February 10: Nepal Rastra Bank (NRB) issued a tight monetary policy for the current fiscal year and increased the policy rates. While under pressure from the external sector including high exchange rate deficit and declining foreign exchange reserves, NRB took a policy of tightening loans by increasing interest rates. Due to this, the internal interest rate of the government also became expensive.

As NRB increased the policy rates, the banks started increasing the interest rate, making the interest of internal debt collected by the government through various monetary instruments expensive.

NRB announced the monetary policy for the current year on July 23. Immediately after the announcement of the monetary policy, the government issued treasury bills as a tool for raising short-term domestic debt. Banks increased the interest rate on 91-day treasury bills issued on July 26 by 2.67 percentage points which was in single digits before the monetary policy.

After that, NRB intervened several times and bought Treasury Bills itself, but the interest rate could not be reduced. So, NRB has to pay high interest rates when raising internal debt through Treasury Bills.

Lately, the interest rate of the treasury started to decrease after the liquidity situation in the banks and financial institutions eased, but still, the interest rate is becoming more expensive for the government compared to the last FY. Last year, the interest rate of 28-day treasury bills remained at 4.72 percent.

In the current year, the lowest interest rate for 28-day treasury was maintained on January 30 at 5.9 percent. Similarly, 9.18 percent interest rate is maintained on 91-day treasury bills, while the interest rate on 182- and 364-day treasury bills is still in double digits.

Similarly, the interest rate of internal debt raised by the government through development bonds also became expensive. In the current year, the government raised Rs 30 billion through development bonds for a period of 2 to 5 years. Its average interest rate remained at 9.95 percent. Last year, when the government raised domestic debt through development bonds, the average interest rate was only 7.74 percent.

As of last year, the internal debt of the government is Rs 984 billion. In the current fiscal year, the government set a target of raising domestic debt of Rs 256 billion. Out of that, Rs 30 billion of debt was raised in the second quarter. Similarly, the target is to raise Rs 88 billion in the third quarter and Rs 138 billion in the fourth quarter.

Through the monetary policy of the current year, NRB adopted a policy of tightening the loans by increasing the interest rate. Through the policy, the bank rate increased by 1.5 percentage points to 8.5 percent. The deadline for standing liquidity facility (SLF) taken by banks for liquidity management also reduced from 2 days to 5 days only. Similarly, the policy rate increased from 5.5 percent to 7 percent, and the deposit collection rate increased from 4 percent to 5.5 percent.

Interest rates of banks are becoming more expensive due to increase in policy rates and lack of liquidity in the financial system. However, as the liquidity situation in the financial system eased recently and the external pressure on the economy decreased, experts say that the internal economy should be made viable by reducing the policy rate through a review of the monetary policy.

Former banker Analraj Bhattarai said, “Even though the external pressure on the economy is less now, the internal economy has not been able to run due to high interest rates. NRB should review the monetary policy.”

NRB is conducting its half-yearly review of monetary policy today (Friday). It is expected that NRB, which maintained the policy regime in the first quarter monetary policy review, will review the policy rates in the second review.

Governor of NRB, Mahaprasad Adhikari has also been indicating in public programs that the provisions of monetary policy will change according to time. He said, “Due to the arrangements made through the monetary policy, we have reached a somewhat comfortable situation. The provisions of the monetary policy are reviewed from time to time.”