This will not only curb NRB’s autonomy but reduce the flow of funds to the government
Kathmandu, June 12
Not even a month has passed since lawmakers poured cold water on Nepal Rastra Bank’s proposal to avert conflicts of interest by limiting the office term of chairpersons of banks and financial institutions.
Now, the government has made deliberate attempt to curb the autonomy of the central monetary authority.
It is widely known that NRB, the central bank, is one of the most professional institutions in the country. This is largely because of the autonomy guaranteed to the institution by NRB Act.
As the process is under way to amend this act, the government has inserted a provision in the final draft of the new legal framework, which makes it mandatory for NRB to seek the permission of the finance ministry every time it wants to make extra expenses.
Section 41 (c) of the proposed NRB Act, which has been forwarded to the Parliament, says NRB must seek government’s approval before allocating portion of net profit for funds other than revaluation reserve fund, monetary liability fund, general reserve fund, financial stability fund and net consolidated savings fund.
“This is a regressive move and an attempt to weaken NRB, as we do not have to take such clearances at the moment,” senior NRB officials told The Himalayan Times on condition of anonymity. “If lawmakers endorse the act as it is, it will have detrimental impact on NRB’s performance.”
Officials of the finance ministry very well know that NRB needs to create different funds while implementing monetary policy, and ensuring price and financial stability. For instance, NRB may immediately need to create, say, a bailout fund if something goes wrong in the economy.
In that situation, it would not be practical for NRB to wait for the approval of the finance ministry, which takes months to take a decision. Although this is a hypothetical case, the proposed legal provision is also expected to affect NRB’s day-to-day work, particularly open market operations.
NRB has to conduct these operations at regular intervals to mop up excess liquidity from the banking sector or to inject liquidity into the banking sector.
Excess liquidity, or too much of cash, tends to depress interest rates and build inflationary pressure, while liquidity crunch, or shortage of cash, prevents banking institutions from extending adequate loans to stimulate economic growth.
To avert such situations, NRB either acquires money from banking institutions by paying certain interest rate or extends money to banking institutions by charging certain interest.
Either way, NRB needs cash at its disposal to pay interest to banking institutions or inject cash into the banking sector. And NRB cannot say for sure how much money it needs to conduct these operations at the start of the fiscal year because they are carried out on the basis of needs.
Despite having no certainty on money that is required to fund these operations, NRB has created market stabilisation fund to finance such expenses. But it does not park all the money required to conduct open market operations in this fund.
Instead, it meets these expenses through the income it generates. One of the benefits of funding expenses related to open market operations through income is that the money does not get locked in for a long period of time.
It means if NRB were to park money in market stabilisation fund, then it would not get the leeway to use it for purposes other than open market operations.
So, if NRB were to follow the legal provision proposed through the revised Act—which suggests central bank deposit money required for open market operations in monetary liability fund—it will have no option but to allocate greater budget than needed to avoid lengthy process of seeking the finance ministry’s approval.
This, on the one hand, reduces dividend flow to the government, and, on the other, causes excessive amount to sit idle in the fund.
“So, the latest government move will not only curb NRB’s autonomy but reduce the flow of funds to the government,” NRB officials said.
A version of this article appears in print on June 13, 2016 of The Himalayan Times.