An assessment of domestic credit to the private sector and export performance of Nepali: A gravity modelling approach.

Abstract

The trade deficit in Nepal has reached an alarming levels because of the ongoing and growing mismatch between imports and exports. Nepal’s trade deficits are the major concern of Nepal’s economy at present. Despite numerous policy efforts, export performance has fallen short of stakeholders' and policymakers' expectations. In recent years, attention has increased to the ability of the banking sector's credit to the private sector (loanable fund) to increase export performance by bridging the gap between a company's productivity and export status. The objective of this thesis is to document the analysis of domestic credit to the private sector and export performance of Nepal and to examine the association of Domestic credit to the private sector and export performance in Nepal. The gravity model method is used in this study to investigate the relationship between domestic bank credit to the private sector and Nepal's export performance employing data from 1996 to 2019. The study found a significant and favourable association between the domestic credit to the private sector and export performance. The study's conclusions showed that domestic credit to the private sector was statistically significant at a one per cent significance level and had a positive impact on export performance. In a similar manner to this, gravity variables, such as distance and GDP of the trading partner, have a significant relationship with export performance, but even at a 10 per cent level of significance, the population of the trading partner countries is not significant. Additionally, the estimated coefficient for governance is 0.522, indicating a statistically significant relationship between governance and export performance at a one per cent.

Financial development improves trade flows by reducing the fictitious gap between productivity and exports, domestic credit should be invested in the manufacturing sector rather than consumption. The Nepali government should support industrial development and the expansion of industries that can replace imported goods.