RUPEE FALLS High Inflation Risk

Nepal’s economy is facing a risk of high inflation with the fall of rupees to a record low against US dollar<br>A CORRESSPONDENT

Dec. 12, 2011, 5:45 p.m. Published in Magazine Issue: Vol.: 05 No.-11 Dec. 09-2011 (Mangsir 23,2068)<br>

With the rise of US dollars, Nepal Oil Corporation has already started rationing the petroleum products citing a heavy loss in import. The indication of the NOC is clear that it wants to increase the current prices.

As Nepal completely depends on the import of petroleum products, the government cannot hold it for a long time. Sooner or later, Nepal will have to increase the prices. The risk is this increase is likely to send the rate of inflation up to double digits.

Nepali rupee recorded back-to-back drop of over one percent and fell to a historic low against a US dollar last week after gloom reigned in equity markets and oil importers and overseas investors bought more dollars in Nepal.

Nepal Rastra Bank (NRB), the country´s monetary authority that adjusts the value of rupee depending on the movement of Indian currency vis-à-vis US dollars, set the price of the greenback at Rs 84.20 for last Wednesday. 

“Because our currency is pegged with the Indian currency, we can attribute the drop to turbulences in Indian market instead of ours,” said NRB spokesperson Bhaskar Mani Gyawali.

Although he did not elaborate, officials keeping track of currency markets attributed the drop to weakening of stock and sharp rise in demand for dollar by oil importers in India.

Rupee has been on a free fall in recent months mainly as dollar gained sharply against Indian currency. This has caused the cost of imports to jump, hurting consumers dearly.

Earlier, the lowest recorded exchange rate for the Nepali rupee was Rs 83.40 against the dollar on March 4, 2009.

Due to India’s slow economic growth of late, foreign institutional investors are pulling their capital out of the country. According to The Economic Times, persistent capital outflows aided the rupee downtrend as foreign institutional investors pulled out $460.40 million in five days since November 15. With institutional investors increasingly purchasing the US dollar for safe investment in the absence of an alternative due to the eurozone crisis, the dollar has strengthened significantly.

Economists and bankers say continuous devaluation of the domestic currency against the dollar has both pros and cons. The strengthening of dollar against Nepali rupee may result in increased remittance inflow. According to NRB Spokesperson Bhaskarmani Gnawali, given the country’s high dependence on remittance, the weakening of rupee is relatively advantageous.

Bankers also say this will encourage Nepalis working abroad to send remittance back home. Banks have been witnessing increased flow of remittance with the beginning of decline of the Nepali currency against the dollar. “Obviously, the remittance flow has gone up significantly in recent days,” said Anil Gyawali, chief executive officer of Nabil Bank.

With the dollar remaining strong, Nepali exports will get a boost with returns getting higher. However, with Nepal’s export volume being smaller than imports, it will not help the economy in totality. “Given the small export basket, Nepal is unlikely to benefit,” said Krishna Bahadur Manandhar, former deputy governor of NRB.

Manandhar, however, sees more disadvantages with weakening Nepali rupee. “At a time when we are facing power crisis, the cost for hydropower developers will go up with the rise in the prices of equipment such as turbines,” said Manandhar.

As of the last fiscal year, Nepal’s import from India stood at Rs 261.63 billion and from third countries at Rs 133.27 billion. However, with imports from third countries constituting around 33 percent of the total imports, the economy may face inflationary pressure.

The country, of late, is witnessing rise in the prices of imported goods. Traders say imported goods have become dearer by around 20 percent in the last two months. The effect of rising dollar is more seen in automobiles, luxury goods and electronics, among others.

Despite the volatility in the currency market, the central bank cannot do much. “We can do nothing as our currency is pegged with IC,” said NRB Deputy Governor Maha Prasad Adhikari. “The destiny of our currency is with Indian currency.”

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