Introduction
In today’s globalized economy, the ability to trade and transact in foreign currencies plays a crucial role in a country’s financial stability. As a developing economy, Nepal engages in international trade, foreign direct investment (FDI), and remittance activities, all of which necessitate the use of Convertible Foreign Currency (CFC).
Definition of Convertible foreign currencies
Convertible Foreign Currencies (CFC) are currencies that can be freely exchanged for other currencies without restrictions from the central bank or other authority. These currencies are widely accepted for trade, investment, remittances, tourism and financial transactions.
Types of Convertible foreign currencies
- Fully Convertible Currencies are those that can be exchanged freely without significant government-imposed restrictions. These currencies offer high liquidity and stability, making them essential for international trade. Examples include the US Dollar (USD), Euro (EUR), Japanese Yen (JPY), and British Pound (GBP).
- Partially Convertible Currencies face restrictions placed by governments on cross-border currency to manage the national economy, prevent capital flight, or regulate exchange rates. For example, the Chinese Yuan (CNY) is partially convertible, as the Chinese government restricts its convertibility for capital account transactions while permitting it for current account transactions.
- Non-Convertible Currencies, also known as blocked currencies, cannot be freely exchanged on the foreign exchange market for other currencies. These restrictions typically reflect economic instability, political decisions, or efforts to control capital flows. Countries with non-convertible currencies often rely on currency pegs or other exchange rate mechanisms to maintain monetary stability. Currencies such as the Brazilian Real, Argentinian Peso, and Chilean Peso are considered non-convertible due to the difficulty of converting them into other legal tenders.
- Convertible Virtual Currencies have emerged with the rise of crypto currencies including Bitcoin, Ether, and Ripple. Although these digital currencies are unregulated and do not hold the status of legal tender, they can be used as substitutes for real, legally recognized currency.
Legal Framework Governing Convertible Foreign Currency in Nepal
Nepal’s legal framework governing convertible foreign currency is primarily shaped by the Foreign Exchange (Regulation) Act, 1962, along with various regulations and policies introduced by the central bank, Nepal Rastra Bank (NRB), and the Ministry of Finance. The framework aims to manage foreign exchange transactions, maintain economic stability, and ensure effective control over the movement of foreign currency in and out of the country. The key legal provisions governing the use of convertible foreign currency are:
Foreign Exchange (Regulation) Act, 2019 (1962)
- Grants authority to the government and the NRB to regulate the conversion and movement of foreign currency, ensuring that all foreign exchange transactions are carried out in compliance with national interests.
- Defines “convertible foreign currencies” as any foreign currencies as may be designated as convertible foreign currencies by the Bank by publishing and broadcasting a public notice.
- Outlines restrictions and regulations concerning the holding, transfer, and conversion of foreign currency.
- Prohibits individuals and entities from engaging in unauthorized foreign currency transactions.
Nepal Rastra Bank (NRB) Act, 2058 (2002)
- Authorizes NRB to regulate the monetary and financial system of Nepal, including controlling the foreign exchange market.
- Section 63 empowers NRB to frame Rules and Bye-laws and to issue necessary order, directives or circulars in order to regulate dealings in the foreign exchange transaction by the foreign exchange dealer.
- Provides NRB with the power to regulate the buying, selling, and exchange of foreign currency by the foreign exchange dealer and intervene in the currency market to stabilize the Nepalese Rupee.
- Authorizes NRB to issue debt bond denominated in foreign currency.
Foreign Investment and Technology Transfer Act, 2075 (2019)
- Enables foreign investors to bring in and repatriate convertible foreign currency.
- Ensures repatriation of profits, dividends, and capital in convertible foreign currencies, subject to NRB approval.
- Allows foreign investor or industry with foreign investment to open an account in foreign currency with any bank or financial institution licensed to deal with convertible foreign currency in accordance with the prevailing law.
NRB Money Changer Licensing and Inspection Bylaw, 2077 (2020)
- Provision of providing license to entities to conduct transaction of convertible foreign currency.
- Mandates preparing and keeping updated record of convertible foreign exchange transaction.
- Requires licensed money changers to issue a Foreign Exchange Encashment Receipt (FEER) when accepting convertible foreign currency from their customers and clients.
NRB Foreign Exchange Transaction Licensing and Inspection Bylaw, 2077 (2020)
- Outlines the procedures and requirements for obtaining a license to conduct foreign exchange transactions.
- Includes the handling of convertible foreign currencies by licensed institutions such as banks, financial institutions, and money changers.
- Allows licensed Hotel to provide their customers with cash exchange of convertible foreign currency up to the limit specified by NRB from time to time.
NRB Foreign Investment and Foreign Loan Management Bylaw, 2078 (2021)
- Facilitates the use of convertible foreign currency in Nepal by streamlining processes for foreign investment, loan acquisition, and repatriation, while ensuring compliance with regulatory requirements.
- Waives the requirement for prior NRB approval for bringing in foreign investment for new ventures and subsequent capital increases.
Anti-Money Laundering Act, 2064 (2008)
- Addresses the regulation of cross-border foreign currency transactions to prevent money laundering.
- Establishes reporting obligations for high-value transactions.
Regulation on Virtual Currencies/Cryptocurrencies
Although Nepal has not passed specific legislation to govern cryptocurrencies, the Nepal Rastra Bank issued a public notice on 24 Bhadra 2078 (23 January 2022), warning against the use of virtual currencies like Bitcoin. It highlights that transactions involving cryptocurrencies may violate existing foreign exchange regulations since they are not legally recognized as tender in Nepal. A similar restriction has been reiterated in the notice published by NRB on 30 Shrawan 2079 (15 August 2022), which declared virtual currencies, network marketing, and hyper fund transactions illegal.
Available at:
https://www.nrb.org.np/contents/uploads/2021/09/FXMD-Notice-03-207879-Cryptocurrency.pdf
https://www.nrb.org.np/contents/uploads/2022/08/FXMD-Notice-2_207980_Cryptocurrecy.pdf
Additionally, The NRB issues periodic circulars to provide updates and clarifications on foreign exchange policies, including those related to convertible foreign currencies. These circulars serve as official communications to licensed financial institutions, guiding them on the implementation of foreign exchange regulations.
List of Convertible foreign currencies
The NRB maintains a list of currencies considered fully convertible, they are:
- USD (U.S. Dollar)
- EUR (European Euro)
- GBP (UK Pound Sterling)
- CHF (Swiss Franc)
- AUD (Australian Dollar)
- CAD (Canadian Dollar)
- SGD (Singapore Dollar)
- JPY (Japanese Yen)
- CNY (Chinese Yuan)
- SAR (Saudi Arabian Riyal)
- QAR (Qatari Riyal)
- THB (Thai Baht)
- AED (UAE Dirham)
- MYR (Malaysian Ringgit)
- KRW (South Korean Won)
- SEK (Swedish Kroner)
- DKK (Danish Kroner)
- HKD (Hong Kong Dollar)
- KWD (Kuwaity Dinar)
- BHD (Bahrain Dinar)
- OMR (Omani Rial)
Through a notice published by Nepal Rastra Bank in exercise of the powers conferred by Section 12 of the Foreign Exchange (Regulation) Act, 2019 on 6 Mangsir 2081, most recently added convertible currency is Omani Rial – OMR.
Available at: https://www.nrb.org.np/contents/uploads/2024/11/OMR-Notice-1.pdf
Importance of Convertible Foreign Currencies
- Foreign Direct Investment (FDI)
Nepal’s economic development is highly dependent on foreign investment in sectors like hydropower, manufacturing, tourism, and technology. Convertible foreign currency ensures that investors can easily bring in and repatriate funds, making Nepal an attractive investment destination.
- International Trade and Payment Settlements
Nepal is an import-driven economy, relying heavily on foreign goods like petroleum, machinery, and electronic items. The ability to settle transactions in convertible currency ensures smooth international trade and prevents foreign exchange shortages. Similarly, Nepalese businesses involved in import and export require convertible foreign currency to pay for goods and services purchased from international markets.
- Remittances & Exchange
A significant portion of Nepal’s economy relies on remittances sent by Nepalese working abroad. The country has received Rs. 763.08 billion in remittance in the first six months of the current fiscal year 2081/82. These remittances arrive in convertible foreign currencies and are exchanged into Nepalese Rupees (NPR) through banks and money transfer companies.
- Tourism and Hospitality Sector
Nepal’s tourism industry earns a considerable amount of convertible foreign currency from international tourists. Hotels, airlines, and travel agencies often receive payments in foreign currencies, which are later exchanged through official channels. Similarly, Tourists can easily exchange convertible currencies at authorized banks and money exchange centers.
- Foreign Loans & Grants
Nepal receives financial assistance from international organizations such as the World Bank, IMF, and donor agencies in convertible foreign currencies, which contribute to infrastructure development and economic growth.
- Exchange Rate Stability and Inflation Control
A sufficient supply of convertible foreign currency helps Nepal maintain a stable exchange rate and control inflation.
Conclusion
The role of convertible foreign currency in Nepal’s economic landscape is undeniably crucial. It facilitates international trade, encourages foreign investment, supports remittance inflows, and strengthens financial stability. Nepal’s legal and regulatory framework, primarily governed by the Nepal Rastra Bank, ensures effective foreign exchange management and compliance with international financial standards. Moving forward, maintaining robust foreign currency reserves and fostering a favorable investment climate will be essential in sustaining Nepal’s economic growth and stability.
Disclaimer: This note is provided solely for general information and does not constitute legal opinion. For specific legal query, please seek professional counsel.
