Nepali rupee drops to over 18-month low

Kathmandu, June 27

Nepal Rastra Bank has fixed the exchange rate of Nepali currency vis-à-vis US dollar at 110.08 tomorrow, over an 18-month low.

The devaluation of Indian currency has hit the Nepali rupee again and brought it down close to the all-time low of 110.28, which was recorded on November 25, 2016. The last time Nepali rupee was valued above 110 against the US dollar was on November 30, 2016, when it was valued at 110.16.

The Nepali currency is pegged with the Indian rupee, which has been depreciating continuously in the recent days. The fall in Indian rupee was primarily due to strong month-end dollar demand from importers and banks amid sustained foreign capital outflows, the Press Trust of India reported. “This is the INR’s lowest level against the greenback since November 29, 2016.”

The sharp devaluation of Nepali currency vis-à-vis the US dollar has posed various challenges for the country’s import-based economy because imports in the coming days will be dearer and there will also be inflationary pressure.

Sharp devaluation of Nepali currency has been witnessed since the third week of April. Nepali currency has been devalued by 5.24 per cent till date compared to the exchange rate of mid-April, according to Nepal Rastra Bank.

Shankar Sharma, senior economist and former vice chairman of National Planning Commission, said that the country, which is already facing pressure in Balance of Payments (BoP), will be adversely affected as the import will be costlier.

Devaluation of currency can have both positive and negative consequences.

The country will lose out while repaying interests and principals on foreign loans, which need to be paid in US dollars. At the same time, Nepal Electricity Authority (NEA) will incur heavier losses as it will have to pay more for off-taking power to power producers, with whom it has signed power purchase agreements (PPAs) in dollar terms. NEA has signed PPA in dollar terms with Khimti, Bhotekoshi, Upper Marsyangdi ‘A’, Upper Trishuli-1, Lower Solu, Kabeli A, Rasuwa-Bhotekoshi project, among others, and appreciation in the dollar will further worsen its financial health.

On the bright side, this is the right time to boost export and attract more tourists into the country as the earning in Nepali currency against dollar will be higher. According to tourism entrepreneurs, the country could lure more tourists if they properly spread the message that a stronger dollar will have higher purchasing power in Nepal with the slide in value of Nepali currency against the dollar.

Also, the remittances that migrant workers send home will have more value when the US dollar appreciates. So, the families receiving remittances will receive more of Nepali currency. The government’s revenue that is collected at customs points will also increase as the price of imported goods rises.

Nevertheless, an import-based economy like ours that is struggling due to supply-side constraints has more to lose from appreciation of the greenback, according to the economists.

Advantages

• Remittance volume will rise as migrant workers will prefer to send more remittance
• Exports could increase
• Higher purchasing power of US dollar helps increase tourist inflow
• Increase in customs revenue
• Country can save US dollars from dividend repatriation of foreign companies

Disadvantages

• Inflation could shoot up as imports become dearer
• Pressure on balance of payments (BoP)
• Country loses more while repaying interest and principal of foreign loans
• PPA on electricity in US dollar terms will lead to further loss for NEA
• Price of international air tickets will rise (in terms of Nepali rupees), students set to go abroad for study or Nepali travellers (to foreign country) will have to pay more in Nepali currency for US dollar
• Black marketing of US dollar could thrive