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India's scrapping of high-value bank notes last month has dragged down economic growth in Nepal, with trade, remittances and tourist numbers all down, BMI Research, a group company of the Fitch rating agency, said on Wednesday.
BMI has revised down its forecast for land-locked Nepal's economy, saying that India's demonetisation could shave Nepal's growth down to 2.2 percent for this fiscal year to July 2017, from an earlier estimate of 2.5 percent.
Nepal's $21-billion economy was already suffering with growth at less than 0.8 percent in the 2015-16 fiscal year after earthquakes in 2015 that killed about 9,000 people.
The Nepal Rastra Bank, the country’s central bank, has now banned Indian currency, saying it wanted a formal communication from RBI about new Indian bank notes being brought into circulation.
"Until such a notice is received, we will not accept the new Indian notes," said central bank official Rajendra Pandit.
Nepali Prime Minister Pushpa Kamal Dahal, a former Maoist rebel commander, spoke to PM Modi after the currency 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 in 2016, or about 2.6 percent of Nepal's gross domestic product.
Thousands of Nepali migrants are returning home as Indian businesses cut production following the cash crunch.
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