Analyzing Nepal’s Foreign Exchange Earnings from Tourism using Co-integration and Causality Analysis

Tourism being one of the major foreign exchange earnings and job providing sectors is a growing service industry in Nepal. The objective of this paper is to investigate Nepal's foreign exchange earnings through tourism with an analysis of the international tourists’ arrival and the duration they spent in Nepal. The researcher has used annual time series data (1991-2014) provided by Ministry of Tourism and Civil Aviation Nepal to analyze the foreign exchange earnings from tourism by using Johansen test of co-integration and Granger Causality. The empirical result from the co-integration analysis concludes that there exists long-run relationship among the foreign exchange earnings from tourism, number of international tourists, and average length of tourist stay. The findings from Granger causality analysis show the existence of unidirectional causality from number of international tourists to foreign exchange earnings through tourism, and average length of stay to foreign exchange earnings. Similarly, bidirectional causality is also found between number of international tourist and their length of stay. This study posits that the increased tourists’ length of stay and number of international tourists’ arrival will lead to rise in foreign exchange earnings, which has multiplier effect by increasing number of places of amenities for the tourists.