KATHMANDU, Oct 1: A demand in Parliament to withdraw Rs 500 and Rs 1,000 notes from circulation has revived debate over whether Nepal could resort to demonetization to bring undeclared wealth into the banking system, particularly ahead of the upcoming provincial and local elections.
Lawmakers from both the ruling side and the opposition, the Nepal Communist Party, have urged the government to consider withdrawing high denomination notes. Nepal Rastra Bank officials, however, say current conditions do not warrant such a move. Finance Minister Dr Swarnim Wagle has also said the government has no plan for demonetization and does not consider it appropriate.
The government is preparing to hold provincial and local elections in February.
During Wednesday’s House of Representatives meeting, Rastriya Swatantra Party lawmaker Yagya Mani Neupane argued that demonetization was necessary to bring black money accumulated over the past 35 years into the formal banking system.
Citing India’s experience, he proposed withdrawing high denomination notes and, if necessary, issuing new lower denomination currency. Nepal Communist Party Chief Whip Yubaraj Dulal backed the proposal, saying his party would fully support such a move and could submit the signatures of all its lawmakers if required.
The demand has also fuelled speculation that demonetization could be considered as a way to curb the use of undeclared cash during elections.
According to Nepal Rastra Bank data, Rs 500 and Rs 1,000 notes account for about 71 percent of the total value of currency in circulation. The debate has resurfaced repeatedly since India withdrew its Rs 500 and Rs 1,000 notes on November 8, 2016.
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Former finance minister Surendra Pandey had also suggested in 2018 that Nepal should restrict high denomination notes and give greater priority to Rs 100 notes.
Sources said the interim government led by Sushila Karki, following the Gen Z movement, was similarly advised to consider demonetization before the House of Representatives election. The government sought Nepal Rastra Bank’s opinion but abandoned the idea after the central bank concluded that the volume of black money held in cash was not as large as widely believed.
Central bank officials maintain that demonetization is unnecessary now, although sources citing ministers say the possibility of such a step before the provincial and local elections cannot be completely ruled out.
The debate comes as Nepal Rastra Bank has just introduced a new Rs 1,000 note under its “Series 2025”, starting September 24. The series refers to the note’s design year. Existing Rs 1,000 notes remain legal tender. The new note contains upgraded security features, including a security thread that changes from red to green when viewed from different angles.
Economists caution that abruptly withdrawing high denomination notes could carry significant risks for Nepal.
Black money is not necessarily stored as cash. Undeclared wealth can be held in land, gold, houses, shares, cooperatives and foreign assets, none of which would be directly affected by demonetization.
India’s experience illustrates the limitations. The Rs 500 and Rs 1,000 notes withdrawn in 2016 represented about 86 percent of the value of currency then in circulation. Although the measure was intended partly to combat black money, about 99.3 percent of the withdrawn currency eventually returned to banks, according to the Reserve Bank of India. The outcome raised questions about the effectiveness of demonetization in eliminating undeclared wealth.
For Nepal, the risks could extend to remittances and confidence in the financial system. Nepal Rastra Bank's annual report shows the country received more than Rs 2.363 trillion in remittances during the current fiscal year. Economists warn that an abrupt currency withdrawal could undermine public confidence in banks and potentially encourage some transactions to shift from formal remittance channels to illegal systems such as hundi.
Any decline in formal remittance inflows could also affect foreign exchange reserves and eventually put pressure on the balance of payments.
Nepal faces another complication because of its open border with India and the fixed exchange rate between the Nepali and Indian currencies. Unilateral demonetization would not necessarily stop cash transactions across the border.
Nepal experienced prolonged economic and diplomatic complications after India's 2016 demonetization left Indian high denomination notes held within Nepal's banking system stranded.
The impact could be particularly severe on daily wage workers, small farmers, petty traders and people living in remote mountain and hill districts where banking services and digital payment systems remain limited. Cash remains an important form of savings in these communities. People unable to exchange old notes within a fixed deadline could risk losing savings accumulated over years.
Implementation would pose another challenge. Nepal has limited infrastructure and administrative capacity to collect and count old currency and distribute replacement notes nationwide within a short period.
Although Rs 1 and Rs 2 coins can be minted domestically by Nepal Rastra Bank's Mint Division or produced abroad when necessary, Nepal depends entirely on foreign printers for banknotes. Printing and importing large quantities of replacement currency would require considerable time and money.
Economists therefore argue that targeted and gradual measures would be more effective than demonetization in fighting corruption and undeclared wealth.
Possible measures include setting legal limits on cash transactions and requiring large payments to pass through banks, expanding QR codes and mobile wallets linked with the national identity system, enforcing anti-money laundering laws, strengthening scrutiny of transactions involving land, gold and cooperatives, improving tax administration and speeding up legal action in corruption cases.
Such measures could make suspicious financial flows easier to trace without exposing ordinary citizens and the wider economy to the disruption associated with sudden demonetization.
