IC shortage

Indian currency (IC) has been in short supply in the Nepali economy for some time, but the shortage has now become aggravated. The crunch is so acute that it´s difficult to buy even a few thousand rupees IC from the commercial banks. Though central bank regulations allow commercial banks to provide an individual up to Rs 25,000 IC per day, the banks say they don´t have the required reserves to meet the daily demand.



The supply has been tightened by the central bank itself, which recently bought IC for hard currency after the demand grew "unnaturally" over the last few months. Last month alone, commercial banks sold Rs 14.5 billion IC in the market, which is a more than two-fold rise within a period of one month. The shortage of IC has come as a blow to people intending to go to India for medical treatment, education, pilgrimage or travel. Many Nepalis residing in the border areas cross over to India to buy essential commodities and they have been affected as well.



The high demand for IC and the resulting shortage have been caused by a number of factors. First, Nepal suffers a huge trade deficit with India--it was Rs 177 billion during the last fiscal year. Secondly, cross-border informal trade is on the rise. Since such informal trade cannot be done through banking channels and LC it has to depend on hard cash. Third, a huge amount of gold has been imported illegally from India with payment in IC after the central bank forced importers to buy their gold from commercial banks. Fourthly, as more and more Indian tourists are using credit/debit cards to make their payments while in Nepal a traditional source of IC has dried up fast.



The central bank should take immediate measures to address the IC crunch. The current policy on gold import does not seem to be working. The bank should hold an immediate meeting with gold importers and address their legitimate demands. The gold import is fast depleting scarce IC on one hand and the government is also losing tax revenue on gold on the other. But if gold importers are refusing to buy gold from commercial banks just to evade tax they should be brought to book. We cannot address the problem of IC shortage effectively as long as we fail to arrest the informal trade.



There are reports that lax border control by police in collusion with smugglers has led to a rise in informal trade in recent months. The finance and home ministries should take immediate measures to address this aberration. Finally, the long-term solution to the IC shortage lies in improving our trade deficit with India.

Related story

No sugar shortage in market, Minister Yadav says