Implications Of Dollar Appreciation
Hira Bahadur Thapa
The continued rise in the value of US dollar is a matter of growing concern all over the world. It is more worrying for Nepal as its imports are many times higher than exports. While Nepal can gain economically, if its exports raise earning dollars, the implications on its economy are serious considering her need for importing goods and services that require international payments. Nepal is compelled to face adverse impact of an appreciated dollar because she has import-dominated economy. The impact on the balance of payment position worsens with every rise in the value of dollar, which is an internationally-accepted currency. As more domestic currency is needed to buy each US dollar, the Nepalese rupee gets depreciated automatically.
There are certain positive outcomes that arise out of rising dollar. The Nepalese economy is basically remittance-dependent. When the value of dollars goes up, the families of those receiving dollar from abroad are benefitted. Their incomes increase as the appreciated dollar fetches them more Nepalese rupees for each dollar. The rate of exchange between the Nepalese rupee and the US dollar crossing 119 rupees per dollar with possible signs of further rise has been welcome news for dollar-earning households. Conversely, this phenomenon is a source of pain from the national perspectives.
Comparatively speaking, the disadvantages coming from the depreciated Nepali rupees are more than vice-versa. Unsurprisingly, countries sometimes pursue the policy of currency depreciation to boost their domestic exports. With depreciated value of the currency, the country’s products become cheaper. They gain competitiveness over foreign goods. Therefore, under certain circumstances, a country is prompted to lower the value of its own currency. But for Nepal there is no such privilege due to negligible quantity of exportable goods. She has to bear the brunt of falling Nepali rupees, which is dollar-induced.
In this connection, a reference to the history of currency war between some major trading partners like China and America may be relevant. A few years back then US administration accused China, one of its valuable trading partners as the two countries trade billions of dollars worth of goods and services annually, of artificially lowering the value of Yuan (Renminbi) to enhance the prospects of the exports of Chinese goods. The Chinese government objected to that criticism. Nevertheless, it was seen engaged in a kind of war with the US because each shifted the blame of the poor performance of one’s economy on the other.
That bitter exchange of accusations and denials continued for some years during the Obama administration, however, a new controversy has now erupted between them following president Trump’s decision to slap tariffs on the Chinese goods, (which has invited retaliation from Beijing) to encourage domestic production. Trump’s decision is intended to please the American producers by making US goods cheaper compared to imported Chinese products. This scenario is troubling to the world economy. Thus a country’s currency becomes a key factor in determining the direction of national economy. Whether that currency serves the very purpose of the economic policy of the country depends on how the government tackles the fluctuation in the currency’s value. Sometimes a currency gets appreciated or depreciated because of external factors over which the particular country does not have any control. There are certain times when a country purposefully pursues the policy of lowering the value of its currency for enhancing the prospects of exports growth as exemplified by the case of China mentioned in the foregoing paragraph.
One should not get surprised that the value of the Nepali rupees goes up or down as per the fluctuation of the Indian rupees vis-à-vis dollar. This is because the Nepali rupee is pegged to the Indian rupee. Nepal has been following the fixed exchange rate policy with India for decades. Now 160 Nepali rupees can buy 100 Indian rupees. It has both merits and demerits. Our economic experts have sometimes argued for the flexibility in the exchange rate between the two currencies but owing to some compulsions the government has hesitated to adopt such an approach. Nepal’s foreign trade is predominantly with India. Our imports have surpassed exports by many times. With this fact under consideration the floating exchange rate between the two currencies seems unwise in economic terms.
Unfortunately, there has been no diversification of Nepal’s foreign trade. Almost two-thirds of trade occurs with India. The balance of payment is unfavourable. Under the current circumstances, the chances of reducing trade dependency on India are few and hence change in exchange rate policy seems a rare possibility despite the fact that present depreciation of our currency vis-à-vis the US dollar is a forced outcome. One of the fundamental reasons for falling value of the Nepalese rupees is the lowered value of the Indian rupees against the US dollar.
There are some valid reasons that have boosted the value of the US dollar. Economists opine that present American policy of encouraging domestic production by dissuading the investors to go abroad for investment backed by imposition of tariffs on the selected Chinese goods have pushed the value of the US currency as dollar is attracted. With opportunities of fetching higher profits from investment in America both the American and foreign investors are keen to invest inside the country thus raising the demand for dollars. The economic sanctions imposed against Iran, limiting its chance of exporting oil has also benefited the dollar as that country is constrained to obtain the hard currency for international payment.
Whatever the reasons for higher dollar value, the truth is that Nepal is bound to suffer from it as imports become more expensive. Petroleum products’ prices are sure to go up and it will have wider ramifications for the country as inflation rises. Students going abroad have to bear the brunt of rising dollars because they have to pay more for each dollar bought. The dollars’ appreciation is turning to be a curse for us. With her limited opportunities of higher exports, Nepal is going to suffer more in the foreseeable future.