The targeted average economic growth rate in the Tenth Plan was between 4.3 to expected 6.2%. This requires GDP to grow by two digits during both the FY 2005/06 and 2006/07. The FY 2005/06 failed to achieve the estimated growth and it looks impossible to realise this level during FY 2006/07 either. The growth slowed down to 2.3% in 2005 according to ADB’s latest report. It is expected to remain at 2% in 2006. ADB anticipates similar slowdown in 2007 with the likelikehood of rising to 3.4%. Given the Maoists’ entry into interim government, continuation of ceasefire, increase in fixed investment, improvement in capital productivity and focused development, growth cannot be expected to exceed 4%, which will still be lower than the lower limit of the Tenth Plan projection. Surprisingly, the projection for developing Asia and South Asia is 7.2% and 7.3% during 2006 and 2007 respectively.

A decline in customs duties, corporate income taxes, shrinking non-tax revenues, the revenue during the nine months of the current fiscal year grew by only 0.1% as against 11.7% in the same period last year. On the contrary, the government’s fiscal deficit has widened alarmingly to Rs. 6 billion because of reduced revenue collection and increased expenditure. For example, the government’s cash-based expenditure during the same period increased by 13.3% compared to 8.9% last year. Trade deficit has registered a growth of 30.2% compared to an increase of 7.1% last year. The economic anomalies followed by declining revenue and accelerating public expenditure has caused the broad money — M2 expanded by 9.7% compared to 5.8% growth in the same period previous year.

The monetary policy in Nepal aims to contain inflation. The policy has to some extent been successful in preventing the depletion of foreign exchange reserve. It has failed to ensure stability of currency and hence to control inflation. The average growth rate of price index from mid-February 05 to mid-January 06 has recorded 7% and the price index of food and beverages group increased to 8.2% from an increase of 3.4% in the same period of the previous year. The villain had been the rise in the prices of grains and cereal products, vegetables and fruits, restaurant meals, pulses and beverages. Reorientation of the measures to contain inflation in the forthcoming monetary policy is a daunting task at a time when increased liquidity is expected for development expenditure. Rise in the price of petroleum products and 13% rise in VAT have further generated pressure in the general price level indicating the fact that such pressure in the economy comes from the supply side. Thus, the tighter monetary policy is also likely to make adverse effect on the output. Policy support can be made easier as long as external sector stability is maintained. However, the current trade deficit limits this possibility as well.

The surplus of Rs. 17.1 billion in balance of payments is not because of the implementable new monetary policy. It is basically because of the huge flow of remittances, which has reached Rs. 61 billion this year. This is 47.3% increase as compared to merely 2.6% growth last year. Commercial banks have not yet received definite directives from the central bank regarding the utilisation of such earnings.

The challenges commercial banks will face in the days ahead are falling spreads, rising provision for non-performing assets and falling interest rates. The new monetary policy should make special effort to reduce transaction costs by searching for new technology to enable the banks to provide products and services in large volumes at a competitive cost with better risk management services. It is not that the monetary policy of 2005/06 is silent on this issue, but results have not been positive. Since the majority of the banks have not upgraded their credit assessment and risk management skills and retraining staff through developing a cadre of specialists and introducing technology-driven management systems, the business of banks would be susceptible to risk. In the context of post-conflict regime, the million-dollar question is whether new monetary policy will have the provision of adequate liquidity to meet credit growth and support investment and export demand by closely watching the movements in the price level? Secondly, will there be any scope to reassess the interest rate policy if it is supportive to maintaining growth and macroeconomic and price stability? Our past experience in this regard is not that encouraging.

There is a need to develop a mechanism for debt restructuring for small and medium enterprises (SMEs). Serious effort is needed to address the gaps created by present policy to address sick industries. A partnership modality to define sick industries for implementing incentive schemes is needed. In addition, the bottlenecks in channelling bank credit to agriculture and SMEs should be removed.

Pyakuryal is president, Nepal Economic Association