Nepal, Argentina and anchor currency

By Dr Raghab D Pant

What is the commonality between the current economic situation of Argentina and Nepal? I know that it is not the same. I, however, also realise that it is also not very far from the same: both countries face severe economic problems (rising unemployment - more than 20 percent in Argentina - growing poverty and a deteriorating financial system) and a weak political leadership. Argentina confronted restless population and the President tried to create a national unity government to confront the crisis. It was not acceptable to the opposition; and both the President and the Minister of Finance had to resign in the midst of deadly rioting in the capital city. The problem has not been settled yet. In Nepal, the government has imposed emergency to fight Maoist insurgency. Still, the predecessor of the current Prime Minister has advanced the idea of national unity the purpose of which, and even the modality of national unity, has not yet been unambiguously defined. Both Argentina and Nepal have not announced any new strategy to improve the economic welfare of the people.

In the monetary area, there is, of course, strange similarity. The exchange rate of the domestic currency of both countries is fixed with the currency of their major trading partner, or what we can call "anchor" currency. The exchange rate with other currencies is fixed taking into account the exchange rate of anchor currency with the corresponding currency. The currency of Argentina, known as peso, is pegged to the US dollar - one to one - and the government is committed to maintaining free convertibility of peso to US dollar and vice-versa. Similarly, the Nepalese currency is pegged to Indian currency at IRs 1= NRs 1.60 and, as expected, the exchange rate with other currencies is fixed by taking into account the exchange rate of the Indian currency with the corresponding currency. Nepal is also committed to maintaining free convertibility of NC into IC and vice-versa. As a result, the Indian currency still functions in Nepal as a store of value, the important function of money in general, whereas in Argentina it is the US dollar. But the anchor currency in both countries cannot be used as a medium of exchange. The Nepal Rastra Bank or the central bank of the country is also the note issuing authority, whereas in Argentina currency is issued by the Currency Board which can issue domestic currency only if it is covered fully - 50 percent in Nepal - by the national foreign exchange reserve.

In the first half of the last decade, when the system was first introduced, Argentina derived maximum benefit from the Currency Board system to check inflation rate that ran into thousands to single digit within months. This stability paved the way for billions of dollars of foreign investment and high economic growth rates between 1991-98. However, since then, the exchange rate of the dollar vis-a-vis other currency of the world was significantly appreciated and Argentina had no other option but to follow it, notwithstanding the domestic situation. As a result, exports declined and imports accelerated, causing severe problem in the balance of payments. The domestic economy has experienced recession since four years, leading to current political problems.

Is the problem that we have witnessed in Argentina recently, as claimed by many, is simply a dance of peso in that the current economic problem began (at least they became visible) from the financial sector? If so, why Nepal, given the similarity in the monetary system of the two countries, has not have the same problems as Argentina. Or, what lessons can we learn from the recent Argentina’s experience?

The answer is not complicated. Had the Indian currency been appreciated, we would have followed the worse situation than Argentina. But it has not. The exchange rate of the Indian currency vis-a-vis US dollar has depreciated steadily since the past few years. Nor India is expected to reverse the direction of exchange rate policy in the near future as many still feel that the Indian rupee is being ‘artificially pegged high.’ Prof Jagadish Bhagawati, a possible candidate for Nobel Prize, has advised recently to make downward adjustment in the exchange rate of Indian currency as it will help to expand export and make import costlier.

Nepal has greatly benefited by pegging its currency to the Indian currency. But only a few in the country have monopolized the benefit due to unsatisfactory policy followed by the Nepal Rastra Bank either by design or by ignorance. The exchange rate policy has not been used properly for poverty alleviation purposes, or there is even chance of it being misused. It is strange to note that they are, according to a press repot, trying to peg NC with Chinese currency also, perhaps even not knowing that a national currency can be pegged with only one currency at a time.

The depreciation of national currency - the exchange rate of NC vis-a-vis Us dollar depreciated by about 35 percent between 1997-2001 - would result in an increase in the value of the national foreign reserve in terms of local currency. The profit will be derived by the institution who has the resources and the authority to hold national foreign reserve. In Nepal, about 35 percent of the national convertible foreign reserves of Rs 8020 crore, as of July, 2001, was held by a few commercial banks that is better not to be named here. The Nepal Rastra Bank allowed these banks to use profit derived from the depreciation of national currency to distribute as dividends to the shareholders. In that process, the banks derived billions of rupees in profit simply by holding foreign exchange or investing national resources abroad rather than in the country. To give one simple example, in the first three months of the current fiscal year only, the commercial banks derived profit equivalent to Rs 55 crore by investing in foreign reserve. As a result of such practices, the share price of some commercial banks is 30 times higher than their actual value. This has, no doubt, increase the so-called NEPSE index, giving a false sense of prosperity.

The profit or loss due to change in exchange rate should be treated in a professional and transparent manner. The current practice that allows a few commercial banks and their limited shareholders to monopolize the gain derived from the depreciation of national currency is extremely immoral, even if it is legal. It must be deposited in the Poverty Alleviation Fund for investment for the benefit of the poor or the Exchange Equalization Fund of the Nepal Rastra Bank. Unfortunately, the Nepal Rastra Bank is always unconcerned. Explaining the issue to the monetary authority is like explaining the chemical composition of water to the passengers of the Titanic!

City Father’s dream

By Khila Sharma

Thanks a lot to the Mayor of Kathmandu Metropolis, the  City Father of our only metropolis, for relieving my pain and suffering. I had been struggling for many days to invent a tolerable excuse for pulling down the houses at Maitighar and Tinkune until I heard him giving an interview to a local FM station last Friday. I am glad that he finally came to know there is, let’s say there was, growing violence in the SAARC region. The violence caused a gulf between the views of Girija Grandpa and his astute chela Deuba uncle, even between him and his enlightened colleague Kishun Grandpa.

The violence in Kashmir is the main reason for the ongoing row between India and Pakistan. I think they made a blunder by making a mountain out of a mole instead of coming to consult the Mayor.

I wonder whether the City Father had been in a long hibernation until the preparation for the 11th SAARC Summit was scheduled. He came, he saw, he felt the need, he recommended and the government decided to spend a large sum of money to pay compensations to those houseless, to dismantle the buildings and develop a park and a Mandala. Is it what he conquered? Should we call Keshav Sthapit, the conqueror? Is it a masterpiece of development? Has Mr Vajpayee been accompanied by the development officials from his much (un)popular Bihar and UP or not? Had the park and Mandala only given a "Heartily Well Come" to the distinguished guests as they were driven by the edifices, or were they given a briefing on how the park and the Mandala were made? Why not advise the guests to learn from this model and to develop their countries accordingly? Why not invite the Israeli Prime Minister and the Palestine leader to have a tour of the park and the Mandala and suggest such masterpieces be constructed on their lands if they really want peace and prosperity?

The inconvenience the metropolis people faced on the eve of the Summit and during it is nothing in comparison with the relief from violence the people in the region are going to get. Don’t you know that the Mayor of Kathmandu has already declared that the only aim of constructing the Mandala is to restore peace and harmony not only in this already-beautiful Himalayan Kingdom but also in the whole region. He is ready to empty his pecuniary resources for the welfare of his neighbours. How generous! If his communist ideals are anything to go by, then it is a must.

For form’s sake

By JUG suraiya

A little after Dabchik on the Agra highway, the coach we were travelling in was stopped by a roadblock of 20 to 30 trucks and buses that had pulled up at a crudely hand-lettered sign which read ‘Gopal Form Co.’ Having got used to the north Indian proclivity of referring to a farm as a form, I surmised that Messers Gopal and Co. were property agents specialising in agricultural land. I was agreeably surprised that so many truckers wanted to acquire a homestead and become gentlemen farmers. Trucking must be a lucrative business.

A co-passenger, Veeresh Malik, disabused me of this notion. He explained that form as in Gopal Form Co did not refer to a piece of land but to a piece of paper. Or rather, multitudinous pieces of paper. Official paper. "What sort of official paper?" I asked. "Oh, the usual stuff," replied Veeresh. "Octroi forms, sales tax forms, challan forms, national permit forms, regional permit forms, forms for getting more forms." "That’s an awful lot of forms", I said. "You bet," said Veeresh.

Sure enough, the truckers were clustering around a small tumble-down tin shack handing over fistfuls of rupees and receiving in return sheafs of paper whose bulk would give a telephone directory an inferiority complex. "What’ll they do with all those forms?" I asked. "Hand them over to the guys in uniform at the checkpost up ahead," said Veeresh. "Who’ll put their chhaap on the forms, without looking at them, and let the trucks go through. No forms, no chhaap, no go. That’s the law."

It was then that the full significance of the Gopal principle dawned on me. A principle as simple and elegant and profound as E equals MC squared. A principle that keeps this vast country with all its factories and farms, its offices and homes, it countless wheels of enterprise going round. And round and round and round itself.

Here, in the middle of nowhere, I witnessed the Gopal principle in action. Generating income and employment. With a minimum of fuss, pother or investment. Suppose that in order to create employment and income opportunities the government or some private party had decided to set up a manufacturing or other commercial unit here. Such a unit would require electricity. Such a unit would also require bricks, cement, steel, all sorts of expensive overheads. Plus trade unions, who’d give endless trouble. So instead of all that, what does any sensible government do? Easy. Devise a law which says a truck can’t operate without forms, which must have a chhaap on them. Bingo. Employment and income both generated at zero cost to the exchequer.

To meet the created demand for forms, the Gopal Form Co. is formed. This gives a fillip to the local economy via the multiplier effect. A printing press to print the forms, a proof reader to see that a sufficient number of spelling mistakes are introduced into the forms to make them look authentic, a sign painter to paint the Gopal Form Co sign, etc.

The truckers buy the forms and transport them 200 metres to the checkpoint to get the chhaap put on the forms. More multiplier effect. People to put the chhaap, uniforms to put on the people who put on the chhaap, ink pads and rubber stamp thingummies with which to put the chhaap, etc.

Civil libertywallas and other wimps who don’t know their angst from their elbow argue that India has too many restrictive laws and should do away with obstructive regulations. What these well-meaning but misguided folk don’t realise is our innate genius for turning a law, any law, into a profitable opportunity for collective and creative enterprise. Left to himself, the Indian is a quiescent chap, given to contemplating his navel and other circumstantial evidence of karmic predestination. But give him a law on which to unleash his inborn talent for overcoming obstacles and he becomes a human dynamo of initiative and industry.

Take child labour. India has the largest number of anti-child labour laws in the world. Appropriately, it also has the largest number of child labourers. Everyone’s happy. Except maybe the labouring children. And who the heck gives a damn for them. They can’t even vote till they’re 18. And then they aren’t children anymore, anyway.

The best thing about laws in India is that they’re so cheap to make. The only price tag is the opportunity costs of legislators. Shooting from the hip, a veteran legislator can rattle off a dozen laws a day. More if he or she works overtime. But no matter how fast our laws are made, they can’t keep pace with the escalating demand. How can we further proliferate laws? Bihar has led the way in this, as in so much else. Former chief minister Laloo Yadav set the ball rolling by promulgating a new law: himself.

An independent profit centre, the Laloo Form Co is all set to make a take-over bid of all other form cos in existence. The promoter of the Laloo Form Co says his shareholders are the people who elected him. The electorate, in turn, might take a leaf from Laloo’s book and set themselves up in business, all 592-million-odd voters in the country. Then we’ll finally come into our own as India, that is the Bharat Form Co.