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The Nepali rupee has plummeted to an all-time low against the US dollar, with the exchange rate at the time of writing on Thursday set at Rs 83.91. The previous low was Rs 83.40 in March 2009. Over a month, the Nepali rupee has lost over seven per cent against the dollar.
What is lost in much of the analysis here is that the fall of the NPR is related directly and solely to the fall of the INR since the two currencies are pegged. The Indian currency has been falling sharply due to persistent capital outflow from India, and investors opting to purchase dollars rather than the euro as a safer currency. The surge in demand for dollars in India has lowered the INR value, and this has impacted directly on the NPR.
The obvious effect of the appreciation of the dollar is that our exports will benefit because our products (pashmina, tea) become cheaper. By the same token, dollar-denominated imports (cars, international credit) will be more expensive. Theoretically, this should boost our exports. But since the basket of goods we export is relatively much smaller than our import volume, the balance is unlikely to shift in our benefit.
On the other hand, the expensive imports will have a lasting effect on the market: even cheap Chinese goods will become more expensive. That many of our manufacturers depend on imported raw materials means that local products will also become more expensive. During the last fiscal year, Nepal's import from India stood at Rs 261.63 billion and at Rs 133.27 billion from third countries, and the pressure from the strong dollar is bound to push these numbers even higher this year. Nepal Rastra Bank has expanded the list of products that can be imported from India by paying US dollars to dampen the rising demand for INR, increasing the import with dollars significantly.
The only saving grace is that our INR peg is still at the golden NPR 160 and two-third of our imports from India is still done in INR. But this import also includes petroleum and because India imports about 75 per cent of its own petroleum requirement, the increased price will be transferred to Nepal.
The most worrying effect will be for hydropower developers as their costs will multiply with the rising dollar, adding to high cost of financing. The Nepal Electricity Authority has signed power purchase agreements with Khimti and Bhotekesi hydropower projects in dollar terms, this means the NEA's losses are bound to grow.
Nepal's cost for debt servicing will also go up, although most of our credit is long-term in nature and the payments will made at the exchange rate of the payment date.
The only bright side is perhaps the increased value of remittance caused by the appreciation of the dollar. Banks already admit that they have experienced a surge in the inflow of remittance from workers abroad with the weakening of the domestic currency. Nepal sells dollars to pay for its balance of trade deficit with India, so it may actually ease our burden vis-à-vis India.
Given that our exchange rate with the dollar is determined by our pegged rate with India, there is little Nepal Rastra Bank or the market can do to sway the rate. Our response should be focused on managing the likely increase in inflation, which has stood in double digits for three consecutive years.
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