Central role of the Central Bank
“We cannot allow the rich to get richer in Nepal. One corporate borrower received refinancing of Rs1.27 billion straight from state coffers, while Nepalis slid into poverty. Small businesses also suffered, but their loans are not being rescheduled.”
That was none other than Nepal Rastra Bank (NRB) Governor Maha Prasad Adhikari in an unedited version of a talk show on Kantipur TV in 2020.
Adhikari was sacked by Finance Minister Janardan Sharma earlier this year, and promptly reinstated by the Supreme Court. And it was scandal-ridden Sharma who had to himself resign this month.
After the pandemic lockdowns hit in 2020, the NRB set in motion refinancing procedures to keep the economy afloat, disbursing Rs158 billion by mid-December last year. This was like printing new money, but there was no evidence that the cash bailouts helped prop up the economy.
In his interview, Governor Adhikari was admitting that there are business entities in Nepal that are ‘too big to fail’, and that the central bank’s refinancing policy was being misused by corporates with political patronage.
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The result is that instead of keeping businesses afloat during the pandemic, selective refinancing has driven up inflation, increased imports, and upped the value of private assets.
Nepal’s budgets have always been populist, no matter the government of the day, but the monetary policy of central banks across the world are necessarily conservative because of the need to keep inflation in check.
The role of a central bank like the NRB is to control inflation, maintain the external balance of payments, and the stability of the financial sector. But the NRB’s credit expansion policy has done the opposite by rescuing those who were never impacted by the pandemic at all.
The NRB in fact massively expanded cheap loans in the past two years to jump-start the economy. This only served to increase the import and inflation. Indeed, loans of banks and financial institutions, which stood at Rs3.21 trillion in 2020, have now surpassed Rs4.7 trillion. There has been no commensurate growth in employment and manufacturing capacity.
It could be that there was too much interference on NRB policy by politicians on behalf of their cronies, but at the end of the day if the central bank had taken a more restrained approach, Nepal’s trade and balance of payments deficits would not have been as high as it is now, and foreign exchange reserves would not have depleted as fast.
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Moreover, a sharp rise in real estate and share prices aided by a 5% interest rate in refinancing, increased investment, availability of repo loans and permanent liquidity facilities has unfairly benefited only the top tier of Nepali businessmen, industrialists, as well as media tycoons.
The credit inflow actually increased imports, as the country rebounded from the pandemic. Moreover, a study by economist Biswas Gauchan showed that a 1% increase in private sector credit increased inflation by 0.31% and imports by 0.7%.
Nepal has registered an 8% annual increase in inflation over the last 40 years. The income of Nepalis may have increased, but it has been absorbed by soaring prices. This means it is the general public that is bearing the brunt even as a chosen few big businesses reap huge benefits from politically-motivated credit outlay in the guise of a pandemic rescue package.
NRB officials blame the failure of their monetary policies on the fixed INR-NPR exchange rate, and say this puts Nepal at a disadvantage every time the Indian rupee weakens against the US dollar.
But this alone does not absolve the central bank, which has (for whatever reason) been reluctant to adopt stricter monetary measures to control import and inflation.
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Even as Nepal’s economic crisis deepens, businesses paradoxically continue to pressure banks for cheap loans so they can keep their profit margins.
The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) on Sunday demanded the continuation of concessional loans extended during the pandemic. However, it is not the central bank’s job to save businessmen from a debt trap of their own making.
It is much more important to save the country’s economy from shrinking forex reserves, widening trade deficit, and inflation.
Governor Adhikari must know why the misuse of bank credit by those with political patronage has hurt the economy. Awareness of a problem is the first step in solving it.
Read also: “Economy in trouble but no need to panic yet”, Nepali Times