Monetary politics

Late last week, under pressure from banks and big business, Nepal Rastra Bank (NRB) Governor Maha Prasad Adhikari unveiled a new monetary policy.

The policy expands credit of banks and credit sector, relaxing several regulatory provisions. But the Rastra Bank is careful not to allow banks to resume reckless lending.

“A cautiously accommodative monetary policy,” is how Adhikari described it.

The private sector has welcomed the policy, and the NEPSE soared steeply into two circuit breaks on Sunday, the first trading day after the policy was announced.

NRB has set a target for credit expansion to 12.5%, up from 11.5% last year. Excluding the last two fiscal years, credit has expanded at an annual rate of 20% in the last three decades, against an economic growth rate of about 4%.

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This is proof that Nepal’s economy has not benefited from private sector credit expansion.

NRB tried to ease interest on loans following the pandemic but revised it to slow credit expansion due to economic turbulence.

The IMF (International Monetary Fund) also blamed an anaemic economy on the post-pandemic monetary policy, and its effects linger.

NRB’s decision to signals that it wants to further reduce the lending rates of banks. However, Nepal’s banks and financial institutions at present are flush with cash, and do not need to borrow from the central bank.

The policy change therefore will not affect the market interest rate. The deposit collection rate, which is unchanged at 3%, will ensure that the interest rate on bank deposits will not go down.

The central bank has chosen to make the monetary policy more liberal through regulatory arrangements rather than monetary instruments to ease the pressure on the capital funds of financial institutions.

The existing loan loss provision of 1.2% on good loans has been reduced to 1.1%, which is estimated to increase the profits of the banking and financial institutions by up to Rs5 billion.

Similarly, the regulatory retail portfolio limit has been increased to Rs25 million lessening the strain on bank capital and making it easier for them to provide loans.

In addition, the new policy includes concessions to the construction sector with struggling businesses after builders complained about being blacklisted for not paying billions owed to the government.

Contractors will not be blacklisted for bounced cheques. The deadline for the loan interest payment has also been extended till mid-December.

But while NRB says it will review existing credit notice and blacklisting directives, a no-penalty policy for dishonouring checks would increase the risk for businesses.

All this is proof that the new NC-UML coalition is beholden to business. This week, the prime minister ordered NEA to resume electricity supply to industries which have not paid power bills worth millions.

NRB also stated that it would ease the current working capital loan guidance, as well as revise the working capital limit (short-term financing extended to businesses to cover its day-to-day expenses) for micro, domestic, small and medium enterprises.

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The bank also announced that Nepalis who had obtained overseas work permits would be able to obtain loans without collateral, increasing the possibility for such people to borrow at a cheaper rate.

The IMF has also suggested that Nepal amend the 2002 Rastra Bank Act to guarantee its independence. It is neither theoretically nor morally appropriate for every change in government to interfere with NRB policies.

Under pressure from big business, Prime Minister Oli, as soon as he assumed office, made direct comments about changing the monetary policy to make it more flexible.

Governor Adhikari had no choice but to give in to that pressure, but he has been equally careful not to repeat the mistakes of the past. He opened the door to credit expansion through his first monetary policy as governor enabling borrowers to obtain billions in refinance and working capital loans.

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Although he has increased the target for credit expansion, Adhikari has been more prudent than before.

The governor has emphasised that seeking economic growth through monetary policy will not work as long as jobs, investment, and productivity do not improve.

“Seeking short-term solutions through a flexible monetary policy poses a challenge to achieving long-term economic stability,” Adhikari said.

In recent years, Nepal’s government and the private sector have pushed for economic revival through monetary policy. But that has allowed real estate and share market speculators a free rein.

The positive impact of such directives have been short-lived, and point to structural problems with the economy.

Economic opportunities in the country are limited because little has been done to create jobs, increase production, and encourage investment — factors that would contribute directly to long-term economic stability.

More than 850,000 Nepali youth left the country for foreign employment and further education in the past year alone.

The biggest problem in Nepal’s financial system is credit abuse. And although NRB has accepted this it has not done much to curb it. The new monetary policy therefore may be ‘flexible’, but does not fix the economy’s old problems.

Ramesh Kumar