THE ECONOMIC WEEKLY September 25, 1954

Crisis of the Nepali Rupee

calculation, standardising the comage and enforcing its own legal lender, not to speak of the functions of more advanced Governments in the matter of mint ing standard coins, issuing and regulating paper cur­rency. The circulation in the Valley and the adjacent, areas being of Nepal silver rupees, the war time rise in the price of silver virtually denuded the Valley of silver coins, of which again, in addition to the Nepali rupee, there were coins of various denominations, the circula­tion of which was local and limited to particular zones. For the last 10 years, silver coins have flowed out of the Valley to be sold by weight in the Bombay bullion mar­ket. This has also left its mark on the resulting currency chaos of Nepal today.

The extent of this chaos can be gathered from the wide differences in the rates of exchange prevailing in different parts of the country. At the time of writ ing, the rate of ex­change in the bazars at Kathmandu is Rs 181 Nepali for Rs 100 Indian, while the rate is as high as 300 Nepali rupees per 100 Indian rupees in Dot i in West Nepal and Rs 200 Nepali for Rs 100 Indian in Dha-ran in East. Nepal. The last few years have been years of constant and violent fluctuations in the ex­change rate and the sporadic attempts at control made by the Government in the past have been altogether un­successful.

Prior to the thirties, however, the exchange rate used to be fairly stable around 100 Indian silver rupees for 125 Nepali rupees, while Indian cur rency notes were at a slight dis­count, rate being 100:128. This relative stability was clue primarily to two factors. Firstly, Nepali currency in those days consisted entirely of silver coins of different denomina­tions, no paper currency having been issued by the Government yet. Secondly, demand for Indian cur­rency was small, imports from India being extrcmely limited and confin­ed to such essential commodities as raw cotton, textiles, salt, kerosene and medicines, etc.

In the early thirties, there was a change of policy and imports from

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The currency situation in Nepal, has deteriorated much farther after this was written. A PTI message of the 20th says that currency brokers in Khatmandu have suspended transaction of exthange of Indian and Nepali currencies, and the rate which had dropped to 189 Nepali for 100 Indian rupees has now risen to 130 to 100, as Nepali currency is not available at all except in small sums and at these rates. Daily fluctuations ranged between Rs 10 and Rs 15 per 100 Indian rupees. The Prime Minister has blamed the dealers for manipulating the rate and has promised to take stern action.—Pel.

IT is only tour years ago that Nepal began to emerge from its seclu­

sion and appear on the international scene. But its economy has stilt to be brought into shape before the country can take its rightful place in the comity of nations. That Nepal has not yet come out of the chrysalis stage wil l be apparent from the fact that its currency has not yet come to any sort of parity wi th the Indian rupee through which its transactions with the outside world are conduct­ed. Its Government is not unmind­ful of the many deficiencies of the administration and of the economy. But progress has been difficult; obstacles are many and one of the most serious is the present chaotic state of currency over which the Gov eminent lias not yet tried to exercise eilective control. The rate of ex­change between the Nepali currency and the Indian rupee is still left, to be fixed by the private money changers—the shroffs, better known locally as ' sharafies'. It is not only the rate of exchange, however, that, is left to the whims of the trader. The circulation of the Nepali cur­rency, still governed by custom, is con­fined to the Kathmandu Valley and its adjacent hi l ly country while in the plains, in Terai and other parts of the State, covering more than half of the total area, only Indian rupees circulate as currency. The Govern­ment has no quarrel with this rule of custom and the old convention is continued of collecting revenue in Indian rupees. As ¾ths of the total revenue is drawn from the T erai where only Indian rupees circulate, the bulk of the Government revenue is therefore drawn in that currency. This dual system of currency is the real crux of the problem in any attempt to regulate the rate of ex­change. And yet, the rate of ex­change affects not only the volume and value of the export and import trade of the country but also inter­nal transactions and the entire eco­nomy.

There is nothing like currency management in Nepal. On the con­trary, Nepal during the Rana regime seems to have been surprisingly in­different about one of the most che­rished prerogatives of sovereignty, viz, of putt ing its own currency into

India to the Kathmandu Valley greatly increased, and along with ris­ing imports, the value of Nepali cur­rency fell in terms of the Indian rupee, exchange rate at the end of 1932 dropping to 132 Nepali rupees for 100 Indian rupees. Subse­quently, however, during the Pre­miership of Shri Juddha Shamsher, when imports were still further libe­ralised and the import ban on a large number of articles like motor ears, radio sets and alcohol was fit ted, the value of the Nepali rupee deefined further with the increase of imports, and by 1939, the rate of exchange dropped to 145 Nepali rupees for 100 Indian rupees.

The outbreak of the war had li t t le effect on the rate of exchange as the volume of imports remained unaffected. After the fall of Prance, however, there was a mild panic and loss of confidence in the Indian rupee which resulted in an appreciation of the rate of exchange to Rs 126 Nepali for Rs 100 Indian. The panic led to the closing of the so called money market for a week and the Government, for the first time, announced control of the rate of exchange at 128:100. But this situ­ation proved short-lived and lasted only for two months. W i t h the return of normal conditions, the ex­change rate depreciated to 134:100 for though the fall of France might have shaken confidence, there was no appreciable fall in imports from India and other countries like Japan. Consequently, the exchange late­returned to its previous level. W i l l i the entry of Japan into the war, how­ever, the position changed. For it meant a sudden stoppage of a num­ber of imports like textiles, electric goods, toys and other luxury articles for which Japan had been an impor­tant supplier. W i t h the drop in imports, the value of the Nepali rupee tended to rise and by 1943-44, only 80 Nepali rupees could be had for 100 Indian rupees. Besides the decline in imports, there were other and more powerful factors operating at this time in favour of raising the value of the Nepali rupee—the return of Nepali soldiers with Indian rupees in their pockets and the sharp rise in the price of silver, which led to a keen demand for Nepali coins.

T i l l the end of the war, the ex-tnange rate fluctuated between 80 and 85 Nepali rupees for 100 Indian rupees. Even after the war, the trend towards the appreciation of the Nepali rupee continued. By the end of 1946, the exchange rate varied between 65 to 70 Nepali rupees for 100 Indian rupees. Heavy (invisible) export earnings in the shape of remittances made by Gurkha troops outside Nepal and the volume of Indian rupees the troops returning to Nepal brought with them were probably the main factors pushing up the rate of exchange at that tune. The Government was 'anxious to arrest further appreciation of the Nepali rupee and issued currency notes of the denomination of Rs 100, Rs 10 and Rs 5 (Nepali) for the first time. As a consequence, the exchange rate came down wi th in a few months to 90:100. W i t h the gradual increase of imports, the Nepali rupee continued to decline t i l l the rate of exchange reached 100 to 112 Nepali rupees for 100 Indian rupees by the end of 1950.

After the interim cabinet was set up by King Tribhuvan in February 1951, the exchange rate began to suffer from violent fluctuations, Speculation, which had begun a few years earlier, now became rampant because of the slackening of various restrictions and the growing volume of imports. The departure of some big Ran as and other landowners (who had large incomes in Indian rupees) to India to settle down there permanently meant not only a fall in foreign receipts but also, perhaps substantial flight of capital from the country. A thi rd factor was the process of creation of currency for meeting budgetary deficits. The last had a markedly adverse effect on the confidence of the people in the Nepali currency. The depreciation of the exchange, therefore, continued steadily, the exchange dealings being marked by almost daily fluctuations.

When the rate reached 145, in September 1952, the Government " f i x e d " 128 Nepali rupees for 100 Indian rupees as the official rate of exchange. Unfortunately, this offi­cial rate could not be maintained, even for a few months; it remained a pions declaration only on paper and ceased to matter at all. This was because the Government failed to reorient its financial and budget­ary policy in unformity wi th the announcement, in July 1953, the Currency and Exchange Department of the Finance Ministry called a con­ference of experts to which the pre­sent writer was also invited, but nothing came out of the delibera­tions. The Government is believed

to have appointed a Currency com­mittee subsequently to report on the exchange problem but not much in­formation has been available to the public.

Though from early times, the ex­change rate has varied wi th the volume of imports into the Kath-mandu Valley, more recently, other factors have also begun to operate. Speculative dealings, for example, have played a large part since the overthrow of the Kana regime, though even before, there had been some developments in that direc­t ion. Again, the note issue, which is directly made by the Povermnent treasury, is not subject to any limits as to maximum issue or reserves. Besides, the Nepali currency does not circulate beyond the towns of Kathmandu Valley and the adjacent regions and in the hilly parts, cur­rency notes are not generally accept­ed as the people prefer metallic coins.

A study of the composition of monetary- circulation is difficult, if not impossible, because there are no reliable statistics of the important items of circulation. Reliance lias therefore to be placed on such infor­mation as is at hand and on the estimates that have been made by knowledgeable people. It has been estimated that the total of Nepali currency notes in circulation t i l l re­cently was about four crores while the circulation of Nepali coins is placed around Rupees five crores.

The minting arrangements for the Nepali rupee are primitive, and the public are not in the know of the basis for putting coins in circulation. Aj, late as 1943 the silver content of the coin was quite appreciable (80:20); in 1947 new coins were coined wi th 70 per cent of the silver content. However, in February 18, 1954, on the occasion of the National Day, cupro-nickel coins were issued and in the words of the Prime Minister, " the inauguration of mint ing new set of coins ushers in the era of effective economy and fruitful use of our foreign resources." In the wake of the transition from the feudal set up, certain changes have been noticeable. Formerly, there was no substantial difference between the state funds and the privy purse of the ruling prime minister, but today there is the Fin­ance Ministry wi th a financial code. Sti l l , the note issue, however, is not subject to any limits or reserves:

The present financial system is also responsible in certain respects for the deterioration, not only in the currency situation but also for the wide fluctuations of exchange rates. It is impossible for the Govern­

m e n t t o h i l l u p b u d g e n t a r y b e n f i t s b y purnping-out paper notes, without inviting disastrous consequences, espe­cially in absence of a controlling authority, like the central bank, to regulate the monetary system of the country. It is no wonder therefore that the exchange ratio between the Nepali and Indian rupees has come to be a matter of grave concern to the people of the country.

W h i l e speaking over the Radio Nepal on the first budget, ever pre­sented in Nepal, the then Finance Minister had reiterated the decision of the Government to establish a State Bank with all the central banking functions for" regulating the exchange of the two countries, but as things stand at present, it appears that even that idea has melted into thin air. Since fluctuations in the value of the Nepali rupee directly affect internal transactions, the need for such a bank hardly need to be emphasised. It is necessary, how­ever, to organise the financial system of the country on modern lines. The dual currency system ' must be abo­lished and the Nepali currency alone should be allowed to circulate throughout the country. This may be difficult, but if a co-ordinated policy is adopted and decisive mea­sures are taken, it should be pos­sible for the Government to circu­late its own currency throughout: the country. For this purpose, the Gov­ernment should give up its practice of accepting revenue in Indian rupees alone. It should be the first duty of the State Bank to establish the circulation of the Nepali cur­rency throughout Nepal. Arrange­ments should also be made for the conversion of Indian into Nepali rupees at all important trading cen­tres. If necessary, foreign exchange dealers should be licensed for this purpose. The system of note issues must be regulated and the State Bank alone should be given the authority to administer all the con­trols relating to dealings in coin, bull ion, securities and foreign ex­change.

Though the country has not yet seen the last year's budget, the two budgets so far presented show that there has been deficit to the tune of, more than one crore of rupees an­nually. The magnitude of the defi­cit is certainly staggering. It is my firm conviction that without wiping out the deficit, the exchange rate cannot be adjusted favourably to us. Deficit financing may have its place even in a backward economy, if it is meant for financing developmental programmes. But for what purpose is the deficit incurred in Nepal—for social services and nation building

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September 25, 1954 T H E E C O N O M I C W E E K L Y

activities or economic development and reconstruction? Such expendi­ture is conspicuously absent. There is shortage of revenue even for meet­ing current expenditure and the Government covers the deficit by printing more paper notes, which affect adversely the internal eco­nomy. For reducing dangers of deficit financing, state expenditure, which has now become too much top-heavy, has to be drastically reduced.

Though past experience indicates that increase in imports tends to br ing down the rate of exchange, it is not easy to relate the move­ments in the rate of exchange to the country's balance of trade. The influence of the balance of pay­ments is still more obscure. This is because, among other things, only a part of the trade between Nepal and India partakes of the character of international trade, and enters into the determination of the rate of exchange. The Terai exports substantial quantities of foodgrains to India, while Kathmandu Valley is always deficit in food, but since the currency circulating in the Terai is the Indian rupee, the impact of this trade is not directly felt on the rate of exchange of the Nepali rupee. This possibly explains the anomaly that Nepal's annual ex­ports are conventionally estimated at Rs 27 crores and imports at only Rs 11 crores, and yet. the Nepali rupee is still going down. If the above figures even approximately indicate the true position of the balance of trade, the progressive de- eline in the rate of exchange can­not he explained at al l , unless there is simultaneously export of capital of considerable magnitude, or worse st i l l , there is a Nepal-wide flight off the Nepali rupee under way. The explanation, therefore, has to be sought in the l imited trade of the Valley, and the dependence of the Valley on imports which have to be paid for in Ind ian rupees. I n ­deed un t i l the economy of the coun­try is integrated and an adequate transport system is bui l t up , the Nepali rupee, which is only the cur­rency of the Valley, w i l l remain t in­der Continuous strain.

Monetary regulation, therefore, must begin w i t h unification of the currency and ending the present system of dual circulation. The State Bank or some other authority w i l l have then to undertake the responsibility of adjusting the money -supply to subserve the fundamental ends of economic policy—

(1) Expansion of domestic out­

put, employment and income; (2) Main ta in ing a high an d

stable level of production and employment; and

(3) Equi l ib r ium in the balance of. payments.

These are, however, long-term measures. If further depreciation of the Nepali currency is to be brought to a halt and the exchange rate is to be stabilised at a reason­able level. I can suggest the follow­ing 7-point programme on the basis of available facts and information collected by me:

1. Without remaining satisfied simply wi th communiques a n d statements about the fixation of the rate of exchange, the Government should take active steps to control this rate, by offering to exchange Nepali rupees for Indian rupees for approved purposes at a stated rate. For the present, the Nepali Bank of which Government owns 51 per cent of the shares can be entrusted wi th this work. True, there is risk of incurring losses in assuming this responsibility but in view of the fast deteriorating t rend of the economy, the step is urgently necessary. Government intervention and con­trol ol the exchange rate itself w i l l have a salutary effect on specula­tors and the handful of money­changers who now manipulate the rate of exchange to the country's detriment.

2. The Government should re­vive the confidence of the people in the Nepali rupee by publishing the full facts about the note issue and the circulation of coins in the coun­try. While answering a question regarding the backing of the Nepali currency, the Finance Minister re­cently stated in the newly set up Advisory Council that the system of note issue and its regulation in Nepal could be very favourably compared wi th that of any other country, but the Minister did not disclose what this system was,

3. Since increasing Imports tend to lower the external value of the currency, I consider it imperative and urgent that imports of luxury articles should be sevorely restricted. Imports of articles like cigarettes. petrol and alcohol, for which the Valley is dependent on India , should be altogether stopped. Since Nepal imports annually cigarettes wor th Rs 1 crore, its stoppage w i l l defi­nitely improve the exchange posi­t ion . The imports of cloth from I n d i a can also be restricted for some months as present stocks in the country are ample for our require­ments. For some time, say he next

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six months, the air travel may also be restricted only to essential pur-poses and the cinemas controlled, if not totally stopped, in order to curtail the demand for Indian rupees.

4. All speculative dealings in exchange should be made an offence and drastic steps should be taken to punish offenders along w i t h a country-wide drive to detect hoard­ers of Indian currency.

5. The above measures should be followed by a declaration that the Government is determined to re­trench expenditure, close the bud­get deficit and stop deficit financing. It needs to be repeated, that a bal­anced budget is essential lor a sound economy.

6. An Exchange Control Board should be set up to determine the rate of exchange to be fixed from time to time. The Board should be constituted wi th the representa­tives of different sections, .so that the Government may he kept i n -iormed of the factors influencing the exchange rate, and gain a pro­per perspective of the current trend in the money market and follow a level-headed policy.

7. Finally. Nepal can establish an Exchange Equalisation Fund w i t h a reseive of Indian rupees un­der the supervision of the Reserve Bank of India wi th the object of i roning out short period exchange fluctuations, restricting short-term movements of funds and undesir­able forward exchange transactions, so that only ' real ' causes are left to influence the long-term trend of foreign exchanges.

The two sets of measures detail­ed above should go side by side, so that one can supplement the other. The short-term measures, however,

should be implemented immediately in view ol the last deteriorating cur­rency situation. The rate of ex­change is now dangerously near 200 : too; if it crosses 200, the future o f Nepali currency a n d along with, i t , that of the economy wil l be imperil led. It should be stressed, however that the only method that can be pursued is that ol t r i a l and error; the measures advocated above may have to be tried and changed, if necessary, ac­cording to the results obtained. The position of the Nepali currency is cri t ical in the extreme and the only chance of restoring stability depends on the r ight policy being adopted and energetically pursued by the Government.

Kathmandu, September 12

September 25, 1954 T H E E C O N O M I C W E E K L Y

September 25, 1954 T H E E C O N O M I C W E E K L Y

Industrial Finance Corporation of India Speech delivered by Shri P C Bhattacharyya, Chairman of the Corporation, at the Sixth

Annual Meeting of the Shareholders held on the 18th September 1954

A S the necessary quorum is pre­sent, we may now commence

the proceedings of the meeting. 2. The first item on the agenda

is the consideration of the Annual Accounts and the Report of the Board of Directors on the working of the Corporation for the year end­ing June 30, 1954. Printed copies of the Accounts and the Report arc-before you. These have also been circulated to all shareholders. I shall, if you agree, take them as read. I would, however, make some observa­tions on a few points.

3. Even though the gross receipts on account of interest, discount, com mission, etc, for the year were higher, the net profit carried to balance sheet at the cud of the year has been lower than that of last year. This is due to the Directors' decision not to charge in the Accounts further inte­rest on the advances to the Sodepore Glass Works Limited, and not to take to the Profit and Loss Account the interest on some other advances where defaults in payment of interest and principal have taken place. The Directors also decided to provide a sum of Rs 5.00,000 as Reserve for Doubtful Debts. The net effect of: all these decisions is that the Corpora turn would have to call upon Govern­ment for a sum of Rs 4,06,363-14-0 to make up the guaranteed dividend for the year. The Corporation would have thus drawn, up to date, a sum of Rs 30,95,490-2-6 from Gov­ernment as subvention to meet the guaranteed dividend, and the total reserves of the Corporation would stand at Rs 19,62,150-0-0.

Doubtful Debts 4. The decision of the Directors

to start an additional Reserve Fund to provide against doubtful debts wi l l , I am sure, meet wi th your approval. The nature of the busi-new. the Corporation handles is such that it cannot hope to escape a cer­tain ..mount or bad, doubtful or frozen d e . The risks assumed by the Corporation are greater than those in commercial banking. The security against which the Corpora­tion advances money goes down in value if the management of a debtor company fails to make a success of its scheme. Nor is such security readily saleable in such circumstan­ces. The Corporation also considers its duty to ensure that, the schemes

which it finances come to eventual fruition, whatever may be the obsta­cles in the way. A l l these l imi t the freedom of the Corporation in dis­posing of the assets mortgaged to it when it finds that a debtor concern has shut down its factory. The Corporation has to be patient wi th the debtors and thus expose itself to greater risks, winch is not the case with a mere financing agency.

Some Difficulties 5. You would have noticed from

the Report that out of a sum of Rs 1,52,98,214 which is the total amount of interest to be received by the Corporation up to June 30, 1954 on the loans since its inception, a sum of Rs 1,33,79,119 was actually received. There have been some defaults in payment of instalments of principal also. This again illustrates the nature of the work of the Cor­poration. It is dealing with compa­nies which are establishing new in dustries or expanding or modernis­ing their plants of diverse nature. Some of them met with adverse fac­tors in the course of the implementa­tion of their schemes which could not have been foreseen initially, The units to which the Corporation grants loans are also widely dispersed all over the country. Adverse natural conditions in some parts of the coun­try or breakdown of transport in an­other part may thus easily upset the programme of some of these con­cerns. The Corporation has to watch such cases carefully and extend its assistance with sympathy and courage during such periods. The figures of defaults in payment of interest or instalments should not, therefore, be taken as indications of bad or un­satisfactory debts. Rather, they should be considered as indications of the solicitude of the Corporation for the successful implementation of the schemes.

6. Appendix; ' E ' to the Report brings out the proportion which the amount sanctioned as loans by the Corporation up to the year ended June 30, 1954 compares to the total paid-up capital of the units to which the loans have been granted. I think we can safely claim that the Corpo-ration has made a significant contri­bution to the development of in­dustries in the country during the last six years, of its existence.

7. The position as on June 30,

1954 regarding the Sodepore Glass Works Limited has been explained in detail in the Report. The Board of Directors has set up a Committee to negotiate with likely parties, for bringing the factory into production at the earliest possible date on mutually satisfactory terms and cer­tain negotiations are in progress.

8. 1 shall now turn to a few points of a general nature. Firstly, I would wish to convey to Sir Shri Ram who was the Chairman of the Corporation since its inception, the thanks of all of us for his work in putting the institution on a sound foundation. I am glad to be able to say that even though he is no longer holding the office of the Chairman, his guidance is still available to us both- in the Board and in the Exe­cutive Committee.

N e w Corporations 9. In the last Annual Meeting,

my predecessor had referred to the recession that had hit the country in the year 1952. I think it would be correct to state that the economic situation has changed for the better since. This should give more scope to the Corporation to assist indus­tries. Our resources are, however, l imited and the field of operation is vast. I, therefore, welcome the es­tablishment of the two new Corpo-

' rations, viz, the Industrial Develop­ment Corporation and the Industrial Investment Corporation, under the auspices of the Ministry of Com­merce and Industry. In the increas­ing tempo of industrialisation in the country, one cannot have too many of such institutions, and the Corporation shall be happy to work in close collaboration with them.

10. Last year, my predecessor had-also referred to the Committee of En­quiry set up to enquire into certain allegations against the Corporation. The Resolution of the Government of India on the Report of this Committee has been reproduced in Appendix ' F' to the Report. I am glad to state that the find­ings of the Enquiry Committee have vindicated the working of the Corporation. This should not, how­ever, engender in us any sense of complacency. It would be the en­deavour of the Corporation to strive continually to improve its operations so as to eliminate all causes for com. plaint from its clientele as well as

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