The fiscal and monetary policy was recently made public through the government budget and the Nepal Rastra Bank (NRB) policy announcement within a gap of six days. A close coordination between the two is essential to achieve the overall objectives of both policies. However, there are some inconsistencies between the two.

As such, the budget has projected the growth rate of 4.5 % for 2062-63 whereas the NRB has presented the projection of 4-4.5 % for the same year. All activities are focused on the basis of economic growth and a difference of 0.5 % of growth is a matter of serious concern, if both policies are focused on the same growth path.

Similarly, the inflation in both documents is represented by the consumer price index (CPI), which is solely collected and compiled by the NRB. Such inflation rates in the government budget are 4.3 % and 4.9 % respectively for 2061-62 and 2062-63 while the inflation rates as mentio-ned in the monetary policy for the respective years are 4.5 % and 5 % respectively. Such inconsistency reveals the lack of reporting and coordination between the central bank and the government.

The sluggish world economic growth is given as one of the major factors responsible for lower economic growth in Nepal for 2061-62, according to the monetary policy document. But according to the World Economic Outlook of the IMF, the global economy is estimated to have grown by 5.1 % in 2004 as a record high during the past one decade, and also, if one sees the average growth rate for 2004 and 2005, it is recorded at 4.7 %. The GDP growth projection for 2062-63, including the sectoral projection of agriculture and non-agriculture of 4 % and 4.8 % respectively, is not consistent with the last four years’ trend, nor are there reasons for these things happening.

The NRB has estimated credit to the government sector on the assumption of insignificant increase in the capital expenditure. It is virtually a dire contrast since the government’s capital expenditure for 2062-63 is estimated to grow by about 48 % compared to 8.9 % in the previous year. Moreover, looking at the declining trend of foreign assistance, e.g, more than Rs. 15 billion, excluding the military and forestry aid during the last six months on the one hand and an alarming estimated growth of capital expenditure on the other, one can easily be surprised as to which mechanism will make sure that the private sector credit will not be crowded out. As such, the increasing trend of deficit financing automatically helps intensify the mobilisation of internal sources through the financial sector in general and banking sector in particular.

The fixed exchange rate or the pegging with the Indian currency has remained a nominal anchor of the Nepali monetary policy. But it is an open secret that illegal circulation of the Indian currency may be a very sensitive issue. It is a fact that the circulation of the Indian currency in Nepal significantly underestimates the demand for money in Nepal. Thus, the money supply based on the demand for money neither reflects the accurate picture nor is a sound basis for the estimation of the impact on inflation.

Since the narrow money in comparison to broad money has a stronger relationship with income and price, it is preferable for the NRB to use narrow money as policy targets. However, the saving deposit based on its withdrawal limit has to be segregated both in the narrow and broad money sections. For the last many years, the NRB has been setting the price stability and favourable balance of payments as the main objectives of monetary policy. Since almost all foreign loans are soft and concessional, these objectives are not self-defeating. However, a central banks is known as a price controller. To be on the safe side and to build up greater confidence, the NRB must be more transparent in expressing the limited impact of money supply on the price level. Thus, the NRB has to decide the price related to monetary phenomenon. For this, the core inflation out of the overhead inflation should be identified so that the price stability target can be met accurately. The time is most opportune for exposing the level of monetary phenomenon-related prices to be stabilised, at least, to build people’s confidence in the NRB.

As in the past few years, the bank/refinance rates are just a policy signal rather than an effective instrument. and the lower interest rate on deposits and higher spread rate may lead to capital outflow too which may make the growth path worse. Although the NRB has signalled some subjective explanations in lowering the CRR in the mid-term policy review it could not express its clear stand in making use of quantitative benchmark about the policy instruments. As such, the monetary policy shows a confused stance of tightening and flexible attitudes with the lack of consistency and close coordination with the fiscal policy.

Dr Paudel is former executive director, NRB