Black-market fuels currency crisis

It has now been around four months since the supply shocks crippled the Nepali economy, with acute shortage of fuel and other essentials dealing a major blow to the economy as well as livelihoods of people—both of which were already battered by the April earthquake and subsequent aftershocks. The supply crisis has had an economy-wide impact across a wide range of sectors with agriculture, business, manufacturing and trade, tourism, energy, health, and education adversely affected.

To fill the vacuum, the black market has swiftly crept in and has kept the wheels turning by oiling the economy. But this comes at a huge cost in terms of the exorbitantly priced fuel, lost revenues for the government, and adverse social implications. Similarly, in border economies, there has been a rampant proliferation of informal trade; taking advantage of the shortage of fuel and commodities, with individuals attempting to make a quick buck by pocketing the price spread.

Not Just Fuel: The black market, however, is not restricted to just the sale of fuel. An important impact of the supply crisis has been a rise in currency black-marketing. As the volume of cross-border trade has dropped significantly, there has been a growing shortage of Indian currency nationwide and more acutely in the border areas. Conversations with local traders at border towns reveal that while in normal times, the informal exchange rate stood at NPR 164-165 for every INR 100; as against the formally pegged rate of NPR 160, during the first two months of border disruptions, the informal exchange rate jumped as high as NPR 175. Recently, with the severity of disruptions at border points gradually waning, the informal exchange rate has also plummeted down to around NPR 168-169 per INR 100. What’s more, the informal currency traders claim to be able to provide any sum demanded by the client, even if it runs into millions of rupees.

Perilous Path: While the informal trade of foreign currencies in the Nepali black market is not an unknown phenomenon with US dollars and other currencies being traded at rates much higher than formal exchange rates, the danger lies in the risk of circulation of counterfeit currency. Given that currency black-marketers are incentivized by the opportunity to make quick and easy money by taking advantage of currency shortage, it is not entirely impossible to discount the possibility that they could also be engaged in the circulation of counterfeit currency.

Despite the flourishing of the currency black market in the border economies, this issue has not received enough media attention, while government regulation continues to remain lax.  The unhindered operations of the black market have multiple serious implications including facilitating trading in contraband items, drugs, arms trade, and even human trafficking. Allegations are rife on the involvement of people in politics and government, in letting the black market proliferate and thrive. However, global experiences indicate that the existence of a parallel supply structure fuelled by black markets can distort long-term economic objectives especially driving away foreign and serious domestic investors.