Nepal | May 22, 2019

EDITORIAL: Liquidity crunch

The Himalayan Times

In order to boost the economy, the government should spend the budget as allocated instead of dilly-dallying in the development works as is happening now

Banks in the country are at present facing a liquidity crunch. This is attributed to less money coming in in the form of remittances in recent times and, more importantly, the low spending of the government.

And the banks have made sluggish deposit collections this fiscal. For instance, the government’s capital expenditure in the first four months of this fiscal year stands at only Rs. 17.66 billion when the budget has allocated a total of Rs. 311.95 billion.

The government thus is responsible for this anomaly and it needs to expedite the government works sooner than later.

Budgets are hard in coming and even when they do they are not spent leading the government to hold Rs 200 billion in its account due to the low spending made by it, as a consequence of which there is a liquidity crunch.

A consequence of this is that the industries and businesses are facing difficulties in acquiring loans from the banks. These days the banks only float a meager amount of credit that too to those clients with whom they have close relations.

Therefore, the liquidity crunch has had an adverse impact on the economy affecting its growth. Most industrialists and businesses have to return without the credit from the banks.

Even the businesses that are existing are not thinking about further expansion as they are facing hardships in running their enterprises. This is because of the fluctuations of the interest rates discouraging the investors.

If things are allowed to continue as they are now, the contribution of the manufacturing sector will shrink. The ever increasing cost of production combined with the high interest rate of the banks means that it is ultimately the consumers who will be suffering.

With the rise in price the export items will also be less competitive in the foreign markets, which will further hit the country’s already fledgling exports.

Credit growth of the banks has slowed down in the beginning of the second quarter of this fiscal due to credit being more than the deposit growth in the first quarter of this fiscal.

The banks are now struggling to maintain the credit to deposit (CD) ratio set by the Nepal Rastra Bank. This is a matter of immense concern as almost all the banks are close to the upper limit of 80 per cent of the CD ratio.

The operation cost of banks is on the rise as they have to collect deposits by providing high interest in order to maintain this ratio.

Usually the demand for credit declines when the interest rates on it go up. This means that the banks would not be able to provide more loans. Except for the Rastriya Banijya Bank which is owned by the government, all banks are near the upper limit of the CD ratio set by the central bank.

Taking into consideration that the country is faring poorly economically, the government needs to step in for only it can bring about the desired changes as the private sector, particularly in the case of Nepal, is not in a position to do so.

The governments in Nepal have always failed to spend as much as provisioned in the budgets, particularly in capital expenditure.

In order to boost the economy, the government should spend the budget as allocated instead of dilly-dallying in the development works as is happening now.


Soil conservation

Nepal’s hills and mountainous regions are very fragile and prone to landslides that cause huge damage to settlements, infrastructure and ecology.

Whatever efforts are made in the field of conservation are inadequate and not well-planned.

A two-day seminar on “Mainstream Basin Approach for Integrated Water Management in Federal Nepal” was recently organized by the Department of Soil Conservation and Watershed Management to conserve soil and watershed areas in an integrated way.

Experts believe that haphazard construction works carried out at local and district levels without taking into account the environmental impact have led to heavy landslides in hills and mountain regions rendering many families homeless and eroding the arable lands which are the major sources of sustainability.

The department has envisaged deploying soil conservation inspectors in all Pradeshes who will provide their expertise on possible ecological disturbances before carrying out any development works to minimize the damage that they may cause in the future.

It is a good initiative that environmental impact assessment is carried out before any public infrastructure work is initiated.


A version of this article appears in print on November 29, 2016 of The Himalayan Times.


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