GOLD and Nepal

Nepal Rastra Bank has blamed - 192 percent rise seen in gold import as one of the reasons behind the balance of payment deficit. In an attempt to curb the huge import of Gold, the Central Bank of Nepal has revised the import process. Now, gold importers are required to deposit 40 percent cash in the bank to get a standby Letter of Credit (LC), bank guarantee or normal LC from the bank for the import.
If you look at the fundamentals, it is not just the lack of political instability or less investor friendly environment in the domestic market that have caused the balance of payment deficit in the country. Global financial crisis and its consequences are also supposed to be equally blamed for the BOP deficit. After the global economic crisis, many developed countries and emerging countries in the World decided to follow the Keynesian Model and introduced billions of dollars of stimulus package, the central banks of these countries also ease their monetary policy .With massive money supply in the market it was certain that globally inflation will be on the raise. When inflation is high and rising, gold becomes a hedge against inflation; and also when there is a risk of a near-depression and investors fear for the security of their bank deposits or bond holding, gold becomes a safe haven.
With United States, being the epicenter of the financial crisis. Countries parking their foreign exchange reserve in US bond started diversifying their investment. Gold turned up as an alternative to the green back , even the Reserve bank of India (Central bank ) purchased 200 tons of gold from the International Monetary Fund in October, taking gold's share of the central bank's reserves from 3.6% to nearly 6.4%.Seeing the high demand for the bullion arbitrageur started importing gold in Nepal and started reselling it to India . 10 gram of bullion in Nepal is NRS 270 cheaper than in Indian market. Gold importer in Nepal is currently banking on price arbitrage. According to goldsmiths in Nepal actual 6 months demand of gold is only 2060kg but currently Nepal is importing 10076 kg of gold. It is the difference in tax rate between these two countries causing the BOP . According to different “gold bugs “prices of gold will continue to go up with raising inflation trend globally. I think NRB should not bar importing gold in exchange of foreign reserve but should develop a mechanism to prevent export of gold to India

Economic crisis

Policy makers these days in Kathmandu are busy to find a solution to whether the upcoming economic storm -dual combination of capital flight followed by deficit BOP and inflation. Ministry of Finance and NRB have come up with different polices, and many more are in pipe line, most outrageous and unviable recommendation was by the Government of Nepal to the NOC to reduce import of oil. Capping the auto & housing loan, revising the gold import procedure or even asking people to consume less fuel is a short term solution. Unless we have a political and economic reform in a policy level, these kinds of erratic crises will continue to linger.
With majority of the imports coming from India, and Nepal sharing an open border with India. You don’t have to be a PHD in economics to figure out why we are having a huge capital flight to India or why we have a ballooning trade deficit with India.
Till the third quarter of the last fiscal year remittances flow to Nepal was decent. With inflow of remittances having a money multiplying effect on the economy channeling through the financial institutions, everybody was enjoying the “free ride”, from the people of the bottom of the pyramid to luxury car driving CEO .Suddenly, the impact of global financial crisis and its aftermath symptoms started propping up in the Nepalese economy . Slow growth rate of the remittances catalyzed by the never ending political impasse have made the situation worse. With deteriorating economic situation at home, investor confidence took a hit; people started pulling out money from the equity market and other form of investment and were waiting on the side line to find new investment avenues. When Nepal just started to feel the impact of global financial crisis and its consequences, its neighboring country India had already start recovering. With the stimulus package introduced by the Government of India and high flow of foreign investment (especially investors borrowing money at a near to zero interest rate from United States and Europe and investing in emerging markets), India is experience rapid economic growth. With growing Indian economy, Nepali here at pulling out money and investing in India, be it buying apartments or asking a family friend to invest in India’s equity markets. Unless we have a stable investment friendly here at home and an investment platform other than realeastes , stock market or simply parking money in some financial insutation ,capital flight will continuous to “takeoff”.
As of for now the real immediate problem is the raising trade deficit and food inflation. In India output of many agricultural commodities has dropped following the lowest monsoon season rainfall in 37 years. Agricultural output situation in Nepal is also grim, Department of Hydrology and Metrology confirmed that the monsoon was weaker and there was 60 percent less rainfall. Production of paddy and maize declined by 11 percent and 4 percent. Paddy and maize contribute 10 percent in Nepal’s GDP and 27.5 percent in total agriculture output. With India already facing a supply constraint, it is very unlikely for India to export its agricultural product to Nepal. Even if the Government of Nepal tries to knock the door of other large agricultural producing nation to import food, the main problem here is the rasing trade deficit. Addition import will further widen the trade gap .I believe in the coming days food security will be the biggest economic challenges the already volatile country of our will be facing .
Shabda Gyawali