The Circular Nexus of Remittances, Banks’ Credit, and Trade Deficits

This chapter is about the circular nexus of remittances, banks’ credit to the private sectors, and trade deficits, which has become a serious concern of the stakeholders, as it has been an increasing trend for a long time now. For this purpose, this chapter uses the annual data from 1996 to 2023. After the examination of the time-series properties of the data, such as the tests for structural break and stationarity tests, I employ the autoregressive distributed lag (ARDL) approach to cointegration. The results show that remittances and banks’ credit to the private sector have a strong positive association with trade deficits. Our findings indicate that remittances have contributed to trade deficits in the long-run. The results indicate that Nepal has a symptom of Dutch disease impacted by the inflows of remittance to banks’ credit to the private sector and to the trade deficits. Some ways to improve this situation may be to design a policy to convert at least some parts of remittances into capital with a sound regulatory mechanism for the proper business environment. Similarly, the banking and finance sector should prioritize financing for the manufacturing sector rather than just focusing on unproductive service sectors in the days to come so that the trade deficits can be reduced to some extent.