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 capita 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 the International Monetary Fund (IMF), World Development Indicator database of the World Bank, CEPII gravity dataset, 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 the GDP of Nepal has a positive impact on exports of Nepal. It indicates that an increase in GDP of Nepal leads to an increase in exports of Nepal. Similarly, the GDP of trading partners has a positive impact on exports. It indicates that an increase in GDP of trading partners leads to an increase in exports of Nepal. Likewise, distance has a negative impact on exports. It indicates that the greater the distance from the trading countries, the lower the exports of Nepal to those trading partners. Moreover, the real effective exchange rate has a positive impact on exports. It indicates that an increase in the real effective exchange rate leads to an increase in exports. In addition, SAFTA membership has a positive impact on exports. It indicates that SAFTA membership leads to an increase in exports of Nepal. Furthermore, the study revealed that the economic freedom index of trading partners has a positive impact on exports. It indicates that an increase in the economic freedom index of trading partners leads to an 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 an increase in GDP of Nepal leads to an increase in imports of Nepal. Similarly, the GDP of trading partners has a positive impact on imports. It indicates that an increase in GDP of trading partners leads to an increase in imports of Nepal. Likewise, distance has a negative impact on imports. It indicates that the greater the distance from the trading countries, the lower the imports of Nepal from those trading partners. Similarly, the real effective exchange rate has a positive impact on imports. It indicates that an increase in the real effective exchange rate leads to an increase in imports. The study also reveals that GDP per capita differential has a positive impact on imports. It indicates that the higher the GDP per capita differential, the higher the imports of Nepal.