Determinants of Foreign Trade in Nepal

Abstract

This study examines the determinants of foreign trade in Nepal. Exports and imports of Nepal are the dependent variables. The selected independent variables are GDP of Nepal, GDP of trading partners, real effective exchange rate, distance, regional economic integration, per capita GDP of Nepal, per capital GDP of trading partners, economic freedom of Nepal and economic freedom of trading partners. The study is based on secondary data of 21 trading partners of Nepal with 210 observations for the period of 2010 to 2019. The data are collected from the Direction of Trade Statistics (DOTS) dataset of International Monetary Fund (IMF), World Development Indicator database of World Bank, CEPII gravity data set and the Heritage Foundation. The regression models are estimated to test the impact of various variables on the exports and imports of Nepal. The study showed that GDP of Nepal has a positive impact on exports of Nepal. It indicates that increase in GDP of Nepal leads to increase in exports of Nepal. Similarly, GDP of trading partners has a positive impact on exports. It indicates that increase in GDP of trading partners leads to increase in exports of Nepal. Likewise, distance has a negative impact on exports. It indicates that greater the distance with the trading countries, lower would be the exports of Nepal to those trading partners. Moreover, real effective exchange rate has a positive impact on exports. It indicates that increase in real effective exchange rate leads to increase in exports. In addition, SAFTA membership has a positive impact on exports. It indicates that SAFTA membership leads to increase in exports of Nepal. Furthermore, the study revealed that economic freedom index of trading partners has a positive impact on exports. It indicates that increase in economic freedom index of trading partners leads to increase in exports of Nepal. In addition, the study shows that GDP of Nepal has a positive impact on imports of Nepal. It indicates that increase in GDP of Nepal leads to increase in imports of Nepal. Similarly, GDP of trading partners has a positive impact on imports. It indicates that increase in GDP of trading partners leads to increase in imports of Nepal. Likewise, distance has a negative impact on imports. It indicates that greater the distance with the trading countries, lower would be the imports of Nepal from those trading partners. Similarly, real effective exchange rate has a positive impact on imports. It indicates that increase in real effective exchange rate leads to increase in imports. The study also reveals that GDP per capita differential has a positive impact on imports. It indicates that higher the GDP per capita differential, higher would be the imports of Nepal.