Nepali rupees is consistently losing value in international market; does this give us an edge or makes vulnerable?

Aakriti Thakali

Nepal’s currency (Rupees/ NRS) is consistently diving downward in terms of exchange rate for quite a time now. If we consider recent accounts, we can see that the Nepali Rupees has devalued by an amount of NRS 7.95 in the period of seven months from January 2018 till date. This can be seen in the figure below:

*The data is taken from Nepal Rastra Bank

As you can see in the table above, the highest devaluation occurred between the month of April and May. If we recall the previous years’ exchange rate something exactly opposite happened between the months of March and April, 2017. The exchange rate per 1 USD was NRS 106.15 on March 01, 2017 which decreased to NRS 103.46 on April 01, 2017. 

Currency devaluation and revaluation happens all the time, but lately our currency has been facing a lot of devaluations which just doesn’t affect the transactions across the border but also inside the country. So this was about what has happened so far, but what concerns us most is what are the implications of such currency devaluation; which will be the center of our discussion here on out.

Breaking down currency devaluation

Currency devaluation can either be the result of general market phenomenon of currency’s demand and supply or a deliberate strategy of an economy for a number of reasons. So when done deliberately, currency devaluation can actually help the economy do better but the real question is, Is that the case with us? Let’s look into it further.

The basic objectives when a country deliberately devalues its currency are:

To drive up the exports and discourage imports

When a currency is devalued, the exports become cheaper for other countries which will drive up the international demand for the products of that country. The live examples are China and South Korea. These countries are keeping their exchange rates low so that their products can be globally competitive in terms of price and will provide them a competitive advantage.

However in context of Nepal, we are a heavily import based economy. So even if the exports becomes cheaper and increases demand, it won’t make much of a difference because the higher volume of expensive imports will exert more pressure in the economy.

To decrease the trade deficit and manage Balance of Payments (BOP)

When the exports become cheaper and the imports become more expensive, the citizen of that particular country are more inclined to use their own country’s products – which will in turn decrease the amount of import. Thus with rising export and declining import the trade deficit can be corrected and the BOP can be brought to positive figure.

However in Nepal, we are dependent heavily on India for all the imports. According to the latest figures published by The Customs Department, of the total trade deficit we have 66.67% is with India. You can see the exact figures in the table below.

One crucially important fact that we need to be aware of now is that “Our currency is pegged with Indian currency at a fixed rate of NRS 1.6 for INR 1.” So the hope that our currency devaluation will help in correcting our BOP goes down the drain here. With the consistent devaluation, NRS might have become cheaper relative to USD, but while exporting to India we are stuck with the fixed rate of NRS 1.6 per one India Rupee. Thus to expect positive changes in trade balance with the devaluation of Nepali currency will be total naivety.

To induce economic growth

The age of information and technology has practically shrunk all the national and international boundaries and the winners of the market now are different from the winners of the industrial age. If we carefully see, the emerging economies of the modern era are characterized by extensive emphasis on export. Here export doesn’t only mean finished products but rather refers to a wide range of services, skilled or semi-skilled human resource including out-sourcing and off-shoring alternatives.

Thus when our currency becomes cheaper in the international market, our products also become cheaper, our labor becomes cheaper – in crux we become economically attractive. However that would be true in our case if we had a core competency. A huge chunk of our active labor force is migrating abroad on a daily basis, so even if our labor rate is attractive for foreign investor the problem will arise in the availability of such huge work force.

According to the recent Budget Speech for this year, the government has set a target of 8% economic growth rate. So like mentioned earlier if we had enough skilled and active human resource in our country along with foreign investment friendly policies, this growth rate is actually attainable. In addition the devaluing Nepali Rupees will make our economy more attractive.

            Now that we’ve established that this devaluation isn’t deliberately planned strategy, let’s see how it can affect us:

Unchecked inflation

Inflation, as known to everyone, is the general rise in the prices of goods and services consequently decreasing the purchasing power of the money. So when the currency of a country devalues, it is obvious that the goods will start becoming expensive, especially the imported products. So this general rise in prices will eventually lead to unchecked inflation.

However in our case, as already discussed 65.25% of our imports come from India and 66.67% of our total trade deficit is also with India. And because of the fixed peg rate we won’t be victim to unchecked inflation. However, we do need to be aware that our inflation is tied to India’s inflation. So if India’s currency sharply devalues or the country faces high inflationary pressure, that effect will be systematically transferred to our country.

Foreign debts become more expensive and difficult to service

When a currency devalues, it becomes cheaper than other currencies subsequently decreasing its power. So when foreign debts are to be repaid or periodic interest/ service charge is to be paid, it becomes comparatively expensive than before.

In context of our country, the recent budget announcement showed a total budget size of NRS 13 kharba 15 arba with following details:

*Part taken from the Budget speech for FY 2075/76.

Thus, from here we can see that we’ll be taking a total of NRS 2 kharba 53 arba foreign loan for which we will surely need to pay periodic interests. So as the Nepali Rupees is getting devalued, the amount to be paid as interest in foreign currency will go up. This will eventually add burden on the government.

Similarly, this is not the only avenue from where foreign loans will enter Nepal. Recently to curb the liquidity shortage in Banks and Financial Institutions (BFIs), Nepal Rastra Bank (NRB) has opened up the way for commercial banks to borrow upto 25% of the core capital as loan from foreign financial body, which of course is subject to approval from NRB again. Recently, NMB Bank has been approved to bring in loan from IFC.

When these doors were opened most banks were reluctant because of the foreign exchange risk that might occur. However, in the Monetary Policy of 2075/76 the NRB has assured that the central bank itself will create a hedge fund to hedge the forex risk, although the specifics are yet to be disclosed. So when NRB bears the burden of any risk arising from foreign exchange fluctuation, the increased cost associated with the devaluation of our currency will fall upon NRB first and to the rest of the economy eventually.

Falling real wages

This point is actually clear in the topic itself. In prior topics we discussed that when currency devalues our labor market becomes attractive to the foreign investors and that is exactly what is being discussed here. Our salary and wages might increase, but in real terms the bundles of products that we can buy from that amount decreases. So in REAL terms we are worst off then we were when our currency had higher value in international market.

            Now that we know the devaluation has no good implications for our economy, it seems rather absurd to be not doing anything at all. So to understand what might have led to this persisting devaluation, we had a short talk with NRB and they mentioned three major reasons for devaluation:

One: The Indian currency is consistently devaluing now as the Foreign Institutional Investors (FII) are withdrawing their investments. Since our currency is pegged with INR, the same chain effect is being transferred to us.

Two: The second reason is associated with the world oil prices. The rising oil prices has played a part in the devaluation of our currency.

Three: Since we’re comparing the NRS’ value relative to USD, it is also important that we look into the factors that influence USD. So if we see in international market right now, the yields on USD based bonds and treasury bills are considerably good because of which the demand of USD has gone up, thereby increasing its value.

Since all the three factors mentioned above are beyond the control of Nepal, there is actually nothing much we can do but to just wait and watch for things to turn around. However one thing that we could do is take this situation as an opportunity and focus on the production and promotion of exportable goods and services. Similarly, each of us as a Nepali citizen have the choice to give priority of “Made in Nepal” products as long as it is affordable to us and is within our reach.