Analyzing the Dynamics between Foreign Exchange Reserves, Trade Balance, Workers Remittances and Balance of Payments in Nepal

Abstract

This study explores the intricate dynamics among foreign exchange reserves, trade balance, workers' remittances, and the balance of payments (BOP) in Nepal, crucial for economic stability and policy formulation in a developing economy. Utilizing data from the Nepal Rastra Bank spanning from June 2017 to April 2024, the research employs statistical and econometric methods, including the Phillips-Perron test, ARDL model, Error Correction Model (ECM), and Granger causality analysis, to investigate the relationships and causal interactions among these variables. Key findings reveal significant long-term relationships, particularly highlighting how foreign exchange reserves are influenced by the trade balance and workers' remittances. The results suggest that maintaining optimal foreign exchange reserves is vital for mitigating trade and BOP deficits, which, in turn, impacts economic stability. The study's insights are crucial for policymakers aiming to develop strategies that enhance economic growth and resilience in Nepal.