Impact of exports on gross domestic product in Nepal
1.1.
Introduction
Trade refers to the
exchange of goods and services between two or more two people and other
institutions. The exchange of goods and services inside the country is called
internal or domestic trade. Similarly, the exchange of goods and services across
international borders is known as international trade.
Nepal's trade with other countries does not go
back into history due to the relative backwardness of the economy as well as
the political and physical isolation. Before 1951, the foreign trade of Nepal
was limited namely in UK, USA, and France. Before World War II, Nepal used to
import from the countries, such as England, Japan, and Singapore and export
agricultural products like jute. After 1960 Nepalese overseas trade became
possible, for the foreign currencies were needed for development. Nepal’s exports
had to be promoted by diversifying its trade.
Now Nepal’s trade is highly concentrated in
India which is nearly 60 percent of total trade and the remaining trade is with
the rest of the world. Nepalese foreign trade performance has so far been poor.
Several factors seem to be responsible. Land lockless is one of the major
causes. A weak production base and lack of competitiveness are other
constraints. Not only the open border with India but also the limited transit
facilities in one way or another way have constrained its trade with overseas
countries. Since transit through China is virtually impractical, India is only
economically viable for commercial flows. Indeed, no country in the world
excluding Bhutan is so hopelessly dependent on the availability of transit
facilities from a single country as Nepal. Nepal imports more but exports are
very little in comparison to imports. (Sharma &Bhandari, 2015).
Nepal an agro-based economy has more than 70
percent of its people engaged on the agricultural profession which has very low
contributions to GDP, nearly 31 percent. Since Nepal is least developed in
industrial raw materials and highly equipped machinery, there is a minimum
chance of cost-effectiveness. Nepal as the least developed country in the world
is bounded on vicious circle of poverty because lumpy amount of people insist
in the agricultural professional where the marginal productivity of labor is
almost zero. To shift the burden of the high density of labor from the agriculture
sector to the modern manufacturing sector, foreign trade can play the vital
role. The same is expected in the specialization of production, division of
labor, and increase in the national income. Foreign trade also widens the
market and increases the inducement to invest income and savings via more
efficient resource allocation. (Bhusal,
2015).
There is a debate on how openness of trade can
bring benefits to developing countries like Nepal. Excessive regulations,
government interventions, and uncertain economic policies play their role as
constraints to growth everywhere. Over some years, Nepal has followed a liberal
and open policy in all sectors. In the trade sector, all trading partners are
given an equal chance to compete and sell their products in the Nepalese
market. With the understanding of market-oriented economic reforms in the early
1990s, Nepal increased its integration into the world economy. No country is
allowed to monopolize in Nepali market and to create bottleneck further.
(Regmi,1999)
Nepal's foreign trade has consistently
suffered from deficits, which can negatively impact the nation's foreign
currency reserves and attract macroeconomic instability. In the long run,
ineffective population management could spell disaster for the nation's economy.
(Pokhrel,2022)
1.2.
Statement
of the Research Problem
Over the last four and a half decades, Nepal’s
external trade sector has experienced significant growth. Imports and exports
have grown dramatically in recent years from 1.8146 billion and 0.9 billion
rupees in 1974/75 to about 1611.73 billion rupees and 157.1 billion rupees in 2022/23
respectively (NRB,2023). The number of imports is highly increases than exports.
In spite of an increment in the volume of imports, exports have failed to reach
a competitive level. Nepal in the current situation can export only agriculturally
based raw items, which means it has to import all expensive and final products
from other countries. Isolated for a long time from the global market, an agriculture-based
country, least developed and landlocked; there are certain facts of Nepal,
which indicate the importance of foreign trade in order to achieve sustainable
economic growth and development. The main problem of Nepalese international
trade is Imports always dominated exports.
1.3.
Objectives
of Study
The major objective of the study is to analyze the impact of exports on gross domestic product in Nepal
2.1 Theoretical Review
Nepal
officially became the 147th member of WTO on April 23, 2004. By
joining the WTO, Nepal can fully enjoy the rights all members have under the
WTO agreements, such as non-discrimination by other WTO members and the ability
to use the WTO dispute settlement procedure. Board commitments were made in 11 service
sectors and 70 sub-sectors out of a total of 170 classified by the WTO. Nepal
accepted an average tariff binding of 42 percent in agricultural products and
around 24 percent I industrial goods. Among the commitments on legislation with
respect to the trade regime, Nepal agreed to amend or enact 38 various acts and
regulations to become compatible with WTO provisions. For instance, the
countries are required to implement fully the provisions of the Agreement on
Sanitary Measures and Agreement Of Technical Barriers to Trade (TBT) by January
1, 2007. With respect to the agreement on trade –Related Intellectual Property Rights,
as a LDC, Nepal needs to develop a new Industrial Act, which will include all
the substantive provisions of the TRIPs agreement, it would encompass all
categories of industrial of industrial property and would incorporate the basis
for an adequate enforcement and be promulgated no later than January 1, 2006.
Thus,
various challenges that Nepal will face. The country need to seek alternative
revenue to finance development gradually, changing laws and regulations to make
laws compatible with WTO commitments and obligations, developing transparent
mechanisms creating institutions, and financing the cost of negotiations
coupled with resources for legal measures and implementation. Nepal became a member to the Bay of Bengal
Initiative for multi-sectored Technical and Economic Cooperation (BIMST-EC) in
February 2004. The other members are
Bangladesh, Bhutan, India, Myanmar Sri Lanka, and Thailand. BIMST-EC's six core
areas of cooperation, inter alia, are agriculture, energy, fishers, tourism,
trade and transportation.
The`
framework agreement on BIMEST-EC FTA was signed on February *, 2004 at Bangkok
during the 5^thBIMST-EC Economies Ministers meeting. The FTA agreement would
first start on trade in Asia, Southeast Asia, and South Asia. This FTA acts as
a link between the AFTA (ASEAN Free Trade Area ) And the SAFTA.
Nepal has been facing a deficit of trade due to the
rapid growth of imports and lagging growth in exports. As an important aspect
of national accounting measures foreign trade should be developed as a main source
of investment to attain and maintain the goal of industrialization, adequate
expansion of employment opportunities, and stability of prices and minimum
level of living standard for the weaker sections of the country. So this
section tries to examine empirical literature in the Nepalese context.
Sharma and Bhandari (2005) examined the
relationship between imports, and exports to economic growth during the period
1974/75 to 2002/200. The different models in linear and log-linear forms have
justified that export growth leads to economic growth. Therefore, the policy of
adequate investment in export-oriented industries that embody a 'proper mix' of
export promotion and import substitutions is suggested.
Bhusal (2015) analyzed the relationship
between foreign trade and economic growth in Nepal using annual data over the
period of 1974/75 to 2013/14. Total
exports and real GDP were taken as a measure of foreign trade and economic
growth and domestic data sets were employed to ordinary least squares method of
regression. Granger causality, co-integration, and error correction modeling
techniques confirmed that foreign trade induces economic growth in Nepal both in the short and long run.
Bhaikaji
Shrestha's unpublished case study export trade of Nepal, TU 2005 pp24–27(2005) points
out about ancient trade history of India and China with our country of Nepal.
Nepal
and India
The
first commercial treaty to be signed between the two countries data as far back
as 1792 when India was under British rule. In accordance with this treaty, a
British resident was stationed at Kathmandu in order to promote trade and
commerce between the two countries. However, the residents were called back two
years later as a result of the war between Nepal and India. With the treaty of
Sughauli, the state hostilities ended and a British envoy was allowed to be
stationed at Kathmandu.
Nepal
and China
There
was a series of wars between Nepal and Tibet and finally, the war came to an
end after the treaty of 1850. According to this treaty, Tibet had to pay an
annual tribute rs.10000 to Nepal and Tibet had to give up her extraterritorial rights
and concessions to Nepal. But with the signing of the 1956 treaty with the People's
Republic of China, Nepal’s relationship with Tibet entered a new phase.
Gautam,(2023
) analysis of his paper, China-Nepal trade expanded from overland to
international trade between the two governments. Barter trading amongst local
people still made up a large part of the trade, and while China and Nepal had
signed several agreements, the volume of trade had not increased. Nepal
exported Rs. 379839 and imported Rs. 110868 during 1956-1962-63 and 1974-1978.
Compared to in do-Nepalese trade, it seems negligible.
Mahat
(2015) found more information about the economic performance of Nepal and the impact
on the economy that has been raised by foreign trade. The main study of this term
paper is the trade deficit in Nepal. The main causes of the trade deficit of Nepal's
geographical structure, are political instability, exchange money rate, and
remittance. The trade deficit has a direct impact on the economic performance
of Nepal. The relationship of Nepal with the major trading partner countries
India and others such as China and Japan has been mentioned because these two
countries China and Japan are potential trading partners of Nepal. Moreover,
this study provides information to readers about as the business environment
and trade policy history of Nepal.
Acharya (2015) found more information low exports of Nepal, The major
causes of Nepal’s increasing trade deficit are landlocked Ness, low export and
high import, low-quality goods, improper trade policy, higher cost of
production, lack of publicity and advertisement, low production, slow
industrial development, lack of trade diversification, etc.
Most of the study is only correlated with Nepalese trade with India and trade deficit. This study tries to examine the relationship between Nepalese import-export Gross Domestic Product. We assumed that Gross Domestic Product is the dependent variable and, Gross fixed capital formation and Export are the independent variable.
3.1 Nature of data
The study is primarily based on secondary
sources of data. Data on imports, exports and total trade are taken from the Economic
Survey Report (MOF, GON) and nominal GDP will be taken from National Account
Reports of the Central Bureau of Statistics, Ministry of Finance, and
Government of Nepal.
3.2 Analysis
For data, analysis descriptive tools such as averages, standard
deviation and variance have been used. The coefficient of determination is the
percentage of the total variation in the dependent variable (RGDP). This is
explained by the regression line. Coefficient of multiple determinations
explains how good is the fit of the estimated regression line to the sample
observations of RGDP and IT and ET. Therefore, it is the measurement of the
dispersion of observation around the regression line.
3.3
Model Specification
This research model specification,
which is follows .it includes that import, export GDP
GDPt
= α + β1EXPt + β2 GFCFt (1)
lnGDPt
= α + β1lnEXPt + β2lnGFCF t …(1)
Where,
GDP =
Gross Domestics Product
GFCF =
Gross Fixed capital formation
EXP
=Export, t = Period, Alfa(α) beta( β) are parameters.
4.1 Analysis and Discussion
The
chapter is basically concerned with vital information regarding the research
work. The data were arranged systematically to show the trend and role of total
trade in Nepalese GDP.
4.2 Trend of Nepalese Trade.
Nepal‘s foreign trade was limited only to
India and Tibet in the past. At the time Nepal faces so many problems in
foreign trade. After the establishment of democracy in 2007 B.S., Nepal has
gradually interred trade relations with other countries/ Nepal adopted a liberal
trade policy in 2046/47 B.S. Now Nepal has relations with more than 100
countries. Nepal is facing the problem of ever ever-increasing trade deficit, imports
are rapidly increasing but the increase in exports is very low. Nepal is unable
to take advantage of globalization. Due to some internal and external reasons,
it is very difficult to maintain a trade balance here.
4.2.1 Table of trade.
|
RS. In millions |
||
|
FY |
Export |
Import |
|
1974/75 |
889.6 |
1,814.6 |
|
1975/76 |
1,185.8 |
1,981.7 |
|
1976/77 |
1,164.7 |
2,008.0 |
|
1977/78 |
1,046.2 |
2,469.6 |
|
1978/79 |
1,296.8 |
2,884.7 |
|
1979/80 |
1,150.5 |
3,480.1 |
|
1981/81 |
1,608.7 |
4,428.2 |
|
1982/82 |
1,491.5 |
4,930.3 |
|
1983/83 |
1,132.0 |
6,314.0 |
|
1983/84 |
1,703.9 |
6,514.3 |
|
1984/85+ |
2,740.6 |
7,742.1 |
|
1985/86 |
3,078.0 |
9,341.2 |
|
1986/87 |
2,991.4 |
10,905.2 |
|
1987/88 |
4,114.5 |
13,869.6 |
|
1988/89 |
4,195.3 |
16,263.7 |
|
1989/90 |
5,156.2 |
18,324.9 |
|
1990/91 |
7,387.5 |
23,226.5 |
|
1991/92 |
13,706.5 |
31,940.0 |
|
1992/93 |
17,266.5 |
39,205.6 |
|
1993/94 |
19,293.4 |
51,570.8 |
|
1994/95 |
17,639.2 |
63,679.5 |
|
1995/96 |
19,881.1 |
74,454.5 |
|
1996/97 |
22,636.5 |
93,553.4 |
|
1997/98 |
27,513.5 |
89,002.0 |
|
1998/99 |
35,676.3 |
87,525.3 |
|
1999/00 |
49,822.7 |
108,504.9 |
|
2000/01 |
55,654.1 |
115,687.2 |
|
2001/02 |
46,944.8 |
107,389.0 |
|
2002/03 |
49,930.6 |
124,352.1 |
|
2003/04 |
53,910.7 |
136,277.1 |
|
2004/05 |
58,705.7 |
149,473.6 |
|
2005/06 |
60,234.1 |
173,780.3 |
|
2006/07 |
59,383.1 |
194,694.6 |
|
2007/08 |
59,266.5 |
221,937.7 |
|
2008/09 |
67,697.5 |
284,469.6 |
|
2009/10 |
60,824.0 |
374,335.2 |
|
2010/11 |
64,338.5 |
396,175.5 |
|
2011/12 |
74,261.0 |
461,667.7 |
|
2012/13 |
76,917.1 |
556,740.3 |
|
2013/14 |
91,991.4 |
714,365.8 |
|
2014/15 |
85,319.1 |
774,684.2 |
|
2015/16 |
70,117.1 |
773,599.1 |
|
2016/17 |
73,049.1 |
990,113.2 |
|
2017/18 |
81,359.8 |
1,245,103.2 |
|
2018/19 |
97,109.5 |
1,418,535.3 |
|
2019/20 |
97,709.1 |
1,196,799.1 |
Sources;
NRB, 2020
Table
1 shows the Trend of export and import trends of the Nepalese economy. We had
taken the data for 46 years. Every year imports are higher than exports. It
means that Nepalese trade is deficit. Nepal depends on other countries for goods
and services. Import does not increases every year some time increases than
last year and some time decreases than the last year. Both import and export
are increases however the volume of import is higher than export.
.
4.2.2
Trend line of export and import
Sources:
Based on the table 4.2.1
In
the above figure trend line measures the fiscal year and the export and import
of Nepalese trade respectively. This data is 46 years fiscal year 1974/75 to 2019/20.
We have seen imports are higher than exports every year. The trend line of
trade is increasing at an increasing rate. Every year Nepalese trade volume is
larger than the previous year.
Nepalese
trade is deficit according to the trend line Because imports are higher than exports.
Nepalese consumption is dependent on imported goods and services. We are not
exporting and producing goods and services that are needed by us.
4.2.3
Trend line of GDP.
In
above the figure, the horizontal line measures the amount of GDP and the vertical
line measures the fiscal year. GDP is the dependent variable. GDP is increasing
at an increasing rate every year. So, there is a positive relationship between
these two variables.
When
we analyze the trend of GDP is increasing but the increasing trend is not
symmetrical. Normal GDP is rising It is Dependent on the agriculture and
political conditions in the country.
4.2.4 Table
no 4.3.1 Trend Of Import, Export, GDP (RS. Millions )
|
FY |
Export |
Import |
GFCF |
GDP |
|
1974/75 |
889.6 |
1,814.6 |
222.3 |
16601 |
|
1975/76 |
1,185.8 |
1,981.7 |
244.3 |
17394 |
|
1976/77 |
1,164.7 |
2,008.0 |
258.0 |
17280 |
|
1977/78 |
1,046.2 |
2,469.6 |
329.4 |
19727 |
|
1978/79 |
1,296.8 |
2,884.7 |
326.3 |
26128 |
|
1979/80 |
1,150.5 |
3,480.1 |
368.1 |
23351 |
|
1981/81 |
1,608.7 |
4,428.2 |
429.9 |
27307 |
|
1982/82 |
1,491.5 |
4,930.3 |
546.5 |
30988 |
|
1983/83 |
1,132.0 |
6,314.0 |
657.6 |
33821 |
|
1983/84 |
1,703.9 |
6,514.3 |
690.7 |
39290 |
|
1984/85+ |
2,740.6 |
7,742.1 |
938.6 |
46587 |
|
1985/86 |
3,078.0 |
9,341.2 |
943.1 |
55734 |
|
1986/87 |
2,991.4 |
10,905.2 |
1182.5 |
63864 |
|
1987/88 |
4,114.5 |
13,869.6 |
1341.4 |
76906 |
|
1988/89 |
4,195.3 |
16,263.7 |
1639.2 |
89270 |
|
1989/90 |
5,156.2 |
18,324.9 |
1700.2 |
103416 |
|
1990/91 |
7,387.5 |
23,226.5 |
2278.0 |
120370 |
|
1991/92 |
13,706.5 |
31,940.0 |
2927.7 |
149487 |
|
1992/93 |
17,266.5 |
39,205.6 |
3727.8 |
171474 |
|
1993/94 |
19,293.4 |
51,570.8 |
4203.2 |
199272 |
|
1994/95 |
17,639.2 |
63,679.5 |
4837.0 |
219175 |
|
1995/96 |
19,881.1 |
74,454.5 |
5608.1 |
248913 |
|
1996/97 |
22,636.5 |
93,553.4 |
6079.4 |
280513 |
|
1997/98 |
27,513.5 |
89,002.0 |
6537.5 |
300845 |
|
1998/99 |
35,676.3 |
87,525.3 |
6526.9 |
342036 |
|
1999/00 |
49,822.7 |
108,504.9 |
7332.4 |
379488 |
|
2000/01 |
55,654.1 |
115,687.2 |
8475.1 |
441519 |
|
2001/02 |
46,944.8 |
107,389.0 |
8486.3 |
459442.6 |
|
2002/03 |
49,930.6 |
124,352.1 |
8806.9 |
492230.8 |
|
2003/04 |
53,910.7 |
136,277.1 |
9094.9 |
536749.1 |
|
2004/05 |
58,705.7 |
149,473.6 |
9142.7 |
589411.7 |
|
2005/06 |
60,234.1 |
173,780.3 |
10157 |
654084.1 |
|
2006/07 |
59,383.1 |
194,694.6 |
10694 |
727827 |
|
2007/08 |
59,266.5 |
221,937.7 |
10892 |
815658.2 |
|
2008/09 |
67,697.5 |
284,469.6 |
10946 |
988271.5 |
|
2009/10 |
60,824.0 |
374,335.2 |
12765 |
1192774 |
|
2010/11 |
64,338.5 |
396,175.5 |
12672 |
1559222 |
|
2011/12 |
74,261.0 |
461,667.7 |
11976 |
1758379 |
|
2012/13 |
76,917.1 |
556,740.3 |
13942 |
1949295 |
|
2013/14 |
91,991.4 |
714,365.8 |
15531 |
2232525 |
|
2014/15 |
85,319.1 |
774,684.2 |
18571 |
2423638 |
|
2015/16 |
70,117.1 |
773,599.1 |
16290 |
2608184 |
|
2016/17 |
73,049.1 |
990,113.2 |
23504 |
3077145 |
|
2017/18 |
81,359.8 |
1,245,103.2 |
27758 |
3455949 |
|
2018/19 |
97,109.5 |
1,418,535.3 |
29139 |
3858930 |
|
2019/20 |
97,709.1 |
1,196,799.1 |
24749 |
3888704 |
Sources;
NRB,2020
In
Above the table shows the 46 years of imports, export, and GDP. Every year imports
are greater than exports. Similarly, GDP is also increasing at an increasing
rate Based on the table it can be calculated. In this parts, summary statistics and regression between dependent and
independent variables are calculated. Finally, regression results are
presented. GDP, EXP, and GFCF are taken as dependent and independent variables respectively.
4.2 Discussion
We take two independent variables export and gross fixed capital formation.
Dependent variable is GDP. R squared S.E of regression, the sum of square resid. However, this study presents the results
based on the statistical software EViews
2012
When we take
log,
· 1
percent in increasing exports leads to a 0.069.94 percent decrease in GDP
growth.
· 1 % increase in GFCF leads to a 1.205396%
increase in GDP growth.
·
The value of the Coefficient is 3.235817 which is
the intercept term of the regression.
· R2
is 0.95 indicating that 95 percent of GDP growth is explained by these
variables in the model significantly.
·
The sum of the squared residuals is 5.45, a measure
of the model's fit.
· There
The value of DW is 0.15 The model is best fitted since f statically DW test.
· The
value of DW is 0.153262 indicates positive autocorrelation in the residuals.
This implies that there is no autocorrelation in the model.
· The
value of R2 is 0.9587 and the adjusted R2 is 0.9568.
these values suggested more than 95 percent variation in the dependent variable
is explained by the dependent variable, which is very high by any standard.
Recommendation
The study reveals that
economic growth is low and unstable in Nepal. Real imports trade is increasing
very fast whereas real exports are not following import trends. The growth
rates of real imports are higher than the growth rates of real exports. The share
of real imports is double the share of exports in real GDP. From the
descriptive and empirical findings and conclusions, the following
recommendations can be made for policy implications:
i.
Recently Nepalese Trade is Deficit due to the
increase agro base products inside the country.
ii.
Economic growth is low and volatile.
Therefore, the government should focus on growth-enhancing policies. There may
be a need for policies of public-private partnership, infrastructure
development policies, and human development. There is also a need for
macroeconomic stability policies so that economic growth and trade variables
should be kept at the required level.
iii.
The results infer that the Nepalese economy
is dominated by import trade. Import substitution policies are now also a remedy
for the Nepalese economy. At least basic goods should be sufficiently produced at
the domestic level so that imports are sustainably reduced.
iv.
Export competitiveness is too weak for Nepal's
economy. Therefore, trade as well as production policies should be linked to
export promotion.
v.
Trading and exporting through importing
readymade merchandise would only reflect increase imports as well as exports.
Such a trade nature would not boost economic growth. Thus, for sustainable
growth policy, domestic production enhancement is a must.
References
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Bhusal, T. (2015). Econometric
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Brunner, A.
D. (2003). The long-run effects of trade on income and income growth.IMF
Working Paper, No. /03/3.
Frankel, A. J. &Romer, D. (1999). Does
trade cause growth? The AmericanEconomic Review, vol. 89(3), pp.
379-399.
Mahat, B. (2015). Impact of trade
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Gautam, S. (2023). Nepal and China
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International Trade on Economic Growth of Nepal. G
International Journal of Economics and Management Studies, Volume 9
Issue 9, 1-7, September 2022
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(2005).Foreign trade and its effects on Nepalese economic development. Journal of Nepalese Business Studies, II(1), 13-33.
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