Nepal Loosing Global Competitiveness

Figure depicts the trend of real effective exchange rate (REER) index of Nepal. Since 2001, as REER of Nepal is appreciating, we are losing competitiveness in global trade. The formula used to calculate REER is REERt = Summation[TWit * { Eit*(Pit/Pitf)}]. Where, i stands for ith trade partner of Nepal and t denotes year, P domestic price level, Pf foreign price, TW is trade weight. REER has been constructed by using data of exchange rate of Nepali Rupees with two currencies, IC and US$. Moreover, here exchange rate is calculated as price of domestic currency in terms of foreign currency. Two currencies are used to construct REER because India is Nepal’s largest trade partner, about 70 percent trade is with India, and remaining trade occurs almost in US$. In addition, except a few countries Nepal's trade with other countries is insignificant; there is no long period time series data of trade with all countries.

US$ and Indian Rupees Exchange Rate

Long run trend of US$ rate vis-a-vis to indian currency (in nominal term) shows that indian rupee is appreciating over the year. As there is fixed exchange rate in between Nepali currency and Indian Currency, it may lead to appreciation of Nepali currency as well. Appreciation of Nepali currency adversly affects Nepali export and economy as a whole.

Importance of Economic Freedom to Development

Economic freedom is one of most important factors of economic growth and development. Here is a good piece of article on economic freedom and its linkage with development by professor BISHWAMBHER PYAKURYAL . He concludes,"... ... ... if someone tries to examine the impact of Nepal’s ailing democracy on economic growth, one can safely say that it is not the redistributive policies of the governments that limit development but the lack of economic freedom."

Volatility of Inter-Bank Rate in Nepal

Higher the interest rates higher its volatility. The figures show monthly inter-bank rate and its volatility of Nepali banks. After 2009, as a result of fall in banks liquidity inter-bank rate significantly increased in Nepal. During the period its volatility, measured by GARCH Model, also increased significantly. It indicates that higher interest rate also leads to higher volatility.