September 2, 2013 Sujeev Shakya

Crisis and Currency

The rupee freefall in the past two months has prompted a lot of knee-jerk analysis. Nepal is fortunate to have Dasain-style budget analysts who, occasionally, emerge to talk about anything between earthquakes to currency-quake. However, what is required is a more in-depth analysis of the issue, which no institution seems interested to take on. This is the time to lament the absence of real economists in private sector bodies. The government will only say what it needs to; real analysis comes from the private sector and public policy institutions.

Peg needs to stay
Discussing the need of the peg has become the best topic for conversation in social cocktail circuits after consuming two pegs. We need to understand that the peg has to stay. The Nepali economy has benefited more from its fixed peg with the Indian rupee than potentially floating it. We should not forget that the Nepali rupee was very much stable, even during the ten years of the insurgency when the economy had gone for a toss.

Peg must be reviewed
The currency peg is not a firm international border that is not supposed to change. The exchange rate between the Indian and Nepali rupee needs to be determined through a review mechanism. When the peg was established in 1960, 95 percent of Nepal’s trade, income and expenses were related to India. At that point in time, due to the existence of multiple exchange rates, it was believed that a fixed exchange rate would stabilise the economy and curb inflation for the poor Nepali. Today, Nepal receives $5 billion in remittances, which is more than what it imports. If one analyses the Indian rupee component in Nepal’s trade and compares it with remittances, the time has come to review the fixed exchange rate.

Since 1960, the peg has been changed only eight times, demonstrating very clearly that the fixed exchange has nothing to do with the economy. It clearly revolves around geo-politics. In 1993, when the peg was last changed to 1.6 there was no remittance economy. The time has come to bring down the rate to 1.4 or 1.45. The Nepali government should have the political will to conduct a thorough analysis and present its case to India. Furthermore, a mechanism has to be started to ensure that the fixed exchange rate be reviewed periodically. If Nepal had received about $10 billion in remittances by 2010 and foreign currency investments in hydropower and other sectors as envisaged, then we would have to be really mentally prepared to see the Indian rupee not only being on par with the Nepali rupee but even lower. We have to have a long-term view on this, not the top of the mind view just because some journalist is hounding someone for comments.

Import substitution
Think a bit more. We have heard enough from self-declared nationalists who want imports to be substituted by domestic products. Please, look at what we import the most—petroleum products, gold, vehicles, heavy machinery, electronics etc. These comprise the bulk of our import bill and we know that we cannot substitute this with domestic production. We should not pursue a policy of promoting substandard products. For instance, there is a ban on the import of mustard oil so that more expensive, substandard Nepali products can be peddled. Similar is the case for chicken. For instance, if international Direct To Home (DTH) service providers were allowed to operate in Nepal, we would not be watching substandard quality interrupted services. In the name of promoting national interests, we have always compromised on quality and given opportunities for ‘rent-seeking’ businesses to flourish.

Long-term view
When the rupee tumbled twenty years ago, Nepal embarked on a long-term strategy to reduce its dependency on petroleum imports. Most of us do not realise that the Hydropower Policy of 1992 was resultant of that effort. The same situation now stares at us, but this time, a more concrete approach is required. Mass transportation based on electricity has to replace fossil fuel consuming vehicles in the long-run. Nepal’s leadership on using electric vehicles for mass transportation has to be demonstrated again. More electricity generation for domestic markets will ensure that Liquefied Petroleum Gas (LPG) used for cooking will be substituted by electricity, which is cheaper. More incentives to renewable energy, like solar, will only help reduce petroleum imports. It is better to provide incentives for hydropower projects than have the economy put through inflation due to an increase in the price of petroleum products.

The currency curry has to be viewed from different lenses. If multilaterals and bilaterals believe that the currency peg discourse is something that needs in-depth analysis and research, please do fund it. But please, no fact-finding ‘parachute consultants’; Nepal needs some real help. The starting point could be to form a unit at the Nepal Rastra Bank, armed with private and public interest takers to look at short-term and long-term solutions, including a review of the situation periodically.

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