The Causes of Trade Deficit of Nepal

This research paper has discussed the principal causes of trade deficit trade deficit of Nepal. Efforts have been made to sort out the external as well as internal sources of trade deficit. Based on exploratory data analysis and using the data during 1976-2004, this paper has found that both external shocks and internal factors are responsible for the ongoing trade deficit. Specifically, demand and price shocks in the big economies of the world have shown inevitable impacts on Nepal's trade balance. Among others, internal bottlenecks such as lack of competitiveness, geopolitical aspects, economic policies, bilateral agreement with trading partner are also found responsible in determining the direction of trade balance. Contrary to some conventional theories and experiences, this paper does not find strong and convincing relationships of budget deficit, excess money supply, real exchange rate, and economic growth with trade deficit in the context of Nepal.