Nepali Times
Economic Sense
Nepal’s "1.6 economy"


How long are we going to be a one-point-six economy? For as long as anyone can remember the Nepali rupee has been pegged at 1.6 to one Indian rupee. The outcome is that every time New Delhi sneezes, Nepal gets the flu.

And so it was with the oil price hike last week. Nepal Oil Corporation (NOC) got together with the oil dealers and gave Nepalis a lovely Dasain gift. No petrol to carry that khasi in the motorcycle, and no kerosene to fry the khasi's innards.
The prices of both oil products had increased in India, and we were just waiting to follow suit. The dealers were hoarding, while NOC was passing the buck saying, "We've been moving supplies". What on earth was happening?

We found out soon enough. No sooner was Dasain over than Nepalis got a triple whammy from NOC: kerosene prices up by 100 percent, petrol by 17.5 percent and diesel by 19.5 percent. Now we are all waiting for the effect on inflation. Usually, the first aftershocks of a 20 percent increase in fuel prices translates into a 1.5 percent increase in the inflation rate, and this is followed by a delayed increase that can go up to five percent. Nepal's inflation rate, which had remained in single digits will now grow. Just wait and see, in six months' time the Finance Ministry will be blaming it all on the oil price hike-"reasons beyond our control". We will make more speeches on oil conservation and some committee will be formed to undertake a study.

Back to the one-point-six syndrome. It affects everything in Nepal, not just fuel prices. When Nepal's foreign currency holdings are robust why on earth do we have to devalue our rupee and make imports costlier? It would be interesting to find out who or what has determined that the appropriate exchange rate with the Indian rupee is 1.6, and fixed it there for eternity. Which economist on either side of the border can substantiate a calculation that shows that the currency rate has to remain at this level? If the balance of payments situation between Nepal and India changes, it should be allowed to affect the exchange rate. I have a sneaking suspicion 1.6 has been set by our lords and masters, the politicians, and the economists in our central bank obediently taken it as a given.

Why else should we stick to this arbitrary ratio that seems to have been set by some astrologer? No Nepali government in historical memory has ever raised this issue with India. Why not?

As a matter of fact, current trends in Nepal's exports, balance of payments and the country's economic position vis-a-vis dollar reserves, suggest that the exchange rate with the Indian rupee would be more realistic at 1.3. If the exchange rate comes down to 1.3 oil product prices can remain the same, the dollar can depreciate against the Nepali rupee, the purchasing power will increase, the real GDP growth rate will improve-all leading to a stronger Nepali economy? Anyone who doesn't want the Nepali rupee to improve, raise your hand. Who in Nepal should have a problem with an improvement in the Nepali economy?
Our economic pundits need to urgently question the unquestionable: why 1.6? It's time we got rid of this irrational fixed rate regime once and for all. It would resolve a lot of problems that plague Nepal: sugar prices, oil prices, vegetable prices, and even labour rates. It will improve the competitive advantage of the Nepali economy, won't it? Write to me and let me know your views.

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(11 JAN 2013 - 17 JAN 2013)