Article
From Aid to Investment: Reframing Germany–Nepal Economic Relations
For more than two decades, German trade and investment in Asia have been dominated by a handful of large economies. China has emerged as Germany’s single most important investment destination outside Europe and the US. Even amid calls for “de-risking” and diversification under the China plus one (C+1) strategy, China continues to absorb a large share of German foreign direct investment (FDI). China is Germany’s largest source of imports, valued at over €150 billion annually, and a top five destination for German exports.
Germany’s diversification efforts toward India, Vietnam, and ASEAN countries have yielded some success, but alternative markets remain underexplored. South Asia beyond India offers such an opportunity. A study* conducted by Samriddhi Foundation in partnership with Friedrich Naumann Foundation (FNF) shows that Nepal stands out as a high potential market because of its untapped potential, and the strategic role Germany can play in shaping its economic transformation. The study further indicates that by supporting the development of liberal economic policies that promote market-led growth, Germany can help Nepal unlock its economic potential and achieve sustained, long-term growth.
Nepal: A Small Market with Strategic Value
Nepal has made notable progress in social indicators over the past two decades. Literacy rates, life expectancy, and access to electricity have improved markedly. However, economic growth remains volatile and structurally weak. Foreign direct investment inflows remain stagnant. With FDI of around €48.7 million in 2024, Nepal is placed near the bottom even within South Asia.
From a German perspective, these figures may initially appear discouraging. Yet this is precisely where strategic bilateral engagement matters. Germany has historically combined trade, investment, and development cooperation to build long-term economic partnerships. Nepal offers a case where targeted support for institutions, infrastructure, and market development could unlock private investment and create new trade corridors between Europe and South Asia.
Exploiting Nepal’s high potential sectors
The International Trade Center (ITC) shows that Nepal has high unrealized potential in medicinal and aromatic plants (MAPS), plywood, laminate wood, and spices, which have substantial demand in the German market. Germany imported plywood worth €393 million in 2024 alone accounting for 8.96 percent of worldwide plywood sales. Likewise, MAPS and spices are highly absorbed by Germany’s health, culinary and cosmetic industry. However, due to stringent statutory and non-statutory high quality requirements, safety standards, and certification demanded by Germany, Nepal has not been able to meet the German market requirement. Through targeted bilateral technical support to meet these standards, along with increased German investment in these sectors, both Germany and Nepal can derive significant mutual benefits.
Beyond goods trade, Nepal also holds an immense potential in information technology (IT) sector. Currently, three-quarters of the Nepal’s IT firms already serve European, American, and Australian clients. By investing in Nepal’s IT sector, German firms by leveraging their understanding of European market requirements could act as intermediaries between European clients and Nepali service providers, while supporting job creation and human capital development in Nepal.
Existing Ties: A Foundation to Build On
Despite its challenges, Nepal already maintains meaningful economic links with Europe. In 2024, total trade between Nepal and the European Union reached €457 million, making the EU Nepal’s third-largest trading partner after India and China. Germany is Nepal’s most important partner in the EU and the third largest global destination for Nepali exports. European and German investments are also growing. Since 2015, commitment from EU investors in Nepal has nearly doubled, reaching €6.6 million in 2024.
With a concentration in energy, tourism, and manufacturing, Germany’s net foreign investment outflow account for about 11.5 percent of the EU’s foreign investment outflow. As these sectors align closely with German expertise, particularly renewable energy, sustainable tourism, engineering, and high-quality manufacturing, both Nepal and Germany can mutually benefit out of Germany’s investment in these sectors.
Why German Bilateral Support Matters
Nepal’s main constraint is not market access, but domestic capacity. As a Least Developed Country (LDC), Nepal currently benefits from duty-free, quota-free access to the EU under the Everything But Arms (EBA) scheme. Yet exports remain concentrated primarily in apparel and carpets which also have stagnated for over a decade. This reflects deep structural bottlenecks. Weak institutions, complex regulations, limited competition, and inefficient public administration raise the cost of doing business. Nepal ranks in the bottom quartile of the World Economic Forum’s Global Competitiveness Index and has one of the highest bilateral trade costs with Germany. Logistics costs alone amount to more than 30 percent of the value of goods, undermining export competitiveness and discouraging foreign investors. Here, German bilateral cooperation can be transformative. Rather than focusing narrowly on aid, Germany can align development cooperation with its trade and investment strategy in four key areas:
- Institutional Strengthening and Regulatory Reform
German support through institutions such as GIZ and KfW can help modernize Nepal’s regulatory framework, streamline business entry, and improve tax and customs administration. Predictable regulation and consistent interpretation of laws are critical for German firms accustomed to legal certainty.
- Trade Facilitation and Infrastructure
Nepal’s high trade costs stem from poor transport connectivity, inefficient border procedures, and weak logistics services. German investment in trade-related infrastructure such as dry ports, digital customs systems, testing laboratories, and logistics hubs would directly reduce costs for exporters and importers alike. Likewise technical support to meet German standard requirement in MAPS, wood and spices would provide Germany with added source of supply of these highly demanded products.
- Competitiveness and Skills Development
Low labor productivity remains a key challenge. Germany’s dual vocational training model which involves theoretical learning in vocational school along with on-job industry training adapted to Nepal’s context could raise productivity in manufacturing, tourism, and renewable energy while ensuring compliance with EU labor and sustainability standards.
- Preparing for LDC Graduation
Nepal is set to graduate from LDC status by 2026, after which it will lose EBA preferences. Continued market access will depend on qualifying for the EU’s GSP+ scheme, which requires strong performance on governance, labor rights, and environmental standards. German technical assistance can support Nepal in meeting these requirements, safeguarding export competitiveness and investor confidence.
A Strategic Opportunity for Germany
For Germany, engaging Nepal is about diversification, resilience, and long-term partnership building. By supporting institutional development and infrastructure today, Germany can shape an emerging market where German firms enjoy first-mover advantages, strong local partnerships, and reputational gains linked to sustainable development. Moreover, by supporting the advancement of liberal economic policies characterized by free trade, open investment regime, and private sector driven growth, Germany can help generate gains to both economies.
In an era of geopolitical uncertainty and supply-chain reconfiguration, Nepal offers Germany something rare: a chance to co-create a market rather than merely enter one. Strategic bilateral support can turn Nepal from a marginal trading partner into a reliable node in Germany’s broader South Asia engagement, thereby benefiting both economies in the process.
*For the detailed report click here.