India's decision to ban old Rs 500/1000 bank notes from circulation is likely to have a negative impact on Nepal's economy, with the country being heavily reliant on India for remittances and trade, said a report.
"With the landlocked nation struggling to rebuild following the devastating earthquake and aftershocks in 2015, the disruption in funds from India is likely to weigh on ongoing reconstruction efforts," the report by BMI Research said.
The Fitch group company also downgraded its growth forecast for Nepal for 2016-17 (July 16 2016-July 15 2017) to 2.2 per cent from 2.5 per cent previously.
The report further said that India's sudden decision to remove its Rs 500 and Rs 1,000 notes will continue to have a negative impact on ordinary Nepalese with Nepal being heavily reliant on India for trade, jobs, and foreign aid.
"With many Nepalese having part of their savings in rupees and the Nepalese rupee being pegged to the INR, the removal of 86 per cent of the total bills in circulation in India will likely continue to have spillover effects on its smaller neighbour," it said.
The demonetisation move by India has led to considerable uncertainty in Nepal as only those in India are eligible to exchange their old banknotes for new ones, it said.
This will undermine economic growth in the nation that is dependent on external funding as it seeks to rebuild homes and buildings destroyed in the massive 2015 earthquake and aftershocks, the report added.
"We believe that the inability of Nepalese citizens to exchange or deposit their notes by the December 30 deadline set by New Delhi could have a negative impact on the savings of the Nepalese people.
"The Federation of Nepalese Chambers of Commerce and Industry estimates that Rs 10 billion (USD 146 million) in defunct notes is held by the informal sector and private individuals.
Considering that nominal GDP per capita in Nepal is USD 837, this represents a significant loss of private savings," it said.
In addition, New Delhi's actions will likely lead to a decline in remittances, weighing on Nepal's economic growth.
Nepal is heavily dependent on remittances from workers in India, having received USD640mn in remittances from India in 2016 (approximately 2.6 percent of GDP).
"Most of these remittances are sent home using the now defunct banknotes and are used to fund reconstruction efforts in Nepal," the report said.
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