'Rise in spending by one percent increases import by 0.77 percent'
KATHMANDU, Feb 20: A recent study conducted by the Nepal Rastra Bank (NRB) shows that rise in government spending also fuels imports.
A working paper entitled 'Macro Models in Nepal: Survey and Empirical Estimation' prepared by the NRB, states that import is sensitive to the government expenditure. The study found that one percent increase in the government expenditure can increase imports by 0.77 percent, meaning that if the government increases spending by Rs 100 in a given time, Rs 77 would be required to foot import bills of the country.
Total import bills of the country has remained higher that the total government spending for the past few years.
“The government's expenditure is largely import-based and any rise in the spending also fuels import as reinforced in the report,” Prakash Kumar Shrestha, a director at the Economic Analysis Division of the Research Department of the NRB, which conducted the study, said.
The study used the sample period of 1975 to 2016 for the estimation. The finding also closely reflects the recent import and spending pattern of the country.
This is one of the reasons why liquidity in the bank and financial institutions (BFIs) and credit flow do not increases even if the government spending rises, Shrestha, who led the study team, said.
The study also found that the Indian inflation, as measured by consumer price index (CPI), triggers price rise by 0.77 percent in Nepal. This means there will be 0.77 percent higher rate of inflation in Nepal.
Shrestha attributed such wedge of inflation to the exchange rate pegging with India. As Nepal relies heavily on India for imports of goods and commodities and that the country has pegged exchange rate regime with India, Nepal's inflation is significantly influenced by inflation in its southern neighbor.
Economists and institutions like the International Monetary Fund (IMF) have been calling the NRB for a more focused approach in bringing down such inflation gap. Inflation in India, money supply and exchange rate are the major factors that determine price rise in Nepal, according to the central bank officials.
Economists say that there is a need to bring inflation at the level of India also to maintain the sustainability of currency peg with India.
Similarly, the finding shows that the income elasticity, or change in the income, also increases imports. According to the report, the income elasticity of exports and imports are found at 1.1 and 3.08, respectively. The rise in the income of people increases consumption and subsequently import as the domestic production alone does not to meet the country's demands.