The Monetary Policy A big let down

RAJU NEPAL

As a routine work of Nepal Rastra Bank (NRB), it came up with the Monetary Policy for FY 2069/70. Everyone related to business specially bankers wait for the policy eagerly as it has immense impact and influence in the economy of the country. The Monetary Policy influences expectations about economic activity, inflation, prices of goods, asset prices, interest rate, investments, exchange rates as well as consumption of the country. At the same time, looking at the monetary policy one can easily say whether the economic agenda of the government will be successful or not in the coming years.

As the full-fledged budget of the government was not brought, all the stakeholders of the country which include Banks and Financial Institutions (BFIs), businessmen and the general public were eagerly waiting for the Monetary Policy for some relief, with hopes and expectation of stability and financial growth in the country.

Now, with the release of the new Monetary Policy, all the expectations of the stakeholders of the country have been drowned. No measure has been addressed in order to decrease the interest rate on borrowings. However, a few measures to boost the productive sector and to manage the forex reserve have been taken.

The broad target set with the implication of this Monetary Policy are a raise in domestic credit by 16%, increase in deposit by 15.1%, GDP growth of 5.5%, contain inflation at 7.5%, stabilize foreign exchange rate (intermediate target) and generate forex reserves enough to finance at least eight months’ imports.

The interest rate in the productive sector like agriculture and hydro-power has given special emphasis in the Monetary Policy. It has decreased from seven per cent to six per cent. Further, to facilitate poultry farming and fish farming, NRB will refinance at the rate of six per cent, and BFIs issuing loans to such farming can lend at an interest rate up to nine per cent.

This was not a new move that it has been taking in order to support the productive sector and agricultural sector.

It has been providing lower refinancing rate in the productive sectors compared to other sectors of the country in previous years also. However, prioritizing these sectors will not have much impact on the economy of the country.

Similarly, lower interest rate in refinancing facility to export-oriented industries, small and medium enterprises, and agro-processing, tourism and hydropower sectors have been kept intact.

With the increased volume of inward remittance, the forex reserve with the central bank is positive. In order to relax the foreign exchange transactions, it has come up with various policies. Some of which include, Nepalis can acquire USD 2500 on each travel abroad that they make against their passports from BFIs.

Foreign Nepalis holding foreign exchange account can also spend up to USD 5000 in a year without seeking approval. The policy has also raised the one-time ceiling of US $25,000 on payment settlement for goods imported from third countries against draft and telegraphic transfer to $30,000.

The policy clearly indicates encouragement of foreign exchange spending and investment abroad. This relaxation in the policy will not help the market instead with the depreciating value of Nepali rupee; liquidity in the market will be added. Instead foreign investment in Nepal should have been induced which has not been addressed in the policy.

The declining sector that is in the phase of dying, stock market and real estate have not at all been addressed in the policy which was the major concern of the market at the current situation.

It can be clearly seen that NRB has no concern for the uplift of these sector.

Concluding the achievement of the targets that are set in this policy is a very tough task as the policies that are brought up are not sufficient to meet the target and cannot be termed beneficial to the economy. On the contrary, this will not help the interest rate to decrease in borrowing but further make no way for investment opportunity making the cost of borrowing higher. With the implication of additional CRR, additional deprived sector lending, insurance of low volume deposit, increased bank rate etc it is expected that the profitability of the BFIs will decrease by one-third of what it was in the FY 2068/69. In order to keep their profitability intact, BFIs are left with no option but to share the increased cost with the customers or try exploring alternate medium to keep its intact.

In the meantime, in order to stabilize the market, NRB should have brought up some measures to keep the interest rate of one year fixed deposit at least at a level of eight per cent. Despite interest rate corridor being not practically possible at present, in order to secure both the depositors and borrowers a level of net margin in interest cost and interest income could have been fixed. It could have relaxed the policy of opening of branches to sthe BFIs.

Finally summing up the Monetary Policy in merely one sentence, Nepal Rastra Bank has failed to meet the expectations of all stakeholders of the monetary policy.

Nepal is COO,

Citizens Bank Intl. Ltd.