Households obtaining health care services in developing countries incur substantial costs, despite services generally being provided free of charge by public health institutions. This constitutes an economic burden on low-income households, and contributes to deepening their level of poverty. In addition to the economic burden of obtaining health care, the method of financing these payments has implications for the distribution of household assets. This effect on resource-poor households is amplified since they have decreased access to health insurance. Recent literature, however, ignores the importance of the method of financing health care payments. This paper looks at the case of Nepal and highlights the impact on households of paying for hospital-based care of Kala-azar (KA) by analysing the catastrophic, impoverishment and economic consequences of their coping strategies. The paper utilizes micro-data on a random selection of 50% of the KA-affected households of Siraha and Saptari districts of Nepal. The empirical results suggest that direct costs of hospital-based treatment of KA are catastrophic since they consume 17% of annual household income. This expenditure causes more than 20% of KA-affected households to fall below the poverty line, with the remaining households being pushed into the category of marginal poor; the poverty gap ratio is more than 90%. Further, KA incidence can have prolonged and severe economic consequences for the household economy due to the mechanisms of informal sector financing to which households resort. A heavy burden of loan repayments can lead households on a downward spiral that eventually becomes a poverty trap. In other words, the method of financing health care payments is an important ingredient in understanding the economic burden of disease.

This Working Paper should not be reported as representing views of the IMF.

Credit constraints are a major obstacle for firms in developing countries, in particular for small firms in the non-traded goods sector. In this paper, we investigate whether foreign currency accounts help overcome this problem, by contributing to financial development. We analyze a novel bank-level data set from Nepal, where a steady inflow of remittances has contributed to foreign currency deposits on bank balance sheets. In this data set we find that: (i) Banks hedge their FX exposure by investing in FX and non-resident assets. (ii) Banks also hedge indirectly via their sectoral lending composition: Banks with a large share of FX deposits primarily lend to firms in traded-goods sectors. They lend only little to firms in the non-traded sectors, as well as deprived sectors of the economy that have been targeted by various support programs. While the direct impact of FX accounts on relaxing credit constraints thus appears small, there is also a substantial indirect effect via the additional creation of domestic deposits -that helps all sectors of the economy.

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As intra-SAARC trade increases, there is a growing need for higher levels of intra- SAARC financial policy cooperation to ensure a stable financial environment by limiting uncertainty for payments. This will facilitate the process of regional trade integration. The experience in Europe suggests that both cooperation in intra- SAARC regional monetary and liberalization policy along with the setting up of an institution to manage trade and payments could contribute towards laying the foundation for future financial coordination with eventual higher levels of mon etary integration within the SAARC region. The paper highlights some areas in this regard, and discusses some paths for greater financial cooperation in South Asia.