May 2: Nepal Rastra Bank (NRB) held a press conference on April 11 and released a report stating that the economy is returning back on track from the brink of crisis.

NRB Governor Maha Prasad Adhikari claimed that the economy is on track, saying that there has been an improvement in the internal and external sectors.

The central bank presented indicators such as the decline in current account deficit, Balance of Payments in surplus and a decline in interest rates of the banks. However, the situation in the market is not as easy as mentioned in Current Macroeconomic and Financial Situation Report of the country published by the NRB.

Banks and financial institutions (BFIs), microfinance companies and cooperatives do not have enough capital to provide loans, while the daily transactions of simple tea shops to large commercial malls are decreasing. There is a continuous decline in foreign trade (import-export business). The daily turnover of the stock market has decreased from Rs 20 billion to around Rs 1 billion.

The real estate business has also slowed down.

As the revenue collection has decreased, the government has found it difficult to meet the current expenditure. Due to the unusual recession in the market, which was not even observed during the devastating earthquake, Covid-19 pandemic and the subsequent lockdown, the common people have started to question - where has the money gone?

Former banker Analraj Bhattarai says that since there is no money in the pockets of consumers, it seems that money is lost in the market.

“We have had easy money for the last 10-12 years. We called it the 'Age of Easy Money'. That cycle is broken, due to which there is no money in the hands of common people," he said, adding, "Due to the excessive cash flow, the prices of the companies increased unnaturally. Now that property cannot be bought and sold. Consumption also increased but the income did not.”

Imbalance in deposit-credit flow

In the current fiscal year (FY), there has been a huge imbalance in the deposit collection and credit disbursement of banks. Despite the increase in bank deposits, there is lack of cash flow in the market due to the low credit flow from banks.

According to the data of the central bank, by mid-March of the current year, the deposits of banks and financial institutions increased by 280.57 billion (5.5 percent), while the loan disbursement increased by 128.18 billion (2.8 percent). In other words, compared to the increase in deposits of banks, the increase in lending is only half in the current fiscal year.

In previous years, the situation in the financial sector was exactly the opposite. In the year 2078/79, the deposits of banks and financial institutions increased by Rs 417.22 billion (8.8 percent), while the credit flow increased by Rs 536.34 billion (12.9 percent). Similarly, in the FY 2077/78, bank deposits increased by Rs 810.72 billion (20.6 percent), while credit flow increased by Rs 906.77 billion (27.8 percent) and in the FY 2076/77, deposit collection of banks increased by Rs 576.24 billion (17.2 percent) while the credit flow increased by Rs 354.11 billion (12.2 percent).

The cash flow in the market decreased this year as soon as the banks’ lending decreased. As the cash flow in the market depends on the loans of the banks, it seems that the cash flow decreases as soon as the credit flow decreases.

The central bank's data show that the credit expansion of banks and financial institutions slowed down in the year of Covid-19 and the lockdown. However, as soon as the Covid-19 pandemic subsided, banks became aggressive in extending loans. When the investment went to the stock market and real estate, those areas became 'overheated'. Now, after the central bank took a tight monetary policy, the credit of the banks has become tight and the cash flow to the market has decreased, due to which there seems to be a lack of money in the market.

Cash transactions also went down

The data of the central bank also shows that the cash flow in the market is decreasing compared to the previous years. In addition to the cash in circulation in the market, transactions through electronic means have also decreased.

According to NRB, in October-November 2020, cash equivalent to Rs 675 billion was in circulation in the market, but in February-March 2023, it has decreased to Rs 615 billion.

In August-September 2022 of the current fiscal year, the cash in circulation had dropped to Rs 594 billion. Likewise, there has been a big decline in the transactions made through various payment methods. In June of last year, transactions through electronic payment exceeded Rs 62 billion, but in January-February, it was limited to Rs 36 billion.

From Covid relief to tight monetary policy

The government appointed Maha Prasad Adhikari as the governor of Nepal Rastra Bank within two weeks of the nationwide lockdown imposed on April 6, 2020 to control the Covid-19 pandemic.

After his appointment, the governor who instructed BFIs to give a 10 percent discount on the interest on loans to the public affected by Covid as a relief, again instructed BFIs to reduce the interest rate by 2 percentage points in May the same year.

The policies issued by the governor, who has been praised for providing relief to the common people whose economic activities were due to Covid-19 through banks and financial institutions, were focused on the relief of the Covid-affected industrialists and the common people and the revival of the economy after the pandemic.

Due to the flexible and expansionary monetary policy of the year 2077/78 and 2078/79 for the recovery of the economy affected by Covid-19, the cash flow in the market increased and the economy became vibrant.

However, when the cash flow in the market was used in unproductive sectors and imports, the indicators of the economy started to turn negative. As a result, the central bank issued a tight monetary policy for the current year.