The Exchange Rate Policy Of Nepal Vis A Vis The Indian Currency

Author : Kalpana Khanal
Publisher :
ISBN 13 :
Total Pages : 256 pages
Book Rating : 4.:/5 (949 download)

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Download or read book Exchange Rate Policy in Development Theories written by Kalpana Khanal and published by . This book was released on 2014 with total page 256 pages. Available in PDF, EPUB and Kindle. Book excerpt: Nepalese currency is pegged with Indian currency since 1960s. Three basic characteristics of Nepal-India relations have gone into the process of adjustment of exchange rates (a) high trade openness with India, (b) high labor movement between Nepal and India and (c) low capital movement between Nepal and India. The Nepalese government has maintained the pegged exchange rate policy, up to now, arguing that the pegging has facilitated Nepal’s goal for a single national currency and it has also facilitated stable trade flows between Nepal and India. However India-Nepal trade relation has changed with the passage of time and in the changed circumstances Nepal may not benefit from the pegging. For this purpose, the various chapters of the dissertation have delved into international and national contexts to come up with a conclusion that Nepal needs to revise the peg with IC for policy independence, to avoid currency crises and to address the issue of unemployment prevalent in Nepal and to maintain price stability. The approach followed is Post-Keynesian approach applicable to development economics and international finance. Chapter one demonstrates that the pegging contributes to the overvaluation of real effective exchange rate (REER). In turn Nepal’s trade deficit has been widening and this deficit was compensated by remittances, which have grown from 9 percent of GDP in 2000 to 22 percent in 2012. The second chapter distinguishes two alternative exchange rate theories and policies namely neoclassical and Post Keynesian. These two broad types of theories discussed here produce different views of globalization and capital flows. The third chapter contrasts two lines of intellectual currents within the development economics. First, is traditional development theory that emphasized, the problem facing developing economies, is not an inherent lack of resources but a failure to utilize those resources efficiently. Second, is the counter reaction to traditional development theories, which argues that successful development would require external sources of finance in the form of capital inflows from developed countries and the free functioning of markets ensures this flow. Fourth chapter undertakes a historical and institutional analysis of monetary and fiscal policies of Nepal over the past six decades and specifically the three decades after liberalization to see how the global debate on development policy prescriptions has affected the local case of Nepal. The issue of capital flows is crucial when we discuss exchange rates and in the case of Nepal private flows of capital in the form of remittance flow has become significant percentage of GDP over the past decade. So, the fifth chapter investigates the impact of remittance flows to Nepalese economy. The sixth chapter discusses the impact of recent volatility in Indian currency to the Nepalese currency. The last chapter draws conclusions relevant for Nepal and prescribes alternative polices that will help maintain financial and currency stability, control inflation, control capital flows as well as address the problem of unemployment in Nepal.