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This week, the Nepali rupee reached the lowest level against US dollar with the Nepal Rastra Bank (NRB) fixing the selling price of dollar at Rs 89.30, and the buying price at Rs 88.70. A year ago on Thursday the dollar was selling at Rs 72.57.
The freefall of the Nepali rupee against the dollar is not good news for the economy, but it is not happening because of anything Nepal has done, or not done. The NPR peg to the INR which cushioned us against our own non-performing economy is now also the reason why the Nepali rupee is affected by the misfortunes of the Indian rupee.
India's widening trade and current account deficits, coupled with declining foreign fund inflows, have depressed the Indian rupee. India spends nine per cent of its GDP in subsidising basic necessities and fuel. With the increase in oil prices, India's trade deficit has increased by 56 per cent this year. Removing subsidies is not an option for an already weak UPA government. The crisis in the Eurozone is not helping either.
Essentially, there is nothing Nepal can do about it. Our rupee leans on its Indian counterpart, and so when the Indian rupee falls, we tumble down too. As the dollar becomes stronger in the global financial market, currencies of emerging markets have depreciated against the dollar. Currently, the Indian currency is one of the worst performing currencies against the dollar.
The dollar can be expected to rise further in the future if the Reserve Bank of India (RBI) does not intervene. RBI's target on arbitrage and speculation in futures and options markets, and its order to exporters of repatriating INR instead of holding dollars seem to have been ineffective so far. So there is nothing we in Nepal can do but wait, and watch, and suffer.
For an import based country like ours, higher exchange rates will put pressure on import prices and push inflation, which currently stands at seven per cent. Merchandise import has increased by 18 per cent to Rs 339.84 billion in the last nine months, and the appreciation of the dollar is unlikely to dampen these figures.
The strong dollar will also make payment of foreign loans and interests expensive. The Rs 20 billion allocated by the government to pay the principle and interest in the current fiscal year's projects will no longer be sufficient. Since fuel prices are bound to rise if this trend continues, expect longer queues at the gas stations, and more political instability as various pressure groups try to use price hikes to fuel street protests.
However, the rising dollar has helped inflate Nepal's economic figures. If you looked beyond the political news last week, you would have noticed some positive developments on the economic front. Nepal's export has already risen by 15.9 per cent this fiscal year, from five per cent a year ago. Remittance inflow has grown by 36.5 per cent to Rs 248 billion in the same period. Income from tourism has risen by 28.9 per cent. A lot of this has to do with the appreciation of the dollar.
After remaining in deficit for two years, the country's balance of payments registered its highest ever surplus of Rs 91.37 billion during the first three quarters of 2011/12 fiscal year. The gross foreign exchange reserves surged by 42.2 per cent to Rs 386.96 billion in mid-April 2012 from Rs 272.15 billion last year.
The dollar alone is certainly not responsible for these figures. What it shows is that despite political uncertainty, power shortages and strikes, our economy managed to do more than just stay afloat. The test will be to monitor if these figures drop and by how much when the dollar stabilises. The Nepal Investment Board was finally given charge of large-scale prestige projects, but this coincided with the demise of the constitution. It won't help allay investor fear of doing business in Nepal if the country doesn't have a legislature, and not even a constitution.
But if we keep waiting for politics to settle down, we may wait forever. So let's move while we can.
See also:
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The almighty dollar
The fall and fall of the Nepali rupee
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