Modeling Foreign Exchange Reserves: A Study of Remittance, Trade Deficit, and Credit to the Private Sector in Nepal
Year: 2026
Type: article
Abstract: The purpose of this research was to determine how Nepal's remittances, trade imbalance, and private sector loans affected the country's foreign currency reserve. The study's foundation is secondary data collected over a quarter of a century, from January 2000 to October 2025. From January 2000 through October 2025, the study makes use of Nepal's annual time-series data. This study uses foreign exchange reserve as its dependent variable and remittance, trade deficit, and private sector credit as its independent factors. Annual data is the type of secondary data that is utilized. Nepal Rastra Bank (NRB) publications and the Economic Survey provide the secondary data. Various statistical tools such as the unit root test, cointegration test, Granger causality test, and Vector Error Correction Model (VECM) are employed in the study. According to the research, the trade imbalance and remittance inflows are the two main factors that keep Nepal's external sector stable. Remittances are a key component in maintaining foreign exchange reserves in the face of a long-term and substantial trade deficit, as confirmed by the Johansen cointegration test and the Vector Error Correction Model (VECM). But in the near term, changes in domestic money and historical patterns in foreign currency reserves have a greater impact on the dynamics of external stability. In the near term, reserve depletion is accelerated by private sector lending, which drives up demand for imports. Additionally, the results of the Granger causality test show that the link is unidirectional, meaning that reserves and credit flows affect remittances and the trade deficit but not the other way around.
Author: Sumit Pradhan
Institution: Pokhara University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W7204232471