The protracted political instability is beginning seriously hurt the already troubled national economy.
Given the failure to substantially increase exports to India, the trade deficit with the southern neighbor – with whom Nepal conducts almost 70 percent of its total foreign trade – has grown to astronomical figures.
Economist Dr. Bishwambher Pyakuryal says the trade deficit with India is reaching almost Rs 100 billion.
That apart, there has been a steady flow of capital out of the country, particularly towards India.
All this has raised the demands for Indian Currency by many folds in the last few years. This trouble has become acute in the recent months.
This growing demand for IC, according to Dr. Pyakuryal – who is also a board member of Nepal Rastra Bank (NRB), the central bank of Nepal – could even jeopardize the economic sovereignty of the country.
In order to fulfill the soaring demands for IC, the NRB has been selling off the precious US dollars.
Two years ago, the NRB had sold US $600 million to purchase IC. A year ago, it sold off US $920 million. In the current fiscal year, the central bank has already sold US $320 million in the first three months for the purpose. If this trend continues, it could end up selling nearly US $ 1.5 billion to purchase IC.
The huge and growing trade deficit with India is the primary cause for shortage of Indian currency, according to officials, The deficit has reached almost Rs 100 billion from the level of Rs 60 to 70 billion a few years ago. Exports to India, which grew by 2.6 percent last year has grown by only 0.9 percent this year. On the other hand, imports from India have grown by 9.9 percent.
The Balance of Payment (BoP) situation has turned negative for the first time since 2002. This year, the BoP has registered the loss of Rs 6 billion.
"We export yarn, zinc plates and some other agro products to India. But we import high value goods like vehicles, spare parts and electronic items from there. This has naturally led to huge trade deficit," said Dr. Pyakuryal.
He points out the need to immediately align Nepal's monetary and fiscal policies to those of India . Otherwise, he warns, the situation could be fatal.
"We have suppressed the actual rate of inflation. Our inflation is influenced more by India's wholesale price index than by our policies. The situation is coming to such a pass that if it is not corrected immediately, we could end up becoming failed state from the failing state level," Dr. Pyakuryal added.
Equally worryingly, the capital flight is occurring in a rapid pace in the country. According to industrialist Rajendra Khetan, the persistent economic instability within Nepal and the attraction of India's economic growth has led to the capital flight.
Khetan says that many businessmen are taking away the capital to reap benefits from the Indian economy.
"The situation is becoming so serious that people have started seeking loans from the banks here at the interest rate of 7/8 percent and take that to India (by cashing it into IC) where they can simply earn 3/ 4 percent margin by putting them in deposits in Indian banks, which give around 10 percent interest on deposits," Khetan said.
He added that the investment in robustly growing Indian share market and real estate has also spurred the capital flight.
All these have led to astronomical rise in demands of IC with which Nepal has a fixed exchange regime. The NRB is spending precious foreign exchange earned through remittance and tourism income in purchasing IC. The IC crunch is slowly beginning to hurt the reserve of US dollar also. Even the total foreign exchange reserve level has slightly decreased recently.
The economists say this kind of situation cannot be sustained for too long.
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