owners signaled that their trade is facing a crisis. The industrialists stated, 'As Nepal transitions from a Least Developed Country (LDC), the garment sector is heading toward a major crisis. The government must formulate necessary strategies for this.'

Among them was garment industry operator Devraj Dahal. He said, 'We should not just bring problems here, but be able to provide solutions. The garment industry is on the brink of a crisis.' Not only him, but many participants in the program reiterated that the industrial sector is on the edge of a crisis. Is the garment industry heading toward a crisis as Nepal becomes a developing nation? Rajendra Raut, President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Koshi Province, says that after Nepal's graduation, the customs exemptions and quota-free market access facilities that LDCs have been receiving will be cut, which could lead to a decline in production and exports, along with other challenges. 

'To mitigate the risks of challenges that will arise after graduation, there is a need for SAWTEE to collaborate with the International Labour Organization and the Garment Association of Nepal to create a necessary plan to utilize the export potential of the ready-made garment sector,' he said. 

As the industrialists have said, a study has also shown that the yarn, textile, and ready-made garment sector, which is a major source of Nepal's foreign currency earnings and employment, has now reached the brink of a crisis. The conclusion of the study is that as Nepal graduates from an LDC to a developing country in November 2026, this sector will have to face a major international trade shock.

According to a study conducted by Dr. Paras Kharel, Executive Director of the South Asia Watch on Trade, Economics and Environment (SAWTEE), this sector will be hit because the duty-free access and trade facilities Nepal is currently receiving will be reduced after graduation.

According to data, this sector achieved a high growth rate of 12.15 percent annually from 1994 to 2003. However, a decline of 4.88 percent in annual exports has been observed in the period from 2003 to 2022.

After the quota system was abolished in 2003, the access of Nepali garments to the US market decreased further. In 2003, the US share of Nepal's total ready-made garment exports was over 83 percent, which has shrunk to about 16.97 percent by 2022. Currently, the European Union has become the main destination for Nepali garments, where nearly 48 percent of exports are made. Nepal is exiting the LDC group from November 2026. This will make Nepali products expensive in the global market. 

Kharel's conclusion is that Nepal's total exports could fall by up to 4 percent after graduation. The textile and garment sector alone will have to bear 70 percent of this potential loss. 'It is estimated that about 125,000 people working in this sector could lose their jobs. This includes 68,000 women and 56,000 men. Comparatively, while it is estimated that 132,000 jobs will be lost in Nepal's overall economy, a large portion (about 95 percent) will be in the garment sector. This clarifies how much risk this sector is in,' said Kharel.

Another major challenge for the Nepali garment industry is the 'Rule of Origin'. Currently, Nepal receives concessions even when importing fabric from third countries to make and export ready-made garments. However, after graduating to a developing country, 'double transformation' (from yarn to fabric and fabric to garment must be done in Nepal or a designated area) will be mandatory to receive the European Union's GSP Plus facility.

Currently, 66.7 percent of Nepal's export-oriented industries depend on imported fabric. Of this, 46 percent of the fabric comes from China and 54 percent from India. Although regional cumulation facilities are available for fabric imported from India under GSP Plus, such facilities may not be available for raw materials coming from China. Kharel claims this will make Nepali garments expensive in the European market. 

A survey conducted by SAWTEE on 28 garment industries has brought out some interesting and worrying facts. Among the industries participating in the survey, 68 percent are medium, 25 percent are large, and 7 percent are small industries.

Industries are facing a shortage of skilled workers. Due to the high cost of living in Kathmandu and the difficulty of making a living on current wages, workers are not staying. Only 32.1 percent of industries have given formal contract letters to their workers. The number of industries contributing to the Social Security Fund is also only 32.1 percent. Most industries have a 'piece-rate' system, which has created uncertainty in workers' income.

Nepal is far behind in e-commerce, which is considered the backbone of modern trade. It was found that only one firm among those participating in the survey sells a small amount of goods through e-commerce informally. According to entrepreneurs, if the obstacles to e-commerce are removed, exports could increase by an additional 25-35 percent.

However, due to the lack of international payment gateways like PayPal in Nepal, high postal/courier fees, complexity of banking procedures, and policy ambiguity, Nepali brands have not been able to reach consumers directly around the world.

Nepali garment industries are still at the lower level of the value chain. About 71 percent of industries work on the FOB-full package model, while only 4.2 percent have their own brands. Inability to establish direct contact in the international market, lack of large investment in marketing, and inability to identify fashion trends are the weaknesses of Nepali industries. Similarly, there is an extreme lack of technology and processing centers to convert natural fibers like Allo and Hemp, which have plenty of potential in Nepal, into fabric.

The report points out that Nepal should also pay attention to countries other than traditional markets. Looking at the global demand for the goods Nepal is currently exporting, there is great potential in the European Union ($162 billion), the US ($73 billion), Japan ($20 billion), and the UK ($17 billion).

The report emphasizes that instead of competing only on price, attention should be paid to quality, design, and timely delivery. It is now mandatory to meet environmental, social, and governance standards for European and American markets. The UK, EU, Canada, and Japan have provided transitional facilities for 3 years after graduation, and Nepal should use this period to increase production capacity and make new trade agreements. Similarly, it is emphasized that the effectiveness of export subsidies and concessions provided by the government should be reviewed and linked to productivity growth. 

Nepal's garment sector suffered huge losses in the past after the end of the quota system. The 2026 graduation could be another such loss. However, Kharel says that if policy reforms, the start of digital trade, and domestic production of raw materials or regional cooperation can be increased in time, it is not impossible to pursue an export potential of $1.2 billion. 

If current problems are solved, entrepreneurs expect exports to increase by 54.7 percent in the next 5 years. 'To save Nepal's garment industry, relying only on subsidies is no longer enough; making it technology-friendly, worker-friendly, and compliant with international standards is the only option,' said Kharel.