Nepali Times Asian Paints
PAAVAN MATHEMA
My Two Paisa
Off with the heads...nah!


PAAVAN MATHEMA


After a yummy plate of momos at a local restaurant last Monday, when I offered the sauni the meal's worth, she refused to accept my cash. "Raja nabhaeko paisa dinus na," she insisted, explaining that she had already exchanged her stash of notes bearing likenesses of the ex-king. Luckily, my friend was carrying notes with Mt. Everest on them and we were able to get out of the situation.

That wasn't the only shop avoiding kingly notes last week and the proprietor certainly wasn't the only one who had rushed to the bank with her cash. Six months ago, Nepal Rastra Bank (NRB) issued a directive to financial institutions to filter out notes bearing portraits of the former kings. It also urged the public to exchange such notes, setting 15 March 2011 as the deadline. But being the last-minute people that we are, it was only two weeks before the deadline that the directive received much attention.

Knowing that the money they had would soon lose its value was bound to trigger a frenzy. People had to queue outside banks to exchange the notes. Many had to wait a day or two to get the new notes. Traders stopped accepting them. It was then that a complaint was filed at the Commission for the Investigation of Abuse of Authority (CIAA) that the directive had not followed legal procedures and was simply inconveniencing the general public. It was the government not the central bank, the CIAA maintained, that had the authority to dismiss a particular banknote as legal tender. The directive was duly rolled back.

Nevertheless, the central bank was still able to replace Rs 61 billion worth of king-imprinted paper money. The move wasn't just politically motivated, however. The directive was part of the Clean Note Policy of the central bank, which aimed to replace old, worn-out notes. Indirectly, the strategy aimed to encourage the public to bring cash hoarded at home into circulation via deposits into the banking system, in order to ease the liquidity crisis.

NRB may be correct in its reasoning, but the time period allotted was too short to implement the directive. The central bank should have used the financial institutions to filter out the old notes instead of giving an ultimatum to the public. If indeed the bank wanted to bring publicly held cash into financial circulation, a nationwide campaign should have taken place to publicise the decision. This would have prevented the havoc created in the market.

A huge number of Nepalis were unaware of the decision even in the last week before the deadline, and did not know that money could still be exchanged at the central bank after the deadline. Some even incurred losses by exchanging their cash for lesser amounts than its face value, fearing that it would soon be demonetised. Two farmers from Nala VDC, for instance, gave away ten Rs 500 notes for just Rs 300 each in Banepa.

The market still circulates Rs 8 billion worth of notes with likenesses of the kings printed on them. The average life of a paper note is a year and a half, so the remaining notes will go out of circulation in due course. For now, the kings are here to stay.

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1. Thurpunsich
I have, in a safety locker in my old house in Dadeldhura, some 2 lakh Nepali rupee notes. All crisp. All with the grumpy face of Gyanendra. 

I live in Timbooktoo, Africa. And I have the only keys to the locker with me.Obviously, I'm too paranoid to trust my relatives with the keys.

If the intelligent people at Rashtra Bank again decide to declare those currency notes illegal, should I buy plane ticket to Nepal to turn them in?



2. who cares
in next column i would like to hear ideas regarding reducing lending rates of banks, without it, economic development is next to impossible.



i have one idea to solve that problem:

#by limiting deposits- like financial institutions should not accept deposits more than 12/15 times of their real capital. 

-and since saving a/c can not be predicted so, if the deposit exceeds, then that deposit should be handed over to NRB charging min. interest rate which can further be lent by NRB to other FIs for lower interest rate.


some benefits:

*today, troubled FIs are giving higher interest to depositors, so healthy FIs can get excess deposit by just providing reasonable interest which would further help in reducing lending rates.

*this will help to exposed FIs bad debt cause they will no longer be able to hide their position with depositors cash.

*this will push FIs to increase their capital, which will then help to bring down risk of deposits, more than before.






if i remember, EU gave a decade or more time to replace their currency, where as in nepal we had just a few months.... why is our govt., policy makers push nepalese hard while they themselves are, probably, the slowest in the entire world in changing themselves, performing their responsibility. 





3. Soni

I have a feeling that this may have a far worse impact than what we have seen. There are a lot of very ordinary people who do not actually have bank accounts in Nepal and who simply keep cash at home for their needs. Lots of people would have substantial amounts ranging anywhere from 5 to 50 thousand or more in cash.

If these people choose to go ahead and convert the currency outside the banking system, as many did, I suspect that you will have an impact, and a pretty severe one, on prices. With inflation at over 12% (real inflation in household basket, not NRB) already destroying savings, if people continue to now change currency outside the banking system, and at a loss, because of whatever reason, I really wonder how that will play out. 

I do know that confidence in money is pretty low, but I don't know what that really leads to. I also know that people don't trusts banks much, after so many of them have been in news for the wrong reasons, I again don't know what that means other than that people are reluctant to go to the banks to park their money and that it is creating, or at least contributing to, the liquidity crunch. I do wish these things were a little simpler than they appear to be.



4. Punit Jajodia
How old a note looks is a result of not only when it was printed, but also of how often it has changed hands. There are lots of crispy and well-conditioned notes bearing the face of former king Gyanendra which can survive at least 6 more months. Is it economically feasible for a country undergoing so many financial problems to incur the loss of printing thousands of new notes when so many of the old notes look fine?

It would have been understandable as a political decision if the government had made it. But the Central Bank has to be devoid of political inclinations and put economy right at the front in its list of priorities. The Nepalese people have far bigger problems to solve than watching the face of the King we no longer believe in.


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(11 JAN 2013 - 17 JAN 2013)


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