EDITORIAL: Money management

The new monetary policy should strongly aim for price stability, interest rate stability and external sector stability

As the central bank gears up for bringing the monetary policy for the next fiscal 2018-19, it is staring at many a challenge. While the Nepal Rastra Bank (NRB) through the monetary policy would look to accelerate the current economic momentum, it will also have to focus on narrowing down trade deficit, increasing the flow of loan to small and medium enterprises, controlling rising interests and increasing people’s access to financial services. The monetary policy is a set of measures employed by the central bank to influence economic activity, particularly by altering the supplies of money and credit and by changing interest rates. The monetary policy in general is expected to be supportive of the government’s fiscal policy and is an annual process. That said, the monetary policy for the next fiscal, for which the central bank is collecting suggestions and feedbacks from the concerned stakeholders, has generated more interest than before, as this will be the first for the most powerful and stable government in more than two and a half  decades. It will be interesting to see how the monetarists strike a fine balance to achieve the 8 per cent economic growth and anchor inflation.

Political stability, a strong government and an uptick in the economy – economy grew by 5.9 per cent in the current fiscal and by over two-decade high of 7.4 per cent in the last fiscal – have brought optimism about sustainable growth. But there has always been a conflict between the economic growth and inflation. If economic growth is caused by aggregate demand increasing faster than productive capacity, or long-run aggregate supply, then it is likely to cause inflation. To sustain the growth and control inflation, economic growth should be spurred by increased productivity. And there have been calls from some stakeholders for bringing an expansionary monetary policy, for they say it would ensure supply of money in the market and control interest rates – both of which are crucial to achieving economic growth target.  The country will require investment of over Rs 500 billion in the next fiscal year to meet the economic growth of 8 per cent. The central bank, however, has to tread carefully, as an expansionary monetary policy could also build  inflation pressure.

In light of runaway interest rates on lending, the central bank’s intervention has become imperative, as high lending rates are considered a major obstacle for the growth of the private sector. The monetary policy of the current fiscal had introduced a provision that the interest rate on savings deposit must be at the level of call deposit. Due to this provision some banks have raised the interest rate on savings deposits to attract call deposits. And almost all banks have done the same to retain the depositors and also to woo other depositors. As a result, lending rates have gone up, making borrowers’ debt servicing costs go through the roof. Hence, the central bank’s monetary policy while should support the fiscal policy, it should also aim to achieve three usual objectives of ensuring price stability (inflation), interest rate stability and external sector (exports, imports and capital flows, including the foreign currency) stability so as to achieve or maintain the desired economic growth.

Welfare plan

The federal government has developed a model bill on Social Security Programme for Orphan and Vulnerable Children (Operation and Procedure) for local levels so that they can launch welfare programme to the target group. The model bill has also been circulated to all local levels. The concerned local levels are required to pass a bill to this effect to launch the welfare scheme to these children below 18 years of age. Objective of the model bill is to regulate funds set up by any person or organization in the given local levels.

The model bill has set guidelines under which cash shall be provided to those children from interest of the revolving fund set up by any person or organisation. Local levels’ permission is a must before running the programme. The revolving fund to be overseen by a panel chaired by an elected woman official cannot be used for other purposes than providing welfare to the target groups. Once the model bill is passed into law it will not only help those children get monthly support from the welfare fund but also help the local levels keep their records and make further plans for their well-being.