An analysis of relationship between remittances and imports of Nepal

Abstract

Background: The remittance has become one of the main sources of financial inflow and has brought significant and structural changes of the developing countries like Nepal. Over the past few decades, Nepal has received a significant increase in the volume of remittances. On the other side, Nepal has been facing a significant trade imbalance from many years. These two variables are most contentious topics in this decade. Objectives: In this context, the paper has examined the relationship between remittances and import in Nepalese economy. Method: A suitable econometric model was developed by including broad money supply and foreign assistance together with remittance in the explanatory variablesin which the import is regarded as response variable. The necessary data were obtained from publications of the MOF from the years 2000/01 to 2021/22, and then the stationarity of the variables was tested. Because of the mixed in order through the results of the stationarity test, a suitable ARDL model was then applied to measure the long- and short-term effects of the explanatory variable. Results: The study's findings revealed that remittances and the broad money supply (M2) were main variables to determine the size of import. Both variables had a positive impact on imports, but the third factor, foreign assistance, had a negative and insignificant impact over response variable. Conclusions: The conclusion of the study indicates that the hypothesis was accurate. It means that when remittance revenue rises in the economy, imports rise along with it. The primary cause of this is remittances have increased recipients' income and the domestic production hasn't increased significantly due to an increase in absenteeism. As a result of mismatch between rising demand and stagnant supply, the import volume has increased. The findings of the research will be useful for academic interest as well as it may assist policymakers while formulating policies to shape imports and increase the effectiveness of remittance wisely. Keywords: Import, remittance, broad money supply (M2), foreign assistance, developing countries.