Yadav Humagain

July 24: Nepal Rastra Bank (NRB) has tightened the screws on economic activities through the monetary policy unveiled on Friday with the motive of improving the economy that is heading towards crisis. NRB Governor Maha Prasad Adhikari was praised for introducing flexible monetary policy in the last two fiscal years considering the impact of Covid-19.  However, this time, he has resorted to strict measures to bring the economy back on track.

Although the past policy made the economy affected by the pandemic vibrant, it also resulted in high Balance of Payments (BoP), decline in foreign exchange reserves and liquidity crisis in the banking system. Therefore, the central bank decided to tighten the economic activities through the new monetary policy.

The monetary policy introduced for the current fiscal year aims at keeping external sector stability by controlling inflation. The monetary policy focuses on promoting overall fiscal stability and boosting productivity by mobilizing fiscal instruments in the productive sector.

The central bank also aims to discourage credit flow by increasing the interest rate on loans through the monetary policy.

The NRB has adopted a policy to mobilize loan in the productive sector rather than expanding credit in the context of high credit-GDP ratio. It also aims to protect small and medium scale industries.

In order to increase the foreign exchange reserves, the central bank has decided to encourage remittance through the banking channel.

Instead of achieving the government’s economic growth target, the monetary policy focuses on fiscal stability.

NRB Spokesperson Dr Gunakar Bhatta says that the monetary policy is focused on resolving the crisis faced by the country’s economy.

“We have brought the monetary policy with the objective of resolving the economic crisis in a phase-wise manner,” Bhatta told reporters, adding, “If the economy improves, the monetary policy can be amended accordingly.” The central bank has been reviewing the monetary policy every three months.

Although the government has set a target of 8 percent economic growth in the current fiscal year, the central bank has decided to limit credit flow. Banks are facing problems in deposit collection because the loans disbursed in the past were extensively utilized in non-productive sectors such as imports. As the banks are facing resource crunch, the central bank has reduced the target of credit flow to the private sector by 6.4 percentage points and fixed it at 12.6 percent.

The monetary policy has focused on fiscal stability at a time when the economy is facing liquidity crisis. The central bank has increased the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) to protect the deposits and strengthen the banking system.

The CRR has been increased from 3 percent to 4 percent.

Likewise, the SLR has been increased from 2 percent to 12 percent for commercial banks and 10 percent for development banks as well as finance companies. As per the monetary policy, the BFIs need to comply with the new SLR by mid-January 2023.

The central bank has decided to increase the interest rate to discourage credit flow. The monetary policy has increased the bank rate by 1.5 percentage points to 8.5 percent. The central bank believes that increase in interest rate will discourage consumption.

Although this policy will affect the interest rate of some sectors, it will not have much effect overall, says banker Bhuvan Kumar Dahal.

“The central bank’s policy will not impact the overall interest rate of the banks,” says Dahal, adding, “The interest rate on other sectors might be more as the monetary policy focuses on credit flow to the productive sector.”

Although NRB has tightened credit flow, it has kept productive sector in priority and also decided to protect small and medium scale industries.

The monetary policy will keep differences in interest rates on loan to be mobilized in productive sector and business sector.    

As per the provision, BFIs can disburse loans up to Rs 20 million to the productive sectors such as agriculture, livestock and fishery, export-oriented industries and industries that produce goods with cent percent home-grown raw materials by charging interest rate not exceeding 2 percentage points added to the base rate.

As per the monetary policy, the central bank will gradually reduce the facilities given to sectors affected by the Covid-19 pandemic. NRB informed that the policy to provide refinancing facility will be reviewed so that only the productive sectors such as agriculture and those badly affected by the pandemic will be given refinancing facility.