Nepal has been adopting a kind of fixed exchange rate with the Indian rupee since 2017. Although the peg level with the Indian rupee has been overvalued and devalued at various times, since 2049, the exchange rate of 160 Nepali rupees to 100 Indian rupees has been maintained unchanged along with the current account balance.
When the fixed exchange rate with the Indian rupee was initially fixed in 2017, the exchange rate was fixed at this level. It is still the same now. Now, there has been a call for the value of the rupee to be determined by the market. Especially in the context of the issue being brought to light after the report of the High-Level Economic Reform Commission formed by the government was submitted to that effect, this is an edited excerpt of an interview with Nar Bahadur Thapa, who has worked as an executive director at the Nepal Rastra Bank for a long time.
Is it time to leave the fixed exchange rate system that has been in effect for 65 years to the market?
Before 2017, Nepal’s exchange rate was determined by Nepal’s money changers and money changers. Nepal had adopted a market-based exchange rate. There was no government intervention. The Asan, Bhotahiti markets used to determine the price of Nepali currency against Indian currency, which we call the exchange rate. But that exchange rate became so unstable that the common citizen suffered a lot. If you asked the money changer in the morning what the exchange rate was today, he would tell you the price, if you asked again after eating, he would give you a different price. Also, when it was very unstable, the common citizen started suffering a lot. It created inconvenience and helped in increasing the circulation of Indian currency in Nepal. In that context, the Government of Nepal and the National Bank of Nepal jointly implemented a fixed exchange rate from April 2017 with the aim of replacing the Indian rupee and bringing the Nepalese currency into circulation throughout Nepal, and to instill confidence in the Nepalese currency among the general public. Although there have been some fluctuations in the rate during the 65-year-old fixed exchange rate system, the same rate was 160 in June 2017.
Some people say that India has undergone major changes, that it is achieving high economic growth rates, that Nepal’s agriculture has collapsed, and that Nepal’s exports have fallen to zero, and that it should be left to the market by keeping the government’s exchange rate fixed. It is true. The government should not determine the prices of some goods and services by itself. It should be left to the market. This is the case in many countries. India has also left its exchange rate to the market many years ago. However, the Indian government and its central bank have done some work. But the exchange rate is determined by the market. Although all the countries except India have reached that stage, Nepal has not been able to reach it. The declaration of a least developed country was made in 1971, and we have been a least developed country for a long time. It has been announced that we will upgrade from 2026. This is going to change after how many years, so it is right to raise the issue of leaving the exchange rate to the market, in terms of time, period, and cycle.
Nepal has a large trade relationship with India, Even now, it has to bear a trade deficit of crores, If the exchange rate is left to the market now and the market price becomes unstable as before, won’t Nepal be in trouble?
## Of course, this is one of the reasons for maintaining a fixed exchange rate. In the past, there were talks that the fixed exchange rate should be changed. Policymakers did not change it due to the large trade relationship with India and the fear that leaving the exchange rate in the market would make it unstable. The country has not developed, it is stagnant, there has been no economic development, corruption has not been controlled, it will be difficult if some players manipulate the exchange rate as they are manipulating the economy. Since 2046 Bhadra, the voice that the exchange rate should be left to the market has been raised since the past. When the interest rate fluctuated, it caused a lot of trouble. The Rastra Bank government was questioned as to why it could not control the interest rate.
There were also attempts to attack the autonomy of the Rastra Bank. Now, if the exchange rate is also left to the market, what will the market say tomorrow, what will the general consumer say, and whether this country is worth it or not? It is not that easy. For example, if the interest rate is left to the market, many people, including the private sector, could not control the interest rate, could not keep it stable, we suffered when there were many fluctuations, and we heard that there was no investment.
The National Bank is trying to indirectly control the interest rate by sending more liquidity to the market, but it is not working. In this situation, Nepal is in, where the economy is not working, the economy is not moving, institutional governance is not working in the country, and there is chaos in the country. If we leave the exchange rate to the market, where will the price of oil go? What will happen to the price of medicine? The question is whether the Nepali economy can withstand the raw materials that Nepali industrialists import from India, when there is one price today and another exchange rate tomorrow.
Therefore, another analysis is necessary to see whether we have reached a state of confidence or not. But the principle is: the market should do the price. The government cannot do the allocation of resources in the way that the market can do. A stable exchange rate, a stable interest rate cannot do it. Prices should remain volatile. It helps clean up the market. But whether the Nepali economy has acquired that kind of capacity is another question.
We have reached a point where we can leave the exchange rate market, Can our economy afford a volatile exchange rate system?
We have not reached the stage where we can leave the exchange rate volatile. Our economy has not yet been able to build that capacity. India has an annual trade deficit of about 10 trillion. What that trade deficit demands is that Nepal’s exchange rate should be 200, not 160. However, dollars are coming in through remittances, which is making up for it. The trade deficit with India demands that the Nepali currency should weaken against the Indian currency. Let’s imagine if it goes from 160 to 200, what will happen to the price of petroleum products? What is the consumer price of pulses and rice used by the general consumer? There is a large community below the poverty line, and due to remittances, the people at the bottom have come up, but they are not that strong. What will happen to their standard of living? The question is whether to take care of that. A crisis can arise in a country that has not gained resilience in the economy. That crisis is the threat of a social, economic, and political crisis. Can we cope with it or not? Can the Nepali economy cope or not? This is a serious question of whether the political system and leadership can cope or not. But basing the exchange rate on the market is an idealistic thing, a very good thing. At some point, we have to leave it to the market. Our future, development says that we will leave it. If we want to go up to the highest point of economic development, it means leaving the demand exchange rate on the market. That is also an identity. It is also a symbol of development. The highest point of development is when the market works. We must go on that path. A market-based exchange rate is also the future of the Nepali economy.
In the future, the government and the National Bank will have to leave the interest rate and exchange rate markets unregulated. That will provide a proper solution. That will guide the allocation of resources, which sector the country will invest in, and which the market will invest in. The right kind of resources will be ensured. But the system in which we have been operating for 65 years. We must have the capacity to face the crisis that may arise when that system is changed.
Social, Economic, Political crisis He said, What kind of crisis is it? Those crises come when the exchange rate fluctuates in the market. Let’s say the price of oil increases from 160 to 180, 200, tomorrow. If there is a movement in the name of price hike, can we withstand it or not? We are dependent on fuel and food grains in India. When the exchange rate changes, the price of petroleum products and food grains may also increase. This affects the kitchen of the common consumer. Therefore, we cannot immediately change the exchange rate system without strengthening the economy. But the future of Nepal is not a fixed exchange rate system. The market-based exchange rate system must be reviewed. All preparations must be made for that. It should not be done without preparation.
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