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