The Nepal Rastra Bank (NRB) has brought out Monetary Policy (MP) for the current year (2007-08) with the declared goals of fighting low economic growth, minimising risks of higher inflation, promoting stability in external and financial sectors, and correcting the present state of low nominal and real rate of interest. It has also set targets — implicit inflation target at 5-5.5 pc (as against last year’s estimated 6.4 pc), a Balance-of-Payments surplus

of Rs.8 billion (as against Rs.7 billion last year), GDP growth rate of 4.5-5 pc (against the previous year’s 2.5 pc). In the light of the country’s economic realities, it has announced a stance of “cautious” monetary policy and catalogued a number of measures to improve the situation in areas of micro-finance, financial sector reform, and foreign exchange sector reform, for instance.

Given the present state and trend of the economy, a number of economists have termed the 5 pc growth projected for the current year in the national budget as a shade too optimistic. And NRB’s new policy seems to go ahead, based on this projection. Among the several factors that affect Nepal’s economic growth in a big way, the monsoon stands out, as the past year’s low growth is attributed mainly to bad weather. MP cannot do much for growth, except its limited facilitative role. But keeping inflation

within reasonable bounds is one of the principal thrusts of any monetary policy. Inflation depends on a number of factors, and several factors are not within NRB’s control, as the new policy itself admits, such as potential hike in oil prices, expansionary fiscal policy, the forthcoming elections to the constituent assembly, and higher food prices in case of a bad monsoon. Even the exchange rate of the Nepali rupee vis-à-vis the US dollar depends not on its market strength, but on the Indian currency’s fluctuating exchange rate with the dollar.

Nepal’s demand for Indian currency has gone up alarmingly high. In the year just past, NRB had to purchase IC worth Rs.64 billion rupees ($920 million) by spending precious dollars. On the contrary, the value of the Nepali currency appreciated against the US dollar by 14.3 pc in the previous year. But, strangely, Nepal has still not revised its exchange rate with the IC, something that does not appear sustainable. This unnatural state of affairs has a number of implications — for instance, the growth rate in remittances from abroad has rapidly declined. NRB can do a lot in financial sector reform and micro-finance. It needs to strengthen its supervisory and regulatory functions, at the same time encouraging the development of those sectors. In Nepal for the past few years, there has existed an unnaturally wide spread between the rate of interest banks charge on their loans and they pay to the depositors who give them the funds to operate and make a profit, which makes the real value of deposits go down over time. The new MP aims to reduce it. But a lot will also depend, as in the past, on how faithfully and rigorously the new provisions are carried out.