Estimated reading time: 13 minutes

NOTE: THIS WILL GO TO THE WHY NEPAL? JOURNAL. Until Then, It stays here, because who knows when I’ll get around to creating it?

Here’s the problem at hand: Nepali currency, the Nepali rupee, is pegged to the Indian rupee. One is to 1.6. One Indian currency buys one rupee 1.6 Nepali rupee. What that means is this rate was set about 50 years ago in understanding of the economic situation and relationship between the two countries. What the pegging means is, regardless of what the Nepali economy is doing at any point of time, it is tethered to the Indian economy in its relationship with the rest of the world.

In essence, the Nepali government is subsidizing Nepali importers at the loss of Nepali exporters. What that means is the poor and the lower middle class, which often in developing countries work in industries that sustain the domestic market or produce for the external market, are being deprioritized and economically unsubsidized or taxed at the benefit of the wealthy and the upper middle class, who mostly import goods and services from other countries. Nepali people like to complain that there is no point in not subsidizing foreign exporters into Nepal because Nepal doesn’t make anything anyway, and Nepal doesn’t have production capacity. I have pushed back on that saying, “Nepal does not have any production capacity and factories because we artificially inflate our currency way beyond the value it should be.” We are punishing exporters, manufacturers, and industries of any kind to the benefit of importers of all kinds.

Take, for example, the case of two companies: say, producers of frozen momo. In year one, they both cost 100 rupees, regardless of what rupee it is. Let’s say 100 IC, that’s 160 Nepali currency. Often the rate of inflation in Nepal has been higher in the last 20 years than it has been in India. Let’s assume the rate of inflation in Nepal is 5% above India. And if we subtract both, let’s just say India has zero inflation rate and Nepal has a 5% inflation rate. In the next year, the price of the Nepali seller becomes 105 rupees. The cost of the Indian seller remains 100 rupees because they don’t face the same inflationary context as faced by the Nepali producer. In normal circumstances, as a result of increased inflation, the Nepali product would get more expensive, relatively speaking, which means people would tend to buy products from India, as would be expected. However, that increase in the demand of the Indian currency would roughly match the increase in the domestic inflation rate, which means the currency would devalue itself against the Indian currency at roughly the same rate. So, in the end, the Nepali currency would be weaker and even the inflation happening domestically would be reflected in the prices of external goods as well, so that the domestic producer would not be held at an unfair disadvantage versus the foreign producer.

With our currency pegged at the constant rate of one to 1.6, however, the Nepali currency cannot devalue year over year. Say for five years, the Nepali inflation rate is 5% above the Indian currency. So, in five years, we get a simple inflation (uncompounded to simplify) of 25%. Nepali products will be 25% more expensive within the Nepali market and within the international market versus Indian goods which will remain at a constant price. That means that even though the Nepali economy is a lot pricier, Nepali buyers will be able to import goods for cheaper from India. This means the factories that were just as competitive as Indian factories become a lot less competent. They have to start firing people more, and there’s increased unemployment. Now, under normal circumstances, that would be a sign for the currency to adjust itself, to devalue, because people are buying less, and things would balance out. But with a strong currency, that is not possible. Additionally, the maintenance of the 1 is to 1.6 ratio is not cost-free. A large percentage of the government treasury is used to maintain that balance. The government must engage in a lot of currency trading back and forth to maintain that peg.

Effectively, what that means is that the Nepali government is taking taxes collected from the entire country, mostly from the middle class and the poor, to subsidize the wealthy in order to discourage and tax the domestic industries and subsidize foreign industries. So, they are taking your money to screw you—screw your business over versus foreign businesses. This sort of perverse behavior also leads to points for additional corruption.

Effectively, what I have said just before would happen if imports of all goods were open. However, that is not the case. Nepal saves what it has of its domestic industry by creating high rates of tariffs and import bans on foreign goods, particularly in the agricultural industry. It needs to do that because, as I mentioned earlier, Nepali goods become less and less competitive every year due to no fault of their own because of the Nepali government’s pegging currency policy.

The system of tariffs and import bans is particularly corrupt for multiple reasons. First, depending on who is in power, which party is in power at any particular moment in time, they can choose to prioritize and favor the industries that fund their political parties the most and lower the tariffs on them versus the industries and businesses that disfavor them. What it means is, it creates a political dependence for businesses that would otherwise thrive quite well. What that means is if you want to be a good businessman, if you want to be an honest businessman, you systematically cannot, because just due to that currency pegging policy, you are at a disadvantage, even if nobody else were funding politicians or bribing them. You would still be at a disadvantage, and it would be in your rightful, reasonable expectation to get concessions and favors for your particular industry or your enterprise. That’s Point number one. It opens up room for corruption and creates an economic dependence or a favor on political parties. It creates the nexus between businesses and political parties. It creates a dependence on politicians that businesses would otherwise not have.

The other is that this sort of tariffs and import controls also creates a very healthy smuggling. If a product is three times as expensive in Nepal as it is in India or China, take the example of motor vehicles, for example. It is easy to create profit if you are to bring in a foreign product illegally in Nepal and sell it at triple the price. Now that creates another avenue for corruption, because if you can turn your 100 rupees into 300 rupees, it’s totally worth the effort to bribe 100 rupees to everybody in the law enforcement chain—down from the lowly Hawaldar and inspector all the way to government ministers and the Prime Minister—to earn that 100 rupees or 50 rupees, which is still a 50 or 100 profit in your initial investment. That sort of smuggling and corruption also inculcates the general attitude of lawlessness and disrespect because people start feeling that the laws are designed to fundamentally disfavor them, that the system is created in a way to encourage corruption and undermining of the system itself. In fact, as I have said before, because the system disfavors the poor and the lower middle class so much, it might be those who are poor and from the lower middle classes who feel empowered to do such smuggling because they understand that the system is stacked against them at a fundamental level. This is a government which discourages its internal production and exporters in favor of foreign imports by subsidizing foreign imports. Again, it creates a dependence on politicians because, despite having taken bribes, they understand that you are thoroughly compromised and you have done a lot of extra-legal activities. So, should the need arise, they have the info of you to take you in control. What that means is the political capture of the country gets even deeper because of this systematic corruption and dependence of smuggling and the nexus of smugglers and politicians.

I want to talk next about how the upper middle class and the wealthy are literally sucking the blood dry out of the lower middle class and the poor. When we talk about imports, what kind of imports does Nepal do, really? What we import is expensive motor vehicles, expensive electric vehicles, expensive jewelry, and consumables that folks in cities use. What we import is education by sending kids to foreign institutions. What we import is foreign services like Netflix and YouTube memberships and so forth. What we import is general consumables, so fairness creams or hair products and face products and washing products and expensive decoration home goods products, and so forth. To make the import of such goods and services cheaper in Nepal, to keep them affordable for the wealthy and the upper middle class, we have been undermining the entire economy and the upward economic mobility of the poor.

The poor don’t just export goods. They also export services. There are millions of Nepalese, very poor Nepalese and lower middle class Nepalese, working in the Middle East, working in Southeast Asia, working their lives away. They send their money into Nepal. By keeping the Nepali currency artificially tethered to the Indian currency, we have kept Nepali currency artificially strong and have thus decreased the potential value of the wealth they would be sending from abroad to Nepal. Imagine if, instead of their money going 1.6 times the Indian currency, it amounted to five times the Indian currency, if that is what the market were to reflect—if that was an accurate reflection of market values. That would mean, just by giving up this insane control to subsidize the wealthy, they would effectively be three times as wealthy as they are right now, and their leverage and the poor would be much richer. That is the simple hack on how Nepal can get ahead: by aligning Nepal’s exchange rate to the market needs and requirements and giving up this bullshit made-up exchange rate that stopped reflecting the economic reality and relationship between the two nations a long, long time ago.

Let me be clear: we as the privileged and the wealthy in Nepal are literally sucking the blood and bone dry of those working in the Middle East and Southeast Asia. We’re undermining their incomes and the worth of their money so that foreign education is cheaper for us, so that our creams and our Netflix memberships and our internet games are cheaper for us. When we complain about the growth of a country and the community and development, this is often not brought up, but this is a crucial factor to be considered. It is such a fundamental part of an upper middle class identity, the pegged currency, that even bringing up the possibility of devaluing the currency is looked upon as an insane solution. We are taught from early childhood that it would throw the economy into chaos and nobody would be able to afford anything, and so forth. And that in a way is correct. We wouldn’t be able to afford foreign imports for as cheap as we do right now. But that’s for the better. We will be forced to buy Nepali products. Nepali products will be finally on a level playing field as foreign products. And if our currency is truly that weak, then it is further better that we are not able to afford. We are currently artificially subsidizing the wealthy and the super wealthy for their ability to import foreign goods and services, while creating a political dependence and a system of corruption associated with the tariff implementation system and the smuggling associated with it. This has empowered corrupt governments and corrupt politicians to extract value of the system. By removing the nonsensical currency peg and readjusting it to be a more market-reflecting value, we would solve a lot of our existing economic problems. This is not me who’s saying it. The Rameshwar Khanal report that was published about half a year ago, also brought it out as a major point of contention in Nepali economic growth, etc.