Money

Strong dollar makes imports dearer as festivals approach

- BIBEK SUBEDI, Kathmandu

Sep 22, 2018-

A rising US dollar is going to make the upcoming festive season painful for the general public as dearer imports will force them to fork out more cash to buy the same amount of goods. Nepal Rastra Bank (NRB) fixed the exchange rate of the US dollar at Rs116.10 on Thursday. Compared to the beginning of the current fiscal year which started in mid-July, the Nepali rupee has depreciated by almost Rs7 per dollar.

The fall of the Nepali rupee against the greenback is mainly due to the sharp devaluation of the Indian rupee with which the domestic currency is pegged. As the dollar gained sharply against the Indian currency, the Nepali rupee has been in freefall—losing more than 6 percent of its value within two months.

The depreciation of the domestic currency is likely to trigger inflation, as the country is highly dependent on imported goods and has very low levels of domestic production. According to the central bank, the country’s export earnings amounted to Rs81.19 billion, while the import bill totalled a staggering Rs1.24 trillion in the last fiscal year ended mid-July.

Nepal’s largest source of imports is India. Production in India is affected by its own deprecating currency, and its production cost rises which makes imports from India expensive. Imports from the rest of the world cost more because of a strong greenback.

Soaring oil prices in the international market has worsened the situation. On Thursday, the price of crude oil in the international market stood at $79.7, a rise of around 10 percent in the last two months. The hike in fuel costs will increase the cost of production which is ultimately passed on to consumers.

As a result, the annual inflation rate, which stood at 4.2 percent in the last fiscal year, will go up and might even exceed the government’s targeted upper limit of 6.5 percent, according to economists.

Economist Chandan Sapkota said that inflation might have reached around 7 percent this month, with most of the inflationary pressure coming from non-food goods and services which are the country’s major imports. “The double whammy of higher fuel costs and imported inflation from India due to a weak rupee will put additional pressure on prices in Nepal,” said Sapkota. “As the inflationary pressure is essentially due to exogenous factors, there is not much the government can do about it.”

Business people agree that the upcoming Dashain festival will be expensive with prices of a few commodities going up sharply. “Demand for readymade garments and electronic goods is very high during Dashain, and prices of both these commodities will be higher due to a strong US dollar,” said Shekhar Golchha, senior vice-president of the Federation of Nepalese Chambers of Commerce and Industry. According to him, the price of such commodities will increase by at least 10 percent.

Apart from the inflationary pressure, a surge in the import bill due to a weakened domestic currency will further increase the trade deficit and widen the current account deficit which has already reached Rs245.22 billion. It could exert pressure on the balance of payments, especially at a time when the country is struggling to maintain it.

Likewise, the strong dollar will also increase the government’s cost of debt servicing on dollar-denominated loans borrowed from multilateral lenders. It will drain funds that can be used for development expenditure, thus widening the country’s fiscal deficit.

Theoretically, a depreciation of the domestic currency has a positive impact on the economy as it can boost the country’s exports by making locally produced goods and services cheaper. However, Nepal has very little to benefit from it as its export basket doesn’t have goods with a competitive advantage. The depreciation of the Nepali currency against the dollar can be a blessing in disguise if the government and the private sector pay due attention to boost the country’s productivity, economists said.

As imported goods will be expensive, domestically produced goods will competitive, according to them. “We must use this situation to our benefit by increasing our productivity,” said Shankar Sharma, an economist and former vice-chair of the National Planning Commission. “This way, we can curb imports and even increase exports.”

There are many instances of emerging economies deliberately weakening their domestic currency to make their goods and services competitive in the international market, according to Sharma.

Published: 22-09-2018 08:29

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