06 PERSPECTIVES

ECONOMICS

investosansar

G-20
to
dilute
big powers demands on currencies

Money moves
WHERE IS THE SO-CALLED
CURRENCY WAR HEADING?
Amit Pyakurel
Kathmandu

t a time when the

economic
environment is uncertain and
does not have proper
momentum, monetary policy has taken the centre
stage to counter this issue.
The US economy had to
lower the interest rate
time and again, and had
also come up with quantitative easing measures
with hidden motives to be
competitive in the global
economic environment as
the printing of more
money devaluates the
currency value, ultimately
giving a competitive advantage to the country.
Likewise, the same policy was adopted by the
worlds second largest
economy, that is, China
which is consistently
being criticised by its trading partners for pegging
its currency at a much lower level. Similarly, countries have joined this socalled currency war as the
Japanese government has
prioritised the devaluation of yen as one of the
major agendas on its economic programme. This
year alone the yen has lost
7.09 per cent and 8.57 per
cent against USD and euro
respectively, which clearly
suggests that the currency
war would be only getting
bitter in the days to come.
This move by Japan is
being criticised by Europe
and South Korea as they
are also major trading
partners of the land of the
rising sun. However, the
South Korean currency
has also been on a slide
since December as it
declined by 2.53 per cent.
In this situation, the
Euro Zone is also being
pressurised to devaluate
its currency euro as
the economically troubled
zone is facing tough
competition in the international markets.
Recently, France also
proposed a debate
on the euro
exchange
rate
signalling a

possible devaluation of
the currency. France is
mainly worried about the
strengthening of the euro
making its export less
competitive in the global
market. In the globally interrelated and competitive
economic environment,
any major stances in the
monetary policy adopted
by one country affects other countries. For example,
the devaluation of the yen
can give Japanese industries relief but for countries like Germany, it
would
have
negative
consequence as a stronger
euro impacts exports.
In coming days, the socalled currency war can be
expected to get only worse
if the European Union
joins the tussle as all of the
major economic powerhouses are involved in
currency devaluation in
this time of fragile economic environment. This
is expected to continue unless the global economy
takes off to some comfort
zone whereas for now, the
unexpected and unstable
currency market can be
expected. In the short run,
a particular government
can be benefited with
these pre-planned monetary interventions to devaluate the currency but
in the long run it would
hurt the global economy as
there would not be any coordination among the major economic powerhouse.
(The author is the manager
at the research and
development department of
Mercantile Exchange Nepal
Limited. He can be contacted
through r&d@mexnepal.com)

foster growth. And Indonesia, one of the rising AsiaPacific economies, said it
was also less concerned about
the exchange rate of the yen
than about Japanese recovery.
If the Japanese increase
their domestic demand it will
help Indonesia, especially
from the export side, said
Hartadi Sarwono, deputy
central bank governor.
Others have noted that the
United States has created vast
amounts of new money just as
the Bank of Japan has, although Federal Reserve Chairman Ben Bernanke said the
US central bank was acting in
line with the G-7 statement using domestic policy tools to advance domestic objectives.
The meeting in Moscow of
ministers from the G-20 nations, which account for 90 per
cent of the worlds gross domestic product and two-thirds
of its population, also looked
set to lay bare differences over
the balance between growth
and austerity policies. The
draft communiqu reflected a
row brewing between Europe
and the United States over extending a promise to reduce
budget deficits beyond 2016. A
pact struck in Toronto in 2010
will expire this year if leaders
fail to agree to extend it at a
G-20 summit of leaders in St
Petersburg in September.
The G-20 put together a huge
financial backstop to halt a
market meltdown in 2009 but
has failed to reach those
heights since. At successive
meetings,
Germany
has
pressed the United States and
others to do more to tackle
their debts. Washington in
turn has urged Berlin to do
more to increase demand.

OFFICIALS POUR
COLD WATER
ON TALK
OF A
CURRENCY WAR

Reuters
Moscow

he Group of 20 (G-20)
nations will not single
out Japan over the weak
yen and will disregard a
call from Group of Seven
(G-7) powers to refrain from
using economic policy to
target exchange rates, according to a text drafted for finance
leaders. A G-20 delegate who
has seen the communiqu
prepared by finance officials
for their bosses also said it
would make no direct mention
of new debt-cutting targets,
something Germany is pressing for but which the United
States wanted struck out.
If adopted by G-20 finance

ministers and central bankers

meeting in Moscow, Japan will
escape any censure for its
expansionary policies which
have driven the yen lower and
drawn demands for action
from some quarters. There
will not be a heavy clash about
currencies in the end, because
nobody can risk such a
negative signal, said another
G-20 delegation source.
The currency market was
thrown into turmoil this
week after the G-7 the
United States, Japan, Germany, Britain, France, Canada
and Italy issued a joint
statement stating that domestic economic policy must not
be used to target currencies,
which must remain deter-

mined by the market. Tokyo

said that reflected agreement
that its bold monetary and
fiscal policies were appropriate but the show of unity was
shattered by off-the-record
briefings critical of Japan.
The G-20 draft merely sticks to
previous language on the need
to avoid excessive currency
volatility, the delegate said.
The yen has fallen by
around 20 per cent since
November. Having firmed
earlier on Friday, it turned tail
and dropped about 0.6 per cent
against the dollar and euro in
response to the communiqu
details. One senior G-20 source
said any reference to targeting
exchange rates was also not
acceptable to China, which is

the worlds number two economy and holds much of its USD
3.3 trillion in foreign reserves
in US Treasury bonds.
Officials lined up to pour
cold water on talk of a currency war where countries indulge in competitive devaluations. European Central Bank
President, Mario Draghi said
recent sparring over currencies
was
inappropriate,
fruitless and self-defeating and
US Treasury Official, Lael
Brainard warned against
loose talk. France has been a
lone voice calling for euro exchange rate targets. Draghi
said the currency was trading
in line with long-term averages, a point endorsed by International Monetary Fund
Chief, Christine Lagarde.
The current talk of currency
wars is overblown, she told
the G-20 ministers and central
bankers, adding, There is no
major deviation from fair
value of major currencies.
Other policymakers in
Moscow said Japans aggressive fiscal and monetary expansion aimed at raising the
inflation rate to two per cent
was to be welcomed if it boosted growth. Australian Treasurer, Wayne Swan indicated
support for Japans monetary
policy saying, Everybodys
got a stake in its ability to

Not in consumers interest

legaleagle

LPG PRICE HIKE DECISION REFLECTS MISMANAGEMENT AT THE GOVERNMENT LEVEL

Ananta Raj Luitel
Kathmandu

he governments compulsion to withdraw its

decision just a day after
the announcement of a
price hike in LPG shows how
it lacks power and that it
is insensitive towards the
rights of consumers.
The price hike of cooking
gas raised questions regarding the decision-making
process and its management
in the government sector.
This decision not only
reflects poor attitude of
the government but also

shows absence of scientific

decision-making process.
Nepal Oil Corporation
(NOC) on Tuesday announced a price
hike by Rs 630 per
cylinder but maintained that it would
provide Rs 550 subsidy every month for
a family if they
are used for household purposes.
As per the decision, there would be
red and blue cylinders in the
market for domestic use
and industrial purpose but
neither has it been able to im-

FDI in Nepal:
A hard sell

Siddharth Poddar
Singapore

or several years now, entrepreneurs in Nepal

have cried hoarse over
the need for greater foreign direct investment (FDI)
into the country. These years
of effort on the part of the
private sector have been
matched with years of inability on the part of successive
governments (whenever we
have had one) in convincing the world to seriously consider investing in Nepal.
The intention to
promote FDI is
evident, but it has
rarely been accompanied with concrete steps to
the same effect. For instance,
one of the most seemingly
compelling arguments in
favour of greater FDI into
Nepal is its location between

T H E H I M A L AYA N T I M E S
SUNDAY , F E B R UA RY 1 7 , 2 0 1 3

economic behemoths China

and India and its
potential to serve as the
natural trading corridor between these two economies. It
is an argument that is often
made, and yet, we have not
really seen much being done
to realise this potential.

In fact, the word potential

is perhaps the most commonly used word in Nepals

ECONOMIC INITIATIVES HAVE TAKEN A BACKSEAT

economic
development
lexicon today.
And hydroelectricity potential
is undoubtedly
its most commonly
used
phrase.
H y d r o electricity has
been Nepals biggest potential for several years now. Far
from servicing a large part of
Indias demand for power (as
hoped for), more than half of
all Nepals households today
do not have access to electricity; and of those that do, do

plement it nor do LPG

bottling plants have proper
facility to do so. The Rs 550
subsidy plan for consumer
cards is also full
of
complications
because consumer
cardholders would
have to pay Rs 2,100
when buying LPG
and then approach
Bank of Kathmandu branches to
claim the subsidy.
The government
has shown lack of management not only in LPG supply
but also in the distribution of
electricity, drinking water,

food supply and other daily

necessities. Although the
rights relating to food and
survival are ensured by Article 17 (3) of the Interim Constitution, under which every
citizen shall have the right to
food sovereignty, as provided
by law, the government is yet
to make any effort to guarantee these rights. The Consumer Protection Act 1998
and its Rules 1999 have guaranteed free supply of consumer goods and services,
but nothing has been done
as per the legal provisions.
As the government could
not even set up a consumer

rights monitoring office in

all districts as per the Act,
there is no guarantee that
the rights of the consumers
will be upheld.
Consumers have the right
to basic facilities such as electricity, water and food, but
the government has not been
able to manage these fundamental rights of
the
people, Consumer Rights
Lawyer, Jyoti Baniya told
THT Perspectives. The decision to hike the price of LPG
was not a big deal for the
government as it has done
such things time and time
again, Baniya added.

burningbright
not really see too much of it.
The state of the hydroelectricity sector in Nepal
today is both a cause and a
symptom of low levels of FDI
inflow. The grossly inadequate supply of power is a
deterrent for any potential
foreign investor looking to
set up an industry in Nepal.
On the flip side, because
there is such little foreign investment coming into Nepal,
the countrys hydroelectricity potential remains just
that, and the nations power
woes continue unabated.
This is just one example of
the kind of challenge Nepal
is confronted with. It would
be foolish to believe that with
the kind of political instability, uncertainty in the labour
market and the poor infrastructure we see today,
foreign investors will be
willing to take a risk investing in Nepal. It is hence
imperative for the govern-

ment to create conditions

conducive to the inflow of
capital. For too long, we have
relied on potential and have
hoped and even expected
members of the global
investment community to
park capital in Nepal. The
results have not been flattering thus far, with just USD 95
million of FDI equivalent
to 0.5 per cent of GDP flowing into the country in 2011.
Different approaches have
to be tried now. The government could start at home,
by encouraging domestic
entrepreneurs to invest locally with assurances of stability in policy, and economic incentives. Increased economic
activity domestically is potentially the biggest catalyst
for increased FDI inflow into
Nepal. Till such time Nepali
entrepreneurs themselves
are not convinced about investing greater sums of capital in Nepal, it would be im-

prudent to hope for increased

FDI inflows. Nepal is competing with several other late developers for the same capital
and it is essential to provide
investors with compelling
reasons to invest, because
potential is enough only
to pique the interest of investors, and not much more.
It is true that Nepals leaders are simultaneously grappling with a number of other
challenges that some would
argue are more pressing, but
it is also worth remembering
that several of these challenges are of their own making. In trying to resolve the
continuing political crisis in
Kathmandu, economic initiatives have taken a backseat.
As important as political
consensus is, economic development cannot be forgotten.
(The author specialises in the
political economy of South
and Southeast Asia and is a
co-founder of StoneBench
Research and Communications.
He can be reached at
siddharth@stonebenchasia.com)