THE Nepali rupee has hit an alltime low against the US dollar, with the Nepal Rastra Bank (NRB) setting the reference exchange rate at Rs 100.60 per dollar for Tuesday. This is the first time that the domestic currency has plunged below Rs 100 against the dollar, which has become the fourth currency whose value has crossed Rs 100 mark, after pound sterling, euro and Swiss franc. The Nepali rupee has been on a rollercoaster ride for the last few months. Earlier, it had reached at Rs 99.02 per dollar on August 16. The depreciation of the domestic currency against the dollar is due to the weakening of Indian currency (IC) with which the Nepali rupee is pegged. In the last one year, the rupee has depreciated by Rs 11.20 per dollar, according to the Nepal Rastra Bank (NRB). The exchange rate was Rs 89.40 per dollar in August 19, 2012. Nepali commercial banks sold the US dollar at around Rs 100.60 on Monday. Being an import-based economy, the depreciation of Nepali rupee against dollar makes a huge impact on the economy. As more money should be spent for purchasing the dollar, goods imported from countries other than India have become expensive. Even from India, many raw materials are imported by paying US dollar which has made raw materials expensive and has pushed up the production cost of industries. “Prices are expected to go up by 25-30 percent once the newly imported goods come to the market after old stocks deplete,” said Rajesh Kaji Shrestha, president of Nepal-China Chambers of Commerce and Industry. With the festive season round the corner, traders and experts say consumers will have to spend more to purchase essential goods for festivals like Dashain, Tihar and Chhath. Industrialists have already started to feel the heat. Hari Bhakta Sharma, chief of Deurali Janata Pharmaceutical Company, said their production costs have gone up by 20- 22 percent with the rise in the dollar price. “As most of our production depends on imported raw materials, the cost has increased significantly,” he said. Bankers said as a result of the strong US dollar, the opening letters of credit (LC) has slowed, and importers have started pre-determining the exchange rate for sending payment for goods to be imported. A senior official at the Nepal Investment Bank Limited said the number of LCs opened per day has come down to two-three from eightten earlier. “About four-five importers hedged the exchange rate on Monday to send their payment after a few days later, fearing a further rise in the dollar price,” he said, adding while hedging the exchange rate, importers have to pay a certain premium to the bank. A major advantage of falling local currency is it gives a huge boost to exports. But Nepal’s dependency on imported raw materials has prevented it from taking benefit from the rupee depreciation. Min Bahadur Shrestha, chief of NRB’s research department, said it is the right time to promote industries that ensure increased value addition within the country. “Industries tend to wait until the dollar value comes down for importing raw materials, which affects the investment environment and production itself,” said Shrestha. Although the falling rupee is making history one after another, the central bank is not in a haste to take measures to correct this situation. “The Nepali currency, which had appreciated against the dollar in last two years in real terms, is now in the self-correcting phase,” said NRB’s Shrestha. “There is no need to intervene at the moment.” According to him, Nepali currency has appreciated by 7-8 percent in real terms, excluding its peg with the Indian currency. “There is also no need for NRB to intervene as the country’s foreign currency reserve is strong enough and the current account surplus is healthy despite massive trade deficit,” said Shrestha. In the last fiscal year, Nepal’s current account surplus stood at Rs 57.6 percent, while foreign exchange reserve at Rs 533.3 billion, which, according to central bank, is sufficient for importing merchandise and service of 10.1 months. Shrestha said the NRB has closely been monitoring the development in the exchange rate and the current account situation. “Even if the current account heads to a deficit, our first step will be to reduce imports and increase exports. Reconsidering the exchange rate peg with the IC would be the last option,” he said. “As the current depreciation of the dollar is a shortterm phenomenon, taking a longterm policy departure may not be appropriate.”
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