12-18 July 2013 #664

And we all fall down

Nepali rupee free-fall hits the economy hard
Paavan Mathema

Like a conjoined twin, the Nepali rupee has been tumbling down with the Indian currency, and hit an all-time low selling rate of Rs. 97.69 against the US dollar on Tuesday this week. The NRs has been continuously weakening against international currencies, but in the last four months it has experienced a sharp depreciation of 11.5 per cent with the dollar.

The US dollar is rising on the international exchange rate arena, stepping on the financial crisis in Europe and the unstable Euro. Investors and financial institutions are now putting their money on dollar-dominated assets and making it stronger against all major currencies, including the rupee. The exodus of foreign capital from India since May has made the IRs fall sharply. Rising demand for gold is also hurting the Indian rupee. This fiscal year, the IRs became one of the worst performers among major Asian currencies. With our currencies pegged at Rs 1.6, the turn of events has directly impacted the NRs.

Theoretically, this depreciation should boost our exports. Nepali products become cheaper and thus there should be a rise in their demand. But the basket of goods we export is relatively smaller in comparison to our import volume.

According to data published by the Trade and Export Promotion Centre, in the first 10 months of fiscal year 2012-13, the total exports of the country increased by only 1.6 per cent to Rs 62.71 billion, as compared to the same period last year. In fact, for Nepal, a depreciation of our currency hurts our exports to some extent because a proportion of our exports require imported raw materials.

Meanwhile, imports in the same period had increased to Rs 494.95 billion, an increment of 21.3 per cent. Pressure from the strong dollar is bound to push this number even higher. The expensive imports will have a lasting effect on the market: even cheap Khasa-bajar goods will become more expensive. This will soon be reflected on retail prices. Vendors are already preparing to increase the price of their imported goods and this will push our inflation further up. The only benefit is the increase in import tax revenue.

The saving grace is that our IRs peg is still at the golden NRs 160 and two-third of our imports from India is still transacted in IRs. The Nepal Rastra Bank had allowed import of more than 160 products against US dollar payment from India. But in the first 10 months of this fiscal year, the country imported goods worth Rs 31.41 billion using the provision, down from Rs 47.46 billion during the same period last year. However, our import from India against IRs also includes petroleum and as 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 Bhotekosi hydropower projects in dollar terms and 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 be made at the exchange rate of the payment date. Another outflow of dollars is in education. Every year, thousands of students leave the country to study abroad. In the year 2011/12, Nepal sent over 9,000 students to the US alone and is the 11th largest source of foreign students in the US. The bills in dollars are paid by their parents in Nepal.

The only bright side is perhaps the increased value of remittance caused by the appreciation of the dollar. Nepal sells dollars to pay for its balance of trade deficit with India, so it may ease our burden with India.

At the time of going to press, the dollar was selling at the rate of Rs 96.31. This slight improvement is the result of a wide set of measures employed by the Reserve Bank of India and market regulator SEBI on Tuesday to prevent the rupee from slipping down beyond the 12 per cent it has fallen since the end of April. 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 focus should be on managing its strain on inflation rate, already in double digits.

Read also:

The Almighty Dollar

For a Few Dollars More

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