July 8: A study conducted by Tribhuvan University has concluded that credit flow of banks and financial institutions and remittances are the main reasons for the country’s burgeoning trade deficit.

A study on remittances, credit flow to private sector from banks and Nepal’s trade deficit conducted by Tribhuvan University in collaboration with the Confederation of Banks and Financial Institutions Nepal (CBIFIN) has pointed out that half of the banking sector's loans have been found to have contributed to the long-term trade deficit of the country. The report states that one percent of loans from banks and financial institutions contributes to a 0.5 percent trade deficit.

"If banks and financial institutions expand credit by 1 per cent, half of that will increase the trade deficit," said Professor Dr Shivraj Adhikari, coordinator of the study, and head of the central department of economics at Tribhuvan University.

The report stated that remittances are also interlinked with increasing the country's trade deficit along with the credit flow of banks. Stating that the trade deficit has increased by 75 per cent due to remittances, the study pointed out that the government should bring a policy to invest remittances compulsorily in projects or should be saved.

Unveiling the report at a press conference on Thursday, the study team coordinator suggested that remittances should be saved in the banks for a longer period or invested in projects. "There should be a policy of holding remittances as bank deposits for at least two years," he said.

An earlier study by Nepal Rastra Bank had shown that a large portion of remittances was spent on consumption. The report pointed out that remittances have increased consumption which in turn increased the trade deficit.

According to the Department of Customs, the country's trade deficit has reached Rs 1.577 trillion as of May this year. As of May, goods worth Rs. 1,763.22 billion have been imported while exports amounted to Rs 185.83 billion.

The growth rate of the trade deficit has not stopped even though the NRB adopted a policy to discourage imports from the beginning of the current fiscal year. The balance of payments has been high due to high imports while the foreign exchange reserves have also started declining.

NRB Governor Maha Prasad Adhikari has admitting that a large part of the loans of banks and financial institutions have been used for imports.

Therefore, the central bank is ready to discourage the use of bank credit in unproductive sector like the import of consumer goods from the upcoming fiscal year.

At the press conference, CBIFIN also urged the central bank to take a policy of expanding investment in the productive sector in order to promote exports. It has urged the central bank to continue the crackdown on imports of unnecessary and luxury goods. CBIFIN Chairman Pawan Kumar Golyan said that a policy should be brought in to reduce the interest rate on loans to the productive sector.