Monetary policy: Insufficient tool to tackle existing and emerging challenges

Nepal Rastra Bank

MAHENDRA SUBEDI, KATHMANDU, July 13: The Nepal Rastra Bank on Sunday unveiled its monetary policy for the fiscal year 2074/075 BS prioritizing agriculture, tourism, energy, small and cottage industries.

The macroeconomic policy released by the central bank involves liquidity management or money supply supporting fiscal policy of the government planning to achieve macroeconomic targets like inflation, economic growth, stability, balance of payment, liquidity and others.

Mandatory provision for banks to float 10 per cent of their loans in agriculture and five percent each to hydropower, and tourism sectors is a welcome step. The central bank has categorically mentioned to invest a quarter of the banks’ investment in the productive sector which is five per cent more than previous fiscal year.

However, former governor Dr Yubaraj Khatiwada said that the borrowers could invest in the real estate sector despite the amount is disbursed in the productive sector. “Monitoring mechanism of the central bank needs to be effective,” Dr Khatiwada suggested.

This year’s monetary policy’s major objective include attaining 7.2 per cent economic growth rate, tame inflation to 7 per cent, maintain broad money growth rate at 18 per cent, increase domestic credit by 27.8 per cent compared to the last fiscal year and to increase credit to the private sector to 20 per cent.

However, the monetary policy unveiled by Governor Dr Chiranjibi Nepal has not received a warm welcome from the industrialists, bankers and the business fraternity. Rather, the industrialists and entrepreneurs are ‘disheartened’ though the central bank claims that the monetary policy ensures complete instruments to cope with the emerging challenges and take the economy towards the right direction.

The monetary policy has invited criticism for not prioritizing economic growth and lacking sufficient instruments for capital flow to boost up economic growth. So, the monetary policy has been criticized for being short of effective monetary instruments to address the high interest rate and volatility of the market. Economic dimensions and the market size have increased in compared to last year, but the NRB has repeated the same ineffective and insufficient measures even in the changed context.

High interest rate despite sufficient liquidity is a problem created by the central bank itself, former governor Dr Khatiwada said. “The NRB could not forecast the economic scenario and there were lapses in monitoring of the BFIs. The central bank should review its policy-level shortcomings rather than overriding them,” the former Governor opined.

Likewise, the commercial banks should mandatorily flow 5 percent of their total investment to the disadvantaged groups, as the provision was made with the objective to enhance the economic condition of disadvantaged groups and communities. But, the investment is not going to the deprived sector directly rather it would be invested by the microfinance institutions.

According to the monetary policy, the banks and financial institutions would be provided with additional benefits if they reached the remote area. If the banks of ‘A’, ‘B’ and ‘C’ categories open their branches in the remote districts, they would be lent Rs 10 million without interest. But, the monetary policy is not clear on sending the banks and financial institutions (BFIs) in the local levels. The roadmap to send the commercial banks to the local levels is hazy.

Furthermore, the monetary policy is silent whether the commercial banks would be required to go to the local levels or there will be some incentives for them to do so.

Monetary policy in itself is not a sufficient measure rather a tool to support the government’s fiscal policy. Instead of the ritualistic presentation, the NRB through its announcement should dare mend the errors occurred/or committed during the last fiscal year.

In the words of Dr Khatiwada, “The NRB should carry out monitoring in the areas where loans are invested. The central bank should show its willingness to take action against those violating the central bank’s directive, especially on credit to core-capital-cum-deposit (CCD) ratio. And, most importantly the NRB should find the way to pull itself out of the self-created trap.” RSS