Nepal’s foreign reserve, which at present totals Rs. 276 billion, is more

than sufficient for about a year for the import of goods and services at the current rate. This, of course, is an implicit assurance given by the concerned authorities to the people not to worry about the health of the country’s economy as the government has adequate resources at its disposal.

We do know, however, what the perceptions of eneral people are with respect to the country’s economic scenario, and how their expectations are formed and changed over time.

It is puzzling why the people are holding the

currency notes of one

thousand and five hundred rupees denomination causing scarcity in the country and panic in the banking sector since the past several months. Currency notes

do not accrue any interest

as deposits do.

Because of rumors now people have started to hoard Indian currency too. Though it is not an illegal activity in Nepal, Indian currency can not be used only as a medium of

exchange.

Otherwise, it is authorized to perform all the activities that money does.

Does this indicate that the expectations of the general people are based on more rational basis and use more information than the official pronouncement? Detailed research in this area has yet to be conducted.

True, available information indicates that despite the surplus in the overall balance of payments, Nepal incurred a minimum deficit of Rs.75 billion in the first nine months of the current fiscal year with India.

Despite this deficit, Nepal’s reserve of Indian currency at the end of Mid-April 2009 was just Rs. 27 billion or less than ten percent of the total reserves. How will we meet the future requirement of the Indian currency?

The government has no plan. It is, however, officially committed to maintain the sale and purchase of Indian currency at the official rate.

Does the public still

believe on this commitment? No definite answer can be given as Nepal does not publish the information of Nepal’s balance of payments position with India.

India is our main trading partner accounting for about sixty percent of the total trade. The total import in the first nine months of the current fiscal year from India was equal to about thirteen percent of the estimated domestic production of goods and services at the current price.

The Indian currency

requirement to import these goods was met partly from export to India, refund of Indian excise duty, use of accumulated reserve and the rest by purchasing

Indian currency from India and by paying import from India in US dollars.

Nepal’ receipts of Indian currency from other sources too, including tourism,

remittances from workers, grants from the government and pensions, are expected to be in billions. If the receipts from these sources are also taken into account, the deficit in the balance

of payments with India in the first nine months of the current fiscal year would come down substantially lower than the amount

indicated above.

Otherwise, it will be

safe to assume that the general public has started to hoard the Indian currency for reasons that are unknown to us.

At present, Nepal’s

demand for import from India is rising at a much faster rate than the growth in GDP. It certainly looks unbelievable: how can imports rise at a faster rate than the growth in income? But this odd result must be looked at from another angle.

True, the growth in GDP in Nepal in per capita terms is barely positive.

The income in monetary terms, however, has risen at a relatively high rate due to rising receipts from

remittances; in the first

nine months it increased

by 60 percent.

With domestic production barely rising, the

import from India over

time has followed the change in receipts from remittances to fulfill domestic demand for goods.

Now, the crucial question is: why do we prefer to

import from India rather than from other countries? This is due to exchange

rate policy of Nepal

Government.

For example, the exchange rate with Indian currency is fixed since the past several years, but the exchange rate of US dollar in July 2008 was Rs. 64.72 per US dollar but had reached Rs. 80.77 in April 2009.

It is more expensive to import from countries other than India while it will

be more beneficial to export to other countries.

As far as import is concerned, India, given the exchange rate policy followed by Nepal, is the cheapest place to market. Therefore, it is beneficial for Nepal to export to other countries rather than India.

The demand for goods from India, and, subsequently, demand for Indian currency, in the coming days will increase further creating increasing gaps in trade balance.

Nepal has to solve this issue domestically as it is more related with the structure of the economy and the exchange rate policy. Otherwise, we have to admit that the general public is not making an irrational decision by hoarding the Indian currency.