Monetary policy: The outrage of the private sector
By Shanker Man Singh
The Reserve Bank of India has increased interest rates. The monetary policy committee meeting increased the repo rate by 35 basis points i.e. 0.35 per cent to 6.35 per cent. Earlier, the interest rate was increased by 50 basis points, but this time the increase is lower than before. The repo rate is the interest rate that banks pay when taking loans from the central bank. Similarly, to maintain liquidity, the interest rate that banks take from the Central Bank has been increased by 35 basis points.
The Central Bank has increased the interest rate in an attempt to stop the rising prices. The governor of the Central Bank of India has said that the liquidity problem is also getting easier. He said that the central bank has reduced the previous target of 7 per cent economic growth to 6.8 per cent.
Experts believe that Nepal should also learn from this and the private sector should also consider this matter. The fact that the private sector, which had been protesting on the streets before the general elections against the high-interest rates and current capital loans of banks and financial institutions, has now come out to meet political leaders has become public knowledge.
Recently, the private sector protested for some time saying that it was a problem to do business after the high-interest rate and the latest directive on working capital loans. At such a time, even the first review of the monetary policy of the current fiscal year by the Nepal Rastra Bank did not seem to satisfy the private sector. The private sector, which has seen that there is no hearing from anywhere on the issues it has raised, has finally reached the power centers and is trying to put pressure on the central bank and banks and financial institutions.
The private sector has demanded that such facilities should be renewed for at least one year, saying that the current arrangement of Nepal Rastra Bank will increase the lack of liquidity in the market. Similarly, it has been suggested that the mandatory cash ratio should be reduced by 1 per cent point, and the funds in the government treasury should be transferred to the market for liquidity management. There are also suggestions such as the provision of a 100 per cent calculation of the amount going to the local level for a certain period, the immediate implementation of the plan to increase capital expenditure, the implementation of the automatic process mentioned in the budget to attract foreign investment, and the immediate implementation of country rating.
Similarly, the private sector and banks should be facilitated and encouraged to take loans from abroad, and the provision of loans to manufacturing industries at lower interest rates than other businesses should be made and implemented immediately.
Although it was less last year, this year the remittance income has improved. As a whole, the external sector of the economy has only improved compared to last year, the pressure is still there.
On the other hand, many problems are seen in the internal part of the economy. The lack of liquidity in the market has affected many areas. It is difficult to get a loan and even if you get, you have to pay high interest.
The cost of production has increased due to high-interest rates. The price is untouchable. It is difficult for the poor and needy to make ends meet. When the internal part of the economy has reached such a state of disrepair, it is highly commendable that the private sector is moving forward with the campaign to ‘save the economy’.
But while moving forward with this campaign, is its inner aim to save the economy or to solve business problems? It is necessary to see. At present, not only industry and business, but the entire economy is facing a crisis. Therefore, this problem can be overcome only with the collective efforts of all. Less than two days after the Council of Ministers agreed to open the ban on the import of goods including vehicles, it has become public knowledge that the private sector will take to the streets.
Remember, in the run-up to the general election, after industrialists and businessmen took to the streets, the businessmen suspended the protest after pressure from the political parties and the top leaders of the three.
After the general election, there is no preparation for the formation of new governments in the union and the state. However, the businessmen have started protesting with their demands. When the private sector protested, the central bank did not make the policy flexible during the first quarterly review of the monetary policy, and now preparations are being made for another protest. The businessmen who faced the 11-month-long vehicle import ban have announced their protest program.
Although there has been some improvement in the economic indicators in recent days, the pressure is still there. According to Nepal Rastra Bank, foreign exchange reserves are still under pressure. The foreign exchange reserve which was 12 trillion 15 billion 80 crore rupees at the end of last June reached 12 trillion 46 billion 22 crore rupees at the end of October.
In addition, such reserves in US dollars were 9.54 billion at the end of last June and remained at 9.48 billion at the end of October by 0.6 per cent. Currently available foreign exchange reserves will meet 8.3 months of goods and services imports. Nepal Rastra Bank had aimed to maintain foreign exchange reserves sufficient to cover at least 7 months of imports through the monetary policy of the current financial year. Similarly, the bank’s interest rate has also increased at a high rate during this period. If we look at the data of Nepal Rastra Bank, the interbank rate, average base interest rate, and weighted average interest rate have all increased at a high rate. Inflation has also reached higher than the central bank’s target. Bankers Association, the umbrella organization of commercial banks, has said that looking at the economic indicators, there is no despair at present. Looking at the economic index, there is no place to be disappointed now, but all the stakeholders should work together on the issue of correction. According to experts, the private sector should not complain as everyone should understand the situation and move forward. Businessmen are not enemies, they are charioteers. Therefore, there is no choice but to understand the situation and move forward. Demand for loans has increased, and financial resources are not sufficient. Export of goods is not significant, foreign cooperation is not good. There is no big improvement in tourism either. No improvement in foreign exchange reserves. Nepal Rastra Bank has stated that the first quarterly review of the monetary policy has been formulated keeping in mind the suggestions of the business world and banking and financial sector.
Keeping in view the continued high inflation and high inflation expectations published earlier by the central bank and the reflection of rising interest rates of RBI of India and the rising interest on fixed deposits in India, continuation of high bank rate in Nepal is expected and therefore, whether it is in the right direction can be a matter of intellectual discussion. This may continue for some time, at least until the third trimester. However, a gradual decline in inflation trends in India and a gradual weakening of the US dollar may contribute to some reduction in interest rates in the fourth quarter. Reducing the spread rate is another positive decision of Nepal Rastra Bank. It will, at the same time, affect the profitability slightly. However, the 4% spread is not new to commercial banks and has been an accepted standard for a long time. Given the increasing competitiveness in the banking sector, this will put pressure on commercial banks to improve efficiency and reduce overhead costs. There are many problems in the banking system which need to be addressed by the central bank as soon as possible.
The private sector has warned that the price increase is the highest in 6 years, the private sector is shrinking and the much-awaited first quarter review of the monetary policy of the current financial year is not addressing the existing problems.
The Federation of Nepalese Chamber of Commerce and Industries (FNCCI) says, “The federation insists on reducing interest rates by increasing liquidity flow to protect the economy from multifaceted crisis.” For that, they have demanded that the company should be refinanced for one year, the mandatory cash ratio should be reduced by one per cent, the amount should be calculated as a 100% deposit for a certain period, and liquidity should be increased by transferring the funds from the government treasury. In the past, the private sector has protested saying that the interest rate hike in the past has affected the industry to the extent that it cannot sustain its business. However, former bankers say that the banking sector is not the only one to blame for this problem.
It is not that liquidity problems do not exist in other countries, but when there are problems in other countries, it does not mean that we should have problems too. Precautions should certainly have been taken by us.
Some hold the opinion that both capital and investment should be looked at rather than just looking at the bank’s profit. Even if it earns 10 per cent profit, it is a mistake to say that the bank is profitable.
For any company or financial institution that has a lot of capital, the profit it makes is very small in terms of percentage.
The government’s economic growth target for the current year 2079/80 is 8 per cent. The government had said that the price increase rate will not go above 7 per cent this year.
According to the IMF, the economic growth rate of the world in 2022 will be 3.2 per cent. In that year, India, China, and Japan will make economic progress at the rates of 6.8 per cent, 3.2 per cent, and 1.7 per cent, respectively.
Similarly, in 2023, the ratio of the global economic growth rate will be 2.7 per cent. In 2023, while the economic growth rate in Asia will be 4.3 per cent, India will progress by 6.1 per cent, China by 4.4 per cent and Japan by 1.5 per cent.
Given the implementation status of the measures taken in the monetary policy recently and the existing national and international economic situation and scenario, the direction taken in the annual monetary policy has been continued in this review.
Based on the improvement in inflation and foreign exchange reserves, it seems that during the half-yearly review of the monetary policy, monetary measures will be changed as per the need. The currently implemented working capital loan guidance will be addressed based on the suggestions received, and given the pressure on liquidity, if the banks and financial institutions do not provide loans in the designated areas, it has been arranged to calculate damages from June 2080 based on mid-June 2080.
Some Suggestions to Make Policy and Economic Management Less Controversial
The current controversy over monetary policy and interest rate hikes by the Council of Ministers clearly shows the lack of economic management and policy analysis capabilities in the Prime Minister’s Office. All over India, including within the Prime Minister’s Office, there is a Council of Economic Advisers headed by the Chief Economic Adviser who closely monitors the country’s economic management and performance and provides policy feedback to the Prime Minister and the Cabinet for necessary action. It is strongly recommended that the new Prime Minister should create a Council of Economic Advisers in the Prime Minister’s Office. Secondly, considering the growing importance of monetary policy in economic management, a 5-7 member Monetary Policy Committee should be formed under the chairmanship of the Governor to formulate and evaluate monetary policy in the country. This will help make the policy less controversial.
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