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April, 2003 |
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Editorial |
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Forex Euphoria Nepal
Rastra Bank (NRB) was quite upbeat while making public its latest report
that the ratio of convertible foreign currencies in the total foreign
exchange reserve has gone up to 80.4 per cent from last year’s 74.4
per cent. While the positive aspects of the development cannot be
undermined, the other side of the coin must not be forgotten.
Looking at the
things as they stand today, there is no denying to the central bank’s
claim that this increase in the forex reserve has come purely as a
result of the increasing practice among the Nepalis working abroad to
send their earnings home through the official channels. As long as these
people follow the practice of sending such money through hundi, (the
informal document used by the unofficial operators who deal in
international funds transfer), the money earned by Nepalis would not
come to Nepal in convertible foreign exchange because the hundi network
is controlled by the Indians and therefore the foreign exchange would
first go to India, get it converted into Indian Rupees and ultimately
the Nepali families would get either the Indian Rupees or equivalent
Nepali Rupees. The effort of the Nepali central bank to develop systems
to encourage the Nepali Diaspora to use formal channels to send their
earnings home seems to have fructified. But a number of
other obvious facts are being neglected in the above analysis. The first
is that though the Indian Rupee has been gaining some value in terms of
dollars, Nepali Rupee has not been allowed to make similar gain. Thus
there is clear advantage for the hundi operators to sell in Nepal the
dollars they get from the Nepali Diaspora. The second is that the recent
months in particular and the entire last year in general have
experienced steep decline in the exports from Nepal to India, thus
Nepal’s earning of the Indian Rupee has significantly gone down, but
Nepal’s imports from India have not reduced, thus widening the trade
deficit with India. Moreover, Nepal’s imports from overseas paying
convertible foreign exchange have gone down particularly in those items
which are used as the raw material for the products that are exported to
India. Thus if we go looking deeper into the situation, the increased foreign exchange reserve of the country seems to be achieved in exchange for reduced economic activities and thanks to the hitherto unexplained policy of Nepal Rastra Bank to maintain such exchange rate that allows people to gain by selling their dollar earnings in Nepal and then immediately converting it into Indian Rupee. This may be a very good short-term policy to liquidate the heavy Indian Rupee reserve in the country, but to project it as a long-term solution to the country’s problems is a sheer folly. |
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