Nepali Times Asian Paints
PAAVAN MATHEMA
My Two Paisa
The almighty dollar


PAAVAN MATHEMA


The Nepali rupee has plummeted to an all-time low against the US dollar, with the exchange rate at the time of writing on Thursday set at Rs 83.91. The previous low was Rs 83.40 in March 2009. Over a month, the Nepali rupee has lost over seven per cent against the dollar.

What is lost in much of the analysis here is that the fall of the NPR is related directly and solely to the fall of the INR since the two currencies are pegged. The Indian currency has been falling sharply due to persistent capital outflow from India, and investors opting to purchase dollars rather than the euro as a safer currency. The surge in demand for dollars in India has lowered the INR value, and this has impacted directly on the NPR.

The obvious effect of the appreciation of the dollar is that our exports will benefit because our products (pashmina, tea) become cheaper. By the same token, dollar-denominated imports (cars, international credit) will be more expensive. Theoretically, this should boost our exports. But since the basket of goods we export is relatively much smaller than our import volume, the balance is unlikely to shift in our benefit.

On the other hand, the expensive imports will have a lasting effect on the market: even cheap Chinese goods will become more expensive. That many of our manufacturers depend on imported raw materials means that local products will also become more expensive. During the last fiscal year, Nepal's import from India stood at Rs 261.63 billion and at Rs 133.27 billion from third countries, and the pressure from the strong dollar is bound to push these numbers even higher this year. Nepal Rastra Bank has expanded the list of products that can be imported from India by paying US dollars to dampen the rising demand for INR, increasing the import with dollars significantly.

The only saving grace is that our INR peg is still at the golden NPR 160 and two-third of our imports from India is still done in INR. But this import also includes petroleum and because India imports about 75 per cent of its own petroleum requirement, the increased price will be transferred to Nepal.

The most worrying effect will be for hydropower developers as their costs will multiply with the rising dollar, adding to high cost of financing. The Nepal Electricity Authority has signed power purchase agreements with Khimti and Bhotekesi hydropower projects in dollar terms, this means the NEA's losses are bound to grow.

Nepal's cost for debt servicing will also go up, although most of our credit is long-term in nature and the payments will made at the exchange rate of the payment date.

The only bright side is perhaps the increased value of remittance caused by the appreciation of the dollar. Banks already admit that they have experienced a surge in the inflow of remittance from workers abroad with the weakening of the domestic currency. Nepal sells dollars to pay for its balance of trade deficit with India, so it may actually ease our burden vis-Ó-vis India.

Given that our exchange rate with the dollar is determined by our pegged rate with India, there is little Nepal Rastra Bank or the market can do to sway the rate. Our response should be focused on managing the likely increase in inflation, which has stood in double digits for three consecutive years.

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For a few dollars more



1. exchangerate
Are you sure that the NEA has not hedged its exposure to exchange rate risks? It would be foolish of the big exporters/importers or any organization that is exposed to exchange rate risks to take a position to hedge those risks. In this day and age, it is very common and easy to hedge such risks.


2. Jeff
I fail to see any reason to complain about this development. After all, toilet paper has a price and on a long enough time scale everything goes to zero.

3. Sushank Kumar Yadav
Rupee appreciation makes imports cheaper and exports more expensive.Likewise, a depreciating rupee makes exports cheaper and imports expensive.Afterall, unless the export increases, the country cannot develop.So, it is good news for industries such as  hotels and tourism and those Nepali industries which generate income mainly from exporting their products or services. Rupee depreciation makes Nepali goods and services cheaper for overseas buyers, thus leading to increases in demand and higher revenue generation. The foreign tourists would find it cost effective to come to Nepal, therefore this will increase the business of tourism sectors like hotel, tours and travel companies.
In concern to bright side of almighty dollar in your words ┬á, i would like to add up here what recently i came to know that a latest report of the world bank on migration and development,┬áwhich says Nepal has 6th position among rest of all across the globe that receive more remittances as a share of GDP in 2011 .Similarly,the Outlook for Remittance Flows 2012-14 estimates that Nepal will receive around US$ 400 million worth of remittances from its overseas workers in 2011, making remittances stand at 20 percent of country├»┬┐┬Żs total GDP.



LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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