Real Exchange Rate and Export in Nepal

Abstract

This study tries to investigate the degree and directional relation of real exchange rate and its volatility on the real export of Nepal, using OLS estimation, taking 63 observations using quarterly data for the period 2004Q3 to 2020Q1. In addition, this literature empirically studies deploying IV-2SLS framework, the continuing deterioration of the external competitiveness of Nepalese products globally due to appreciation of Nepali currency vis-à-vis IC and USD that is blamed to have been fueled by remittance inflow. Upon empirical analysis, unlike the global weakening link between real exchange rate and volume of export, our finding suggests there is no significant effect of real exchange rate on export of Nepal, at least statistically. Exchange rate volatility has statistically significant and inverse effect on the real export. Expectation of appreciation in real exchange rate yields rise in real export in same direction. For IV-2SLS framework, we treat remittance inflow as endogenous variable and several others as instruments. This results remittance inflow has inverse relation with the real exchange rate. That means there is no traces of remittance induced appreciation of real exchange rate of Nepali rupees. Nepal has an appreciation of REER by a single digit since base year 2010. So, her choice should be export promotion of comparative advantage goods which have highvalue

low-weight products rather than wasting time and resources in currency devaluation for export. There is dire need of forward-looking and forex hedging market. Since there is no appreciation of Nepali currency induced by remittance inflow, there is no urgency to halt migrant worker rather the policy maker should implement the conducive environment that flourishes the saving and investment habit of remittance receivers.

Keywords: Export, REER, IV-2SLS, External competitiveness, Exchange rate volatility, Remittance