KATHMANDU: Nepal Rastra Bank (NRB) adopted a 'flexible and expansionary monetary policy' for economic revival after the COVID-19 pandemic in the fiscal years 2077/78 and 2078/79. Governor Maha Prasad Adhikari received praise from the general public, industrialists, and businessmen for this approach.

The flexible monetary policy increased cash flow in the market and stimulated the economy. However, the investment was channeled into non-productive sectors and the import of consumable goods, leading to negative impacts.

The surge in real estate business and sharp increase in imports resulted in a decline in Balance of Payments and subsequently the foreign exchange reserves declined. Consequently, NRB issued a tight monetary policy in 2079/80 to 'correct' the economy. Although the monetary policy agenda for 2081/82 has been termed as 'cautiously flexible', the internal market is yet to become vibrant.

Due to the strong monetary policies, the external sector of the economy has become stable, but the internal economy remains sluggish, putting pressure on NRB to adopt a more flexible policy. The tightened policies affected credit flow to banks, import-export activities, and government revenue, resulting in sluggish economic activities and its negative impact on economic growth.

The government estimates the current economic growth to be 3.9 percent. The National Statistics Office reported contractions in the industry and construction sectors, with the trade sector's growth rate remaining sluggish. Credit expansion, which significantly contributes to economic growth, has been slow. Last year, bank loan expansion was limited to 4.6 percent, and in the current fiscal year, it stands at 5.2 percent. While there was a liquidity shortage in banks and financial institutions last year, this year banks are experiencing excess liquidity.

According to NRB data, from mid-May to mid-April, total deposit collection amounted to Rs 6242 billion, while loan flow stood at Rs 5133 billion. The credit-deposit ratio (CD Ratio) of banks fell to 80.08 percent due to the imbalance between deposit collection and credit flow.

With excess liquidity, banks have the capacity to expand their loans. However, the slowdown in economic activities, tightening of loans for current expenses, and pressure on banks' capital reserves pose risks to credit expansion. Bad loans have also increased and banks have to allocate significant amount in provisioning.

Nabil Bank’s Chief Executive Officer Gyanendra Dhungana highlighted the lack of demand for loans in the market and the banks' inability to extend loans due to pressure on their capital funds. He emphasized the need for the government and central bank to work towards credit expansion, stating, "To make the market dynamic, the government needs to increase capital expenditure. Monetary policy needs to facilitate banks to store capital."

In its third quarterly review of the current monetary policy, NRB hinted at a more flexible approach in the coming days. The review reduced the risk weight of hire purchase vehicle loans to 100 percent. Additionally, NRB announced easing measures to relieve pressure on capital funds by allowing the use of additional instruments. To boost the real estate business, NRB increased the loan repayment return ratio for home purchases from 50 percent to 70 percent.

NRB Executive Director Prakash Kumar Shrestha indicated that if external economic conditions remain stable, the bank will signal a more flexible monetary policy. He said, "The economy is in a comfortable position in terms of the external sector due to our strong policy, and this quarterly review has indicated future policy flexibility."

The Federal Government revealed budget policies and programs targeting a 6 percent economic growth rate and to limit inflation at 5.5 percent for the next fiscal year. Accordingly, NRB has started preparing for its upcoming monetary policy and has urged concerned parties to submit their suggestions within 16 days.