US Dollar Price is Rising; What Does it Mean to Nepal?

The jaw dropping increase in the price of the US Dollar is making daily headlines in the world. With this increase, some sectors are having a rise while some are getting into churning a lot of costs.

Be it a company or the whole economy, almost every country in the world is being affected through this hike in the US Dollar price. Since the global trade impliedly relies in the US Dollar across the countries (in most cases), the rise in US Dollar has been a boon to some countries, while some economies, are in a huge loss.

Why is US Dollar that important to the world?

Let us go back to the history. To understand how the US dollar became the World’s reserve currency, we must understand the Gold Standard and the Bretten Woods Conference.

Most economies used peg their currencies against gold to stabilize the currency exchanges. However, the gold standard was suspended by some countries during the World War I, in 1914.

During that time, many countries lost their wealth as they had insufficient physical gold reserves to pay for the imports of weapons and other essentials. That’s when Fiat Currency came into play.

During the World War I, and II, the supply of gold plunged, which led to the fall of the Gold Standard.

The US abandoned the gold standard in 1971, to curb the rising inflation and to prevent the excessive outflow of US dollar to convert into gold. Then, the British Pound Sterling and US dollar became the global reserve currencies, as the UK and the US were powerful economies with the maximum gold reserves at that time.

According to Investopedia, the United States holds more than 8,133 tons of gold- the largest gold stock in the world.

In the end of the World War II, the Bretten Woods Conference concluded all the member national currencies to be valued in relation to the US dollar.

Once put into effect, its clauses required that the price of gold be tied to the U.S. dollar. In addition, the value of every other currency in the system was then pegged to that of the U.S. dollar. As a result, the US dollar became the main reserve currency.

It means, if Nepal has to buy something from other country, it must pay in the US Dollars. That’s why Nepal needs more and more US dollars for paying against its imports, as the US dollars price has risen.

What does the rise in US Dollar price mean to Nepal?

Well, it has a direct visible effect on the economy of Nepal. The rise in US Dollars touches every aspect of the Nepalese economy like:

#Trade

The BOP deficit, according to the Current Macro-Economic and Financial Situation Report by NRB (up to Mid-June 2022), the Balance of Payment Deficit is Rs 269.81 billion. Similarly, the foreign currency reserves is USD 9.45 billion. Last year, it was USD 11.7 billion for the same period.

The decrease in the foreign currency reserve is due to increase in imports. And to pay for the imports, Nepal buys Indian Rupees by selling the US Dollars.

Why? Because more than 87% of the imports in Nepal are from India.

As the Nepali Rupee is pegged against Indian Currency at a fixed rate ( 100 Indian Rupee= 160 Nepali Rupee). However, the Indian currency is pegged to the US Dollar.

Now that the Indian Currency is also losing against the US Dollars, the Indian Government has allowed Nepal to pay for the imports in the Indian Rupee. This will create a demand for the Indian Rupee and rise its price in the international market.

The balance of payment deficit directly influences the foreign exchange reserves, causing the liquidity crisis in the domestic market.

With a very dismal exports, Nepal only gets a fraction of US Dollars in its foreign currency reserves. The major source of it is remittance as of now, not the exports of goods.

#Finance

With the rising dollar rates, it affects the financial system of an economy. Nepal too, is experiencing the liquidity crisis in the banking sector. The Russia-Ukraine war have also affected to the imports somehow. Most importantly, the rising oil prices have also swiped away the foreign currency reserves towards the payment for that.

#Business and IT Sector

Nepali businesses including SMEs to large ones pay heftily on social media ads these days. The rise in dollar price means, they have to comparatively pay more Nepali currency for the same kind of service that could be done with less before.

Also, the IT community relies on all the international products and services. Whether it is for domain hosting of the website, or running ads, the global companies accept payments in US Dollars. This way, it is being costly to the average Nepali business to pay for such services.

The marketing and administrative costs of the businesses are increasing in Nepal due to this.

But the freelancers and people working in the off shore companies are in safer side

There is a significant number of young freelancers in Nepal, who work for foreign clients and companies staying in Nepal. The freelance job platforms like Upwork, Fiverr, Freelancer, etc are getting popular these days, which allow the freelancers to sell their service at the comfort of working from their own home.

The work from home culture, which is more induced by the Covid-19 pandemic effect is somehow making a positive impact upon the economy. As the workers no longer need to go to other countries to work for them, they can simply live their life as a digital nomad and earn dollars staying Nepal.

The rise in the price of US Dollars means that the nominal income of the freelancers is increasing.

This reveals that whether the rise in the US Dollar Price is affecting the Nepali economy at large, it has also created some space for the growth of the gig economy.

Also read: Prepaid Dollar Card- Necessity or a Luxury for Nepali?