By Shanker Man Singh
Before the new financial year 2081/82 begins, Nepal Rastra Bank (NRB) will announce the monetary policy. For this, the NRB has started collecting suggestions from stakeholders.
Issues such as inflation control, stability of interest rates, and mobilization of financial resources are addressed through monetary policy.
According to the “Monetary Policy Formulation Procedure”, there is a provision to publicize the annual policy within 15 days of the end of the financial year and the quarterly and half-yearly reviews within 45 days of the end of the quarter.
The monetary policy of the new year is expected to be more flexible than the current one. The budget for the upcoming year 2081/82 has also said that monetary policy will be used to improve the economy.
After saying that the monetary policy in the budget itself will bring policies to improve the economy, there is pressure on the NRB to bring a flexible monetary policy. Now there is a need to support the economy by bringing flexible monetary policy.
When foreign investment banks come, a wave will be created to come from the private sector to the banking and financial sector as well. Through the upcoming budget, the government aims to achieve economic growth of 6 percent and limit inflation to 5.5 percent.
At present, it seems that there is a shortage of borrowers rather than a lack of capital for lending in the banking sector.
No doubt that the economy should be made sustainable as the growth of bad loans will decrease if the economy is sustainable.
The tightening of monetary policy in the past has had a negative impact so far. According to the recently made public data, due to economic relaxation, the investable capital of banks and financial institutions and foreign currency reserves of the country are in a favorable position. However, as problems such as high inflation and pressure on the balance of payments may recur when the economy is reformed, it cannot be forgotten that the central bank has the challenge of balancing economic stability with supporting the financial policy. While fiscal policy usually determines the size of the budget deficit, monetary policy can facilitate the bridging of that deficit. It is clear that when the budget deficit is high, NRB’s concern and interest are in the most successful and effective implementation of the financial policy, so there is a risk that the private sector will be given less priority.
Monetary policy is the policy made by the central bank i.e. NRB and is related to the monetary affairs of the country.
Monetary policy includes measures taken to regulate the supply, availability and cost of credit in the economy. Monetary policy oversees the distribution of credit among users as well as loan and interest rates. It is important in promoting economic growth in an underdeveloped country like Nepal. The various instruments of monetary policy include variations in bank rates, other interest rates, selective credit controls, money supply, variations in reserve requirements and open market operations.
If the main objective of monetary policy is economic growth as well as stability of prices and exchange rates, other aspects can help it.
Since monetary policy controls the interest rate and inflation within the country, it can affect people’s savings and investments. Higher interest rates also contract greater opportunities for investment and savings, thus helping to maintain a healthy cash flow within the economy.
Monetary policy should help export-oriented units to substitute imports and increase exports by providing loans to industries at low interest rates. This should help to improve the balance of payments situation.
The two main phases of the business cycle are “boom” and “depression”. Monetary policy is the biggest tool that can be used to control the ups and downs of the business cycle by managing credit and controlling the money supply.
Inflation in the market can be controlled by reducing the supply of money. On the other hand, when the money supply increases, the demand in the economy also increases.
Since monetary policy can control demand in the economy, it can be used by monetary authorities to balance the supply and demand for goods and services.
Since monetary policy can reduce interest rates, small and medium enterprises (SMEs) can easily get loans for business expansion.
Under the monetary policy, it is expected that additional funds will be allocated at low interest rates for the development of priority areas such as small industries, agriculture, and underdeveloped sections of society.
The entire banking industry is managed by NRB. Although NRB aims to provide banking facilities nationwide, it uses monetary policy to direct other banks to establish rural branches where necessary for agricultural development.
The government has set a target of limiting inflation to 5.5 percent in the next financial year. Inflation is at 4.61 percent in the current situation with no increase in loan demand. As soon as the interest rate increases, it has an impact on inflation, so the monetary policy is challenged to maintain inflation within desired limits.
If we want to increase the revenue, we have to increase the import. Looking at the current imports, we are told that we have foreign exchange reserves that can cover 12.5 or 10 months of imports.
However, to increase the revenue, the import must also increase. Therefore, it is challenging to maintain the external sector in its current favorable position.
According to NRB rules, the primary capital fund should be 8.5 percent based on the total risk assets of banks. According to the data till the end of last March, many banks have come close to this limit.
Recently, the share price of banks in the market has been at a very low level, so the bankers have also started withdrawing from the demand to be able to issue rights. Now another option is debentures or preference shares with unspecified maturity period (maturity period) which are counted in primary capital.
At present, various securities laws and regulations do not envisage non-maturity bonds.
Both the government and NRB have planned to take some steps to speed up the transmission of monetary policy.
The government has prepared to reduce the interest rate of small savings accounts. If the small savings rate is linked to the bank rate, it can act as a permanent solution. In order to improve monetary transmission, the National Bank wants banks to change the base rate calculation methodology from the average cost of funds to the marginal cost of funds.
The central bank plays an important role in ensuring economic and financial stability. Despite the global financial crisis, central bank has expanded its tools to address risks to financial stability and manage volatile exchange rates.
Nepal’s external sector index has started to improve, and foreign exchange reserves have increased, which has supported imports. According to the International Monetary Fund (IMF), despite the expansionary monetary policy, credit flow has increased as expected.
This may indicate a limitation in the effectiveness of the policy. Global economic recession and external economic conditions can pose a challenge to Nepal’s economic stability and growth.
The need for quick and serious analysis of the difference between estimated and actual credit flows indicates potential risks in the financial sector.
The views expressed in this article are the author’s own and do not necessarily reflect People’s Review’s editorial stance.
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