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NAVIN SINGH KHADKA


The timing couldn't have been worse. After announcing fuel price hikes last week, the government followed up with pocket money for civil servants and a VAT hike to 13 percent.

Even people who supported the government on the fuel price were aghast. Economists warned it would increase inflation and trigger an exchange rate increase with the Indian rupee.

"The country's productivity will drop and competitiveness will be hurt," predicts former Finance Minister Prakash Chandra Lohani. Another ex-finance minister, Ram Sharan Mahat, agrees: "The loss of competitiveness will hurt investment."

Nepal is already a high-cost economy but the fuel price hike and 13 percent VAT increase last week were a double whammy that will have repercussions from the macro-economy right down to individual families.

Decreasing domestic productivity would mean increased imports from India with which we conduct 60 percent of our trade and have NRs 50 billion annual deficit. All this will put more strain on the Nepali-Indian rupee parity and force revision of the current 160-100 rate.

Economists agree that the Nepali rupee is already overvalued against IC. Now that the Indian rupee is gaining strength because of the weaker US dollar, there appears to be no option but to devalue the Nepali rupee.

Chances are the US dollar will continue its slide, which means a stronger Indian currency, which in turn means more pressure on the Nepali rupee," says another ex-finance minister, Badri Shrestha.

Economist Bishwambar Pyakurel says the Nepali rupee's overvaluation is not sustainable anymore. "Sooner or later, it will have to be revised considering the IC's strength." And when that happens, it will be another blow to hard-pressed Nepali families who will have to endure another price spike of Indian imports.

Experts agree that the government should have avoided increasing the VAT rate at such a critical time and there were plenty of other options for non-tax revenue. "Increasing VAT and fuel together was bad timing," Shrestha says.

However, Prime Minister Sher Bahadur Deuba, has a very simple logic for the increases: the government needs money. "Since the Maoists did not come for talks, we have to go for elections and that means we need to increase revenue for more security expenses," he said this week.


LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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