Ministry of Finance and Nepal Rastra Bank have endorsed a new policy on gold, under which they have converged at maintaining separate reserve of monetary gold and 24 caret pure gold. [break]
“We will bolster reserve of monetary gold to back up currency and the additional 24 caret pure gold reserve will be maintained to intervene in the market in case of distortion,” said a highly placed source at MoF.
Currently, NRB has over six tons of gold in its reserve. While five tons of the reserve is in Nepal, another 1.2 tons is deposited in Luxemburg against the interest return of two percent per annum. The interest is received in gold.
“We have set a target to add three to four tons of yellow metal in the monetary gold reserve every year once we attain BoP surplus,” said the source. What this means is, the policy has adopted a strategy to utilize the surplus BoP to procure gold. So far, the surplus is maintained in foreign currency.
The government decided to adopt the new approach mainly as the rate of return of gold in recent years has remained much higher than currency. “Our experience suggests, the rate of return of currency stands just at 0.5 percent, whereas the return of gold has hovered well around five percent,” said the source.
Gold became preferred choice to invest on for the government also because the country lacks long-term infrastructure investment schemes, something that sparks multiplier effects in the economy and yields higher returns.
“Given the political transition and internal stability, we are failing to perform well even on the regular development works. In such a situation, we can´t expect long-term development schemes to come into being in the near future,” said the source.
Likewise, under the new policy, the central bank is planning to build inventory of 24 caret pure gold in such a way that it could instantly inject a ton of yellow metal in the market whenever distortion in seen.
“Most importantly, such reserve will facilitate the government to tighten imports whenever needed without impacting supplies,” said the source.
The government has currently banned the import of gold after it failed to re-impose higher import duty, which was necessary to plug the duty differences on gold between Nepal and India. But as that has created short supply, it has sparked illicit inflow of gold from India.
This has caused two-pronged loss of revenue as well as Indian currency. “We are aware of the damage being done. But given of the political stalemate we have no other options in hand as well,” said the official.
Nepal´s gold import in 2009/10 had touched Rs 41.63 billion as substantial duty difference on gold between Nepal and India spurred smuggling from Nepal to India.
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