A new monetary policy for the year 2005-06 is imminent. It is reported that the new policy aims to control inflation, boost investment, maintain macroeconomic stability and be more liberal. Accordingly, the central bank is likely to be a little tougher on commercial banks vis-a-vis the interests of depositors by forcing them to hike the rates of interest on deposits. The new policy may allow travellers going abroad to carry more foreign currency and also allow other market players to deal in treasury bills, and so on. The problem with Nepal’s monetary policy has often been its poor implementation. If the past is any guide, mere statements of policy, strictures and instructions are not enough; the central bank needs determination. Over the years, despite NRB’s supervision, the two commercial banks with key government stakes—RBB and NBL—continued lending to wrong projects and unscrupulous people, as a result of which these banks are now crippled by billions of rupees in bad, and perhaps unrecoverable, loans. For several years, despite NRB, commercial banks have been paying nominal interest on deposits—for example, around two per cent on savings accounts—while charging a much higher lending rates.

But one stark reality is that NRB cannot formulate a monetary policy independently, as it has to fulfil the various terms and conditions of a three-year loan agreement it signed with the International Monetary Fund (IMF) some two years ago under the Poverty Reduction Growth Facility (PRGF). This agreement determined last year’s and this year’s monetary policy, and, therefore, NRB cannot make any changes in monetary and financial policies without IMF’s approval. For example, it has to maintain a fixed exchange rate with the Indian rupee, having to fix the Nepali rupee’s exchange rates with convertible currencies in view of the Indian currency’s exchange rates with those currencies. That means NRB’s power to influence economic growth through monetary measures and control the inflation rate will be very limited. This fact will also bear on other areas, such as dealing with excess liquidity in the banking sector and low demand for credit. So it would be wrong to expect the new monetary policy to make any significant departure from last year’s.