Nepal should immediately review its existing exchange rate system that is pegged with Indian currency, economists and businessmen said on Friday after Nepali currency hit all-time low of rupees 95.99 against 1 U.S. dollar.
Following continued slump in Indian rupee (INR) that touched the lowest ever level of 60 rupees against 1 U.S. dollar, Nepal Rastra Bank (NRB), the central bank of Nepal determined the reference rate of 95.99 rupees for the dollar as selling rate and 95.39 rupees as buying rate on Friday.
Nepali currency that used to remain at the level of 49 against U.S. dollar in 1992 February has touched 96 at present but it is pegged at 160 for 100 INR for so long, said senior economist Keshav Acharya, "his sort of foreign exchange system has favored Indian market alone creating economic imbalance here."
He urged the government to revise the pegging standard promptly and set the provision for periodic review of currency valuation in every 3 months.
Due to rising current account deficit (exports minus imports), slowing capital inflows and sluggish economic growth in India weighted by the robust U.S. jobs data and expectation that the U.S. Federal Reserves will withdraw quantitative easing, the value of INR is depreciated widely against U.S. dollars.
Federal reserves' eventual exiting from quantitative easing will increase the interest rates in USA. The higher interest rate significantly upped the attractiveness of U.S. dollars.
"The costly dollar will add burden to the public especially due to the costlier imports of essential goods like petroleum products, thus it will fuel already high inflation in the market," economist Acharya said.
Further the government will be compelled to pay more for debt servicing and the expensive dollar will guide the importers to rely more on Indian market, which will further increase the trade imbalance with India.
Nepal needs to revise the value of its currency with India taking the differentials in growth rate, wage rate, capital inflows, inflation rate and the export trends into consideration, Acharya, who is also former economic adviser to the Ministry of Finance, said.
Importers are affected due to strong dollar as they will have to bear more cost on opening letter of credits and higher amount of tariff on the imported items, Dr. Rajesh Kazi Shrestha, president of Nepal China Chambers of Commerce and Industry (NCCCI) said.
"As Nepal does not have stable foreign exchange policy to regulate the fluctuation of Nepali currency against U.S. dollar, importers are always facing tough time in doing business," Dr. Shrestha, who is former assistant minister of Industry, Commerce and Supplies, told Xinhua.
Appreciation of dollar is favorable to the remitters and the exporters, those who earn foreign currencies. But due to a large trade deficit in the country, it is a challenge for Nepal to benefit from strong dollar.
Nepal's imports from third country stand at 1.65 billion U.S. dollars while total trade deficit during ten months of 2012/13 has surged by 22.7 percent to 4.2 billion dollars compared to the same period of last year, according to the NRB.