Of the different sectors in the economy, the banking sector is regarded as the barometer. But due to the political uncertainty, people’s faith in the banking sector has diminished. So, there are people who prefer to hoard money rather than to deposit it in the banks, despite the inflation rate of 11 percent in the country. Because of this inflation, the value of Nepali currency declines at least by 10 percent or so per year.
In the past, there had been occasions when it was difficult to get notes of high denominations like that of Rs 500 or Rs 1000 from the banks, though the central bank did very little to reduce the circulation of such notes. More recently, an effort was made to put certain type of notes out of circulation. It was expected that such activity would compel certain groups of people to deposit their money in the banks. But due to reasons unknown, the government later on backtracked from its decision.
It is not that there is liquidity crunch of Nepali currency alone. The Indian currency is still scarcer in the country. For the last two years or so, the central bank of the country has been providing far less Indian currency to the money changers to meet its demand in the market. In general, the commercial banks of the country have not been exchanging the Nepali currency into Indian currency, which they used to do. Even it is very difficult to get Indian currency from the central bank and its branches in various parts of the country.
Therefore, in the black market, one has to pay more than the official rate of exchange to get Indian currency against Nepali currency. The lower supply and higher demand for the Indian currency has in fact resulted into unofficial devaluation of the Nepali currency.
Mostly, the people living in the Terai region of Nepal have been facing severe problem due to the non-availability of the Indian currency in the market. Many of those living along the Nepal-India border region need Indian currency to buy certain basic goods from the Indian side of the border. If they fall ill, they find it difficult to get treatment across the border in India. During the emergency, if at all they want to exchange Nepali rupees in the border region in Nepal or India, they have to pay more than the official rate of exchange between the Nepali and Indian currency. This is a great burden on the common people along the border whose interdependence with people across the border is so massive.
Because of the scarcity of the Indian currency, its acceptability has grown in Nepal even in general transactions. There are reports that the Indian currency is in circulation even in the remote parts of the hills. Millions of Nepalis working in India now directly get their earnings of Indian currency to their homes. Earlier, they used to convert the Indian currency into Nepali currency when they returned Nepal. But now they do not find it profitable to do so.
The recent revelation made by Nepal Rastra Bank Governor Yuba Raj Khatiwada is still more alarming. He mentioned that during the last seven months, the Indian currency withdrawal through the ATMs in India amounted to Rs 19 billion, which used to be only Rs 3 billion in the same period last year.
It appears that the economic condition of Nepal is worse now than what it used to be even during the conflict period some five or six years earlier. Unfortunately, the drivers at the helm of affairs of the nation appear to be least bothered about the economic
outlook of the country.
outlook of the country.
Besides, the Nepal Stock Exchange (NEPSE) index is on decline with the decline of transaction. People do not feel secure to buy shares of one or the other economic ventures. There was a time when they used to be in long queue to buy the shares, but that is history now.
Also, the deficit in balance of trade has galloped beyond any proportion. During the time of conflict in 2004-05, the deficit in balance of trade was to the tune of Rs 90 billion, which increased more than two-and-half fold to Rs 239 billion in 2010-11. The ratio of export to GDP used to be 10 percent in 2004-05, which has declined to 5.2 percent in 2010-11.
Because of the huge deficit in balance of trade, the country perhaps for the first time plunged into deficit in balance of payments to the tune of US$36 billion. Earlier the deficit in balance of trade used to be met by earnings from other accounts but now it is no longer possible to do so.
Unfavourable balance of trade and balance of payments situation is mainly because there are very little efforts made for wealth creation in the country. Such a situation is largely caused by the lack of improvement in infrastructure facilities in the country. For years, the country has not been able to increase the supply of power beyond 600MW. As such, load shedding problem is rampant. Besides, the political uncertainty coupled with labour problem, scarcity of raw materials and frequent bandas have aggravated the situation.
Because of these problems, most of the industries are closed. Even production in agriculture, service and other sectors are affected. Many districts in Tarai and hills that used to produce surplus food have turned into food-deficit districts. No new investment is coming up. Even foreign direct investment is shy. Since 2003, there has been zero investment by the Indian private sector in Nepal. There are also reports that foreign aid has been curtailed in certain sectors because of the lack of faith of the donors in implementation capacity of the Nepali government. All this caused massive unemployment in the country.
By all accounts, it appears that the economic condition of Nepal is worse now than what it used to be even during the conflict period some five or six years earlier. Unfortunately, the drivers at the helm of affairs of the nation appear to be least bothered about the economic outlook of the country. They do not understand what will happen if the economic structure of the country collapses. Many of the problems – be it related to banking, industries and trade – is due to the lack of production. Production, however, may grow only when due infrastructural facilities are developed and favourable environment is created for investment. Perhaps, this is the only mantra left to save Nepal from further economic crisis.
dr.hbjha@gmail.com
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