KATHMANDU, SEPTEMBER 20

The depreciation of the Nepali currency vis-à-vis the US dollar is likely to worsen the economic problems for the country by adding pressures on inflation, foreign debt and import bills.

As per the foreign exchange rate of the Nepal Rastra Bank (NRB) for Wednesday, each dollar will fetch Rs 127.91, although a slight improvement compared to over a week earlier when the US dollar exchange rate stood at staggering Rs 128.15. The domestic currency has depreciated by Rs 8.56 against the US dollar since January. The Nepali currency was traded at 118.78 per dollar at the start of the year.

Gunakar Bhatta, spokesperson for NRB said that the emergence of global uncertainties including the Ukraine-Russia war has also led to the strengthening of the US dollar.

'The Nepali currency, which is pegged with the Indian currency, has been affected as the Indian currency continues to weaken against the dollar after the central bank of the United States hiked interest rates to control inflation, increasing the demand of US government's bonds and securities worldwide and ultimately strengthening it. As capital from India continues to flow to the US, it has weakened the Indian currency, affecting the Nepali rupees as well,' Bhatta explained.

According to him, depreciation of the Nepali rupee will quicken inflation and add burdens to the country's foreign debt, including import bills. 'This can discourage investors at the international level,' he said.

As per Resham Thapa, economist and associate professor at the Central Department of Economics at the Tribhuvan University, the Nepali currency has indirectly appreciated by eight to 10 per cent compared to its 10 major trading partners over the past decade in terms of Real Effective Exchange Rate (REER).

'The strengthening of the US dollar, however, has also led to imbalance in our economy's external sector. The parameters of exchange rates do not interact with our economy but affect trade, which leads to increased cost of production by about 10 to 15 per cent. This affects our competitiveness in terms of exports and also increases our effective exchange rate,' Thapa said.

Referring to Nepal's import-based economy, he said as the strengthening of the dollar increased the cost of production and dampen the country's export potential, further widening the trade deficit.

Binit Mani Upadhyaya, spokesperson for Nepal Oil Corporation (NOC), shared that the strengthening of the US dollar is also a factor in increasing the import cost of petroleum products. 'The price list sent by the Indian Oil Corporation (IOC) and the change in exchange rates of US dollar with the Nepali rupees are the two factors for change in prices of petroleum products,' he shared.

Similarly, Manik Ratna Shakya, president of the Federation of Nepal Gold and Silver Dealers' Association, shared that the increase in dollar rate will affect gold prices along with other imported commodities.

'As our currency is pegged with the Indian currency, we have become more connected with the fluctuation in India's economy than our own. Although the price of the yellow metal has decreased in the domestic and international markets at the moment, the gold market may face some adverse effects as the US dollar continues to remain strong,' Shakya shared.

On a positive note, NRB's Bhatta opined that the strengthening of the dollar may lead to an increased flow in remittance into the country as the US dollar is expected to get stronger in the coming days.

The dollar remained strong near a two-decade high versus major peers today as investors held firm in expectation of another aggressive rate hike by the Federal Reserve, the centrepiece of a week packed with central bank meetings, Reuters reported.

A version of this article appears in the print on September 21, 2022 of The Himalayan Times.