The appreciating Nepali currency against the US dollar might affect remittance income and export of Nepali products.

The appreciation of the Indian currency (IRs) with which our currency is pegged to has pulled down the exchange rate of the US dollar to Rs 85.

In late June, the dollar had reached Rs 91.28 –– the highest ever –– after the Indian currency plunged to lower than IRs 57. Since then monetary intervention by the Indian central bank has saved the Indian currency from plunging further.

Nepal Rastra Bank (NRB) had fixed the dollar exchange rate at Rs 85.05 for today –– the lowest in the last four and a half months.

By closing time today, the central bank had fixed it at Rs 85.24 for tomorrow.

Today’s average of the dollar exchange rate fixed by 20 commercial banks stood at Rs 84.98.

Even though Nepal’s financial conditions have nothing to do with the exchange rate movement, the fixed exchange rate regime with India takes the Nepali currency along its ride. India’s current reformist steps like removing subsidy on fuel and allowing foreign investment in retail stores has sparked global confidence in the Indian currency once again, pushing it up.

“For the Indian economy, having a strong currency is favourable, but for a fundamentally weak economy like Nepal, a strong currency turns out to be unfavourable,” said economist Dr Chiranjibi Nepal.

The cheaper US dollar translates to a decline in remittance income. Appreciation in US dollar had swelled remittance income by 41.8 per cent amounting to Rs 360 billion, last fiscal year.

“Reduced remittance in the absence of a full budget can bring another round of liquidity crunch in the financial sector which will be detrimental to economic activities, as the rate of expansion in lending is still slow despite enough liquidity,” he added.

Likewise, a weak dollar means Nepali exports will be expensive in foreign markets. Nepali exports to third countries is already meagre, as Nepali exporters have been unable to exploit the advantage forwarded by cheap Nepali currency.

“Nepali exports will be unfavourably affected for being expensive due to the weak dollar,” added Nepal. Merchandise exports to third countries had increased by 17 per cent to Rs 24.6 billion, aided by the appreciation in the dollar.

However, despite expensive dollars translating to expensive imports, it did nothing much to deter imports.

Published on: 26 September 2012 | The Himalayan Times