Nepali Times
Economic Sense
Free the Nepali Rupee


As this is the land of rumours, this Beed as a good Nepali feels obliged to pass on to the public the latest one. So, have you heard, the Nepali Rupee might be devalued?

The immediate impact of this whisper floating around was that in the informal market the greenback was being exchanged for as much as Rs 80. The spurt in gold imports coupled with an hysterical rise in the demand for foreign currency made everyone conclude the Nepali Rupee would be devalued against the Indian Rupee. People started placing bets, as if at a roulette table-170, 180, 200. The government had to intervene and tell the huddled, whispering masses that no such devaluation would take place. This topic is particularly close to your Beed's heart, so I will once again examine whether there is any hint of rationality behind having a fixed exchange rate.

This is the history of this practice: On 13 April, 1960, the Nepali government adopted the policy of unlimited convertibility of Nepali Currency (NC) to Indian Currency (IC) in Nepal. The argument for the fixed exchange rate with regard to Indian currency was to help lower the fluctuation in the price level of Indian products, as the consumption basket of poor Nepalis consisted mostly of items imported from India. In the last forty years there have been only seven adjustments in the NC-IC exchange rate with the last change on 1 February 1993. Since then, the magical rate of 1.6 has not changed.

It is surprising to see a country's currency not change its value in eight years despite major changes in economic activity. The assumptions that dictated the pegging of a fixed exchange rates may not be valid any more, but that 1.6 fetish is alive and kicking us in the teeth. All figures show that India does not dominate Nepali trade as it used to, so it is puzzling that we are stuck with the old exchange rate.

What's more, today remittances from Nepalis working abroad equal the value of exports from Nepal. These remittances enter Nepal through official and unofficial channels. This also has a strong bearing on the rate of the US dollar vis-?-vis the Nepali Rupee.

It is important to accept that the ultimate parameter for any economy in the world is the US dollar, whether to measure GDP or per capita income. Unfortunately, Nepal's currency does not have a direct relationship with the dollar, but only an implied one through the Indian Rupee. A fall in the Indian Rupee against the US dollar means fall of Nepal's GDP. Ridiculous! How can we truly judge the progress of the Nepali economy?

This issue of the exchange rate needs to be brought into the ambit of economics rather than politics-like so many other things. When trade and transit issues are being discussed, why not talk about this too. If the Nepal Rastra Bank does not bring this up, or explain it to the public, it is not doing its job. Why not push for 1.3 parity with Indian Rupee to start with? The dollar will come down to NRs 60, our purchasing power will increase by 20 percent and so will our GDP and per capita income.

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(11 JAN 2013 - 17 JAN 2013)