India's demonetisation drive drags down Nepal's economy: Report

India's scrapping of high-value bank notes last month has dragged down economic growth inneighbouring Nepal with trade, remittances and tourist numbers all down, BMI Research, a groupcompany of the Fitch rating agency, said on Wednesday.

BMI has revised down its forecast for land-locked Nepal's economy, saying that India'sdemonetisation could shave Nepal's growth down to 2.2 per cent for this fiscal year to July 2017,from an earlier estimate of 2.5 per cent.

Nepal's $21 billion economy was already suffering with growth at less than 0.8 per cent in the 2015-16 fiscal year after earthquakes in 2015 that killed about 9,000 people.

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"The disruption in funds from India is likely to weigh on ongoing reconstruction efforts," theresearch agency said in a report, adding that Nepal's economy was heavily reliant on India fortrade, jobs and aid.

The announcement by prime minister Narendra Modi on November 8 to ban 500- and 1,000-rupee notes wasintended to flush out billions of dollars in unaccounted wealth and hit the finances of militantssuspected of using fake currency.

The Nepal Rastra Bank, the central bank, has now banned Indian currency, saying it wanted a formalcommunication from the Indian central bank about new Indian bank notes being brought intocirculation.

"Until such a notice is received, we will not accept the new Indian notes," said central bankofficial Rajendra Pandit.

That leaves thousands of Nepalis doing informal trade along the open border with India without themeans to receive or make payments for their business.

Nepali Prime Minister Pushpa Kamal Dahal, a former Maoist rebel commander, spoke to Modi after thecurrency ban to ask for arrangements for the exchange of the now defunct Indian cash held in Nepal,but that has yet to happen.

The inflow of Indian tourists to Nepal, who account for a quarter of about 800,000 visitors a year,has fallen. Many Indian tourists have traditionally carried Indian currency for payments in Nepal.

In addition, Nepal depends heavily on funds from workers in India, who sent home $640 million in2016, or about 2.6 percent of Nepal's gross domestic product.

Thousands of Nepali migrants are returning home as Indian businesses cut production following thecash crunch.

(Reuters)