Nepal will keep its currency pegged to the Indian Rupee to ensure stability in the financial system, according to Swarnim Wagle, Member, Nepalese National Planning Commission.

Wagle, however, underlined that the pegging arrangement may need to be reviewed in the long run as the two economies have followed a divergent course in the last few decades.

According to Wagle, the pegging was last reviewed in 1994 when the exchange value was revised from 145 to 160 Nepalese rupees for every 100 INR. Since then the Indian economy has strengthened while the Nepalese economy has became more dependent on remittance earnings, which now account for 27 per cent of GDP.

Though the share of remittance in GDP has come down from 29 per cent over the last two years, it is still the mainstay of the Nepalese economy with nearly one-third of the population working abroad.

Growth is back

Wagle says the trend may correct if the domestic economy grows. After 23 years of low 1 to 2 per cent growth, Nepal is poised to record over 7 per cent growth in 2016-17 (Nepal’s fiscal ending is July 15).

“With two months to go before the fiscal ends, we are certain to record 7 per cent growth. The challenge is to maintain this growth in the future,” he said.

According to him, bumper production of paddy and construction (and reconstruction) activities were major contributors to growth this year.

The country is also taking a number of policy measures to promote industrialisation.

However, Wagle feels the smaller economies in the region would do better to latch on to Prime Minister Narendra Modi’s ‘Make-in-India’ campaign to attract investments in the value chain. Govind Raj Pokharel, CEO of Nepal Reconstruction Authority, feels high growth will be maintained for a couple of years as reconstruction activities are finally catching up.

Of the huge $3.2 billion aid received by the country, including $750 million from India, following the devastating earthquake in April 2015, the Reconstruction Board could so far spend only close to $1 billion.

Pokharel says that the country is lagging the reconstruction schedule by nearly one year. However, he gives a couple of reasons for the delay.

First, Nepal lacked the capacity to make use of such large funds in such a short span of time. Second, there were problems in following procedures set by the donors. And, many reconstruction activities — like rebuilding of houses — are dependent on the interest of the house owners.