Some of the economic challenges Nepal faces are beyond our control, but many of them are a direct result of our own incompetence
Two events this week portend significant impact on our economy. On Tuesday, the US dollar crossed the Rs 100 barrier (Rs 102 by Thursday) with a potentially huge impact on inflation and balance of payments. The same day, the Civil Aviation Authority of Nepal held a press conference in which it announced an ill-timed and ill-thought ban on wide-body aircrafts flying into Kathmandu airport.
Taken together, this is like kicking an economy that is already down. There is precious little Nepal can do about the surging dollar because of the INR peg. The USD has strengthened by 15 per cent in the last six months against the Indian rupee and the Indian government and the Reserve Bank of India (RBI) have been at loggerheads over the proper response and slow to react. Wednesday’s decision by the RBI to buy back INR 80 billion in bonds to shore up money supply tackles the symptom and not the disease. Liquidity had become tight after efforts to stem the INR’s free-fall raised interest rates.
The real problem has been India’s chronic current account deficit, which used to be covered by foreign investors pouring money into the country. But red tape, corruption, and economic slowdown in the West have kept investors away. Meanwhile, India’s imports especially of oil, coal, and gold has surged, putting pressure on the exchange rate. With elections coming up, Indian leaders will be expected to take populist decisions rather than bite the bullet.
The 100:160 INR peg means that India’s woes have impacted directly on Nepal. The vast Indian economy can take knocks, but for Nepal crossing the psychological NPR 100 threshold could make an already precarious situation perilous.
A falling domestic currency need not necessarily be bad news for a country as long as it has sizeable exports, but only 12 percent of Nepal’s foreign trade is made up of exports. A strong dollar could also be hugely advantageous to a country so dependent on foreign remittances and tourism. Nepalis working abroad sent home USD 4 billion last year and this amount will automatically increase by more than 20 per cent when converted to NPR. Nearly 40 per cent of foreign remittances are sent home just before the holidays, so the benefit of a strong dollar will be felt immediately in the next three months. Tourism pumped in an estimated Rs 32 billion last year and with the stronger dollar this total will also go up, even if the total number of visitors doesn’t.
Most of the remittances, however, are used up by Nepalis to pay for imports of consumer items, energy, and food. The dollar appreciation, according to one estimate, will trigger 20-30 per cent inflation in a market dominated by imports.
So, to sum up, there is nothing we can do to stem the rupee slide because of the INR peg. And what we should have done to take advantage of the strong dollar (boost exports, invest remittances in the productive sector) should have been done decades ago. It’s too late now.
CAAN's (Civil Aviation Authority of Nepal) ill-advised decision to issue a half-baked statement about a “ban” on wide-body planes flying into Kathmandu because of cracks on the runway could not have come at a worse time. To correct one mistake (shoddy construction during asphalt overlay work two years ago allegedly due to corruption) CAAN made a blunder by announcing a ban that it couldn’t enforce. A decision of that magnitude should have been made in consultation with airlines and announced by the minister.
CAAN met with the airlines Wednesday and lamely back-peddled stating that it wasn’t a “ban” per se, but just a “suggestion”. But the damage has been done, the news has hit the international wires and social media, panicking tourism wholesalers and individual travellers.
Some of the economic challenges Nepal faces are beyond our control. But many of them are a direct result of our own incompetence.
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When is a ban not a ban, KUNDA DIXIT