Rupee devaluation to hit inflation, growth rate

Illustration: Ratna Sagar Shrestha/THT

Kathmandu, August 31

Constant weakening of Nepali currency vis-à-vis US dollar over past few months poses a serious threat to the country’s economic targets set for the ongoing fiscal.

As Nepal is an import-based economy, the ongoing sharp depreciation of domestic currency against the US dollar will also make imports costlier and impact the country’s inflation, said experts.

The value of Nepali rupee, which is pegged with the Indian currency, will have depreciated to a fresh all-time low of Rs 113.89 per US dollar over the weekend as per the exchange rate of Nepal Rastra Bank, owing to persistent demand for the US currency with rising crude prices in the Indian market and weakness in almost all other Asian peers.

Compared to today’s exchange rate of Rs 113.49 per dollar, the domestic currency has depreciated by a massive 8.51 per cent against the US dollar in the past five months. The domestic currency was valued at Rs 104.58 against the US dollar on March 30.

“Appreciation of the greenback will raise Nepal’s import bill as our market is based on imports. Worse, it will also make domestic produce costlier as our industries are heavily reliant on imported raw materials,” said Senior Economist Keshav Acharya.

As per the latest government statistics, Nepal’s imports sky-rocketed by 57.18 per cent in the first month of this fiscal to Rs 120.61 billion, while exports witnessed the marginal growth of 3.19 per cent to Rs 6.92 billion compared to the corresponding period of the previous fiscal.

“Had our exports been strong and supply side robust, appreciation of the US dollar would have actually been a boon to our economy,” added Acharya.

Costlier imports will hit Nepal’s balance of payment, make it difficult to contain inflation below 6.5 per cent and achieve economic growth of eight per cent as targeted for this fiscal, according to Acharya.

More importantly, the stronger dollar will add financial pressure on Nepal Electricity Authority, as it will have to pay more to power producers with whom it has signed power purchase agreements in dollar terms.

“The depreciating rupee also means that the country will lose out while repaying the principal and interest of foreign loans, which need to be paid in dollars,” Posh Raj Pandey, a trade economist, told THT.

But all is not dark and dreary, as Nepal could reap benefits from the appreciation of the US dollar by welcoming more foreign tourists into the country. Similarly, remittance recipient households will receive more of Nepali currency due to the increasing value of the US dollar.

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