Economic Diplomacy – A Vital Tool of Foreign Policy

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Nepal’s Foreign Policy – 2077 document outlines the growing importance of Economic Diplomacy in advancing the country’s foreign policy goals. It defines economic diplomacy as the use of economic tools to pursue foreign policy goals, including trade negotiations, foreign aid coordination, labor mobility, and investment promotion. The policy notes that the COVID-19 pandemic has added new challenges to these efforts.

This year, a report from the High-Level Economic Reforms Commission, led by former Finance Secretary Rameshore Khanal, identified foreign investment as a key driver of economic growth. Notably, foreign aid accounted for about 14.5% of Nepal’s total estimated budget of $14.1 billion for the fiscal year 2024/25, underscoring the role of economic diplomacy in national development.

At present, trade, tariffs, minerals, and even defense deals are referred to as part of economic diplomacy. Simultaneously, the uncertainties attached to the global context are challenges for achieving goals through economic and trade engagement. As such, any country must be equipped with the required diplomatic abilities and tactics to cope with these challenges, and for proper economic engagement with global partners.

Although Nepal has engaged in economic diplomacy for decades, the country officially embraced it in 1996. The term itself has led to a positive shift in Nepal’s outlook towards the economy, trade, and investment sectors. However, the fact remains that Nepal has yet to fully capitalize on the broader goals of economic diplomacy, other than labor remittances.

Historically, Nepal served as a crucial transit hub between India and Lhasa (now part of China’s Tibet Autonomous Region) during the 17th and 18th centuries, with Indian and Chinese traders passing through the Kathmandu valley. This preliminary trade network can be viewed as the early phase of economic diplomacy in Nepal, as the country began formalizing its approach in the 20th century. 

In February 1996, a 15-member task force led by National Assembly member and former Foreign Secretary Uddhav Dev Bhatta submitted a report recommending the formation of an Economic Relations and Coordination Division (ERCD) under a special or additional foreign secretary. The report emphasized that economic diplomacy should be a central pillar of Nepal’s foreign policy, as a critical aspect of overall foreign relations.

Recently, in 2025, the Government of Nepal created the Economic Diplomacy Division within the MoFA. By fiscal year 2009, the government began allocating a modest budget to facilitate the MoFA and its missions to accelerate economic diplomacy practices. 

Likewise, in 2017, MoFA introduced a ‘Country Strategy for Economic Diplomacy’, outlining Nepal’s economic diplomacy approach toward 36 countries across the globe. This strategy guides newly appointed ambassadors to focus on economic diplomacy as a key part of their mandate.

Earlier, in 1956, Nepal established a Consulate General in Lhasa to strengthen ties with China and promote socio-economic cooperation. Prior to that, a ‘lawyer’s office’ had been operational in Lhasa since 1856, with the main objective of facilitating trade between Nepal and Tibet. Subsequently, Nepal expanded its consular presence in China, with offices now operating in Chengdu, Hong Kong, and Guangzhou. The government’s consulates are also located in Kolkata (India), Texas, California, and New York (USA), and Jeddah (Saudi Arabia) – the latter primarily focused on supporting labor migrants. 

More importantly, it has been widely understood that economic diplomacy cannot rely solely on diplomatic missions. A holistic approach should be adopted, one that includes trade, investment, climate diplomacy, fintech, and labor migration. It is vital for Nepal to exit the financial grey list to attract foreign investment and international support.

With diplomatic ties spanning around 183 countries, Nepal has a strong platform to activate its economic diplomacy. However, it is also true that many missions operate under budget and personnel constraints. To maximize impact, missions must deepen collaboration with the Nepali business community and diaspora. This partnership is key to turning economic diplomacy into tangible growth and development.