There are understandable and obvious reasons of seemingly insatiable demand of Indian Currency (IC) in the Nepali economy. India is not only Nepal's largest trade partner, but the Nepal-India export-import ratio is about 1:7, that too only computing on the trade figures of formal channels.
In the first half of the current fiscal year alone, Nepal Rastra Bank purchased nearly about 50 billion Indian Rupees paying other 'highly' convertible foreign currencies; mainly the US dollar. Due to this reason, among others, Nepal's Balance of Payment position has remained shaky for a couple of years now. Purchasing the IC against the forex reserve to finance the deficit trade appears to be nothing less dangerous than riding on a tiger. Worse, there is no sign of narrowing down the gap in this bilateral trade, at least not in the foreseeable future.
To phrase it differently, for long years to come, Nepal has no option but to manage adequate amount of IC to keep alive its economy. It also means that we must explore the ways of managing the sources to reduce the strain on the forex reserve.
This is particularly where our national fiscal managers and monetary authority have failed to devise pragmatic policies vis-a-vis IC management. Had Nepal been able to better manage it, the IC shortfall in the economy though would not have completely neutralised but the gap would have been far narrower than now. There are at least three strikingly glaring issues in this regard, taking-up which could solve larger part of the problem.
First, amending the present system, the central bank of Nepal must allow smaller amount of IC to enter into the banking system. Only excuse that the central bank has to debar IC to NC exchange has increased incidences of fake IC notes, and bank teller's inability to screen them off. But, each bank would not perhaps mind to bear a little additional cost on screening if they could collect substantial amount of IC. This could reduce the IC holding by the individual and the IC entered into the country would spontaneously come into the system.
Second, the central bank must have enough guts and urgency to talk to lift the embargo on transactions in Rs 500 and Rs 1,000 denominations IC notes. It is an open secret that these notes are freely traded by individuals and businesses all over Nepal. But it cannot come and be counted in the system due to the legal sanctions. If this issue could be resolved sooner, the IC supply in Nepal would ease substantially.
Third, and the most crucial is that the IC issue is no longer monetary or trade issue alone. It has rather become a bilateral political and diplomatic issue. The Rs 500 and Rs 1,000 denomination issue is linked to smuggling, terrorism and underworld operations, perhaps much hyped than what the reality is. Therefore, the political leadership must take initiative to assure New Delhi about the fair handling of these notes. The political leadership has to play its long due role of opening a formal channel for remittances from India to Nepal. All these efforts combined would at least solve fifty per cent of the problem.
