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Nepal keen on devaluing its currency

world Updated: May 19, 2007 03:26 IST
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The tumultous changes in Nepal have taken their toll. As the country haltingly proceeds towards a democratic setup, it has realised it needs to devalue its currency (Nepalese Rupee) in order to give some stimulus to its exports.

The macroeconomic indicators are grim. In the past five years, the average rate of growth of GDP has been 2.14 per cent - easily the lowest in South Asia.

While growth is slow, the rate of inflation rose to 8 per cent in March against 5.8 per cent in the same month of the previous year. It has also been projected that the economy will not grow at a rate higher than 2.91 per cent per annum till 2011. “We are open to devaluing our currency now,” Ram Sharan Mahat, Nepal’s Finance Minister told Hindustan Times, adding that the over-valued Nepalese Rupee has been a hurdle to the country's economic progress.

More than 70 per cent of Nepal’s export is to India.

“Theoretically, devaluing currencies always helps in increasing exports, but we have no idea what is going
to happen in Nepal,” Shankar Prasad Acharya, the Director of Nepal Rastra Bank’s Foreign Exchange
Department, said.

Acharya said that since the Nepalese Rupee is pegged to the Indian Rupee basket, and the Indian rupee has strengthened considerably, the currency value of the Nepalese rupee too rose considerably during the last few months against the US dollar. “And it is this that has also affected our exports,” Acharya said. The
readymade garment industry, which has been one of the largest exporters from Nepal, suffered considerably
during the last four months.

Several Nepalese economists have been arguing that as exchange rate determination is an important monetary
instrument for maintaining growth and containing competitiveness, the existing exchange rate with India
needs reassessment.

Diplomats at the Indian Embassy at Kathmandu were not unduly bothered. “If they (the Nepal government) are keen to devalue the Nepalese Rupee, we have no problem,” one of the Indian diplomats, who refused to be quoted, said,
adding New Delhi would not try to stop Nepal if it wanted to wriggle out of Indian currency
basket.

The diplomat said India would have no major problem even if the Nepalese government wanted to shift from
fixed to floatation exchange rates. At present, the fixed exchange rate between Indian and Nepalese Rupee
is at 1:1.60.

However, the Nepalese government would probably have to consider the fact that India, as an external factor, has
significant impact on Nepali domestic price levels.

Email author: anirban20@yahoo.co.uk