State-sponsored economic crisis
On 8 April, Finance Minister Janardan Sharma suspended Nepal Rastra Bank (NRB) Governor Maha Prasad Adhikari at a time when the country struggles to cope with a serious economic crisis during an election year.
Minister Sharma has, without evidence, accused the governor of damaging the country's banking and financial system, being “dishonest” and “inefficient” at his post in the central bank. Adhikari was also accused of leaking confidential information to the media about a $35 million transfer to a Nepali that the US anti-money laundering regulators had flagged.
The allegations against Adhikari are so vague that the minister does not even have to prove them. In fact, the chair of the three-member judicial committee set up to investigate the suspended governor is a kin of Finance Minister Sharma himself, and casts doubt on an impartial inquiry.
To be sure, Governor Adhikari was appointed by the preceding UML government, and had been at odds with Minister Sharma ever since Prime Minister Sher Bahadur Deuba’s coalition government took over last year.
The Maoist minister’s list of grievances against Adhikari are obviously a smokescreen for political retaliation, and a way to divert attention from his incompetent handling of the economy.
Minister Sharma was put on the hot seat just as Nepal’s economy began sliding, first due to the pandemic and then by the Ukraine War.
The minister is understood to have met Deuba to try to oust the governor, and when that did not work, brought in his boss Pushpa Kamal Dahal to convince the prime minister that Adhikari was working for the UML.
Deuba, who is already accused to be in the sway of his Maoist coalition partners for giving away the Bharatpur mayorship to Dahal’s daughter Renu, agreed to the governor’s ouster.
The pandemic has affected remittance inflow, imports surged after the lockdown was lifted, which has led to a serious depletion of foreign exchange reserves. This has led to inflation, a liquidity crunch in the banking sector due to unproductive loans, and surging petroleum imports.
The governor can be blamed for failing to curb lending to real estate and imports since last year, but it was the government which prioritised increased spending, ensuring revenue by taxing imports.
The Ministry of Finance is responsible for the economy, not the NRB, plain and simple. Instead, Minister Sharma has used the pandemic and the Ukraine War as an excuse, and made the the central bank governor a scapegoat to absolve himself of blame.
The plot thickened a few months ago when Minister Sharma sought to implicate Governor Adhikari in bribery allegations case involving NRB board member Subodh Kumar Karna. He accused Adhikari of failing to take action against Karna, who was accused of demanding a $30,000 bribe from a well-known businessman. Actually, the Nepal Rastra Bank Act 2001 does not give the governor any authority to take action against a board member, it is up to the council of ministers.
In a democracy, central banks are generally free from direct government intervention. Indeed Nepal’s National Bank Act envisages the institution as an ‘autonomous organisation with uninterrupted’ succession. This is not to say that Nepal Rastra Bank has been completely free from political interference in the past.
The previous K P Oli government, while selecting both NRB deputy governors had sidelined competent and capable candidates in favour of cronies from his home district. Even so, the NRB is known to be relatively unaffected by political wheeling-dealing, unlike other agencies of government.
This row could not have come at a worse time. The economy may not be in a crisis as Sri Lanka, but it is headed for a free-fall. Governor Adhikari’s suspension and Subodh Kumar Karna’s absence have reduced the seven-member NRB board of directors to five. The terms of two other members is set to expire on 16 April.
The coalition government has created further instability by weaponising its authority, and running out the governor to create a vacuum that will aggravate the economic crisis, and in this Prime Minister Deuba is as much to blame as Finance Minister Janardan Sharma.
The coalition government weaponising its authority to suspend the central bank governor only threatens to aggravate an economic crisis of its own making.