Nepal Rastra Bank (NRB) was quite upbeat while making public its latest report that the ratio of convertible foreign currencies in the total foreign exchange reserve has gone up to 80.4 per cent from last year's 74.4 per cent. While the positive aspects of the development cannot be undermined, the other side of the coin must not be forgotten.

Looking at the things as they stand today, there is no denying to the central bank's claim that this increase in the forex reserve has come purely as a result of the increasing practice among the Nepalis working abroad to send their earnings home through the official channels.

As long as these people follow the practice of sending such money through hundi, (the informal document used by the unofficial operators who deal in international funds transfer), the money earned by Nepalis would not come to Nepal in convertible foreign exchange because the hundi network is controlled by the Indians and therefore the foreign exchange would first go to India, get it converted into Indian Rupees and ultimately the Nepali families would get either the Indian Rupees or equivalent Nepali Rupees.

The effort of the Nepali central bank to develop systems to encourage the Nepali Diaspora to use formal channels to send their earnings home seems to have fructified.

But a number of other obvious facts are being neglected in the above analysis. The first is that though the Indian Rupee has been gaining some value in terms of dollars, Nepali Rupee has not been allowed to make similar gain.

Thus there is clear advantage for the hundi operators to sell in Nepal the dollars they get from the Nepali Diaspora. The second is that the recent months in particular and the entire last year in general have experienced steep decline in the exports from Nepal to India, thus Nepal's earning of the Indian Rupee has significantly gone down, but Nepal's imports from India have not reduced, thus widening the trade deficit with India.

Moreover, Nepal's imports from overseas paying convertible foreign exchange have gone down particularly in those items which are used as the raw material for the products that are exported to India.

Thus if we go looking deeper into the situation, the increased foreign exchange reserve of the country seems to be achieved in exchange of reduced economic activities and thanks to the hitherto unexplained policy of Nepal Rastra Bank to maintain such exchange rate that allows people to gain by selling their dollar earnings in Nepal and then immediately converting it into Indian Rupee.

This may be a very good short- term policy to liquidate the heavy Indian Rupee reserve in the country, but to project it as a long-term solution to the country's problems is a sheer folly