After going through a tumultuous period of nine months as a result of the Covid-19 pandemic, the Nepali economy is slowly getting back on track with the resumption of economic activities. However, as the transmission of coronavirus continues to wreak havoc nationally and internationally, dark clouds of uncertainty still loom over the country’s road to recovery which remains in a fragile state.

After his appointment as the Governor of Nepal Rastra Bank in early April this year, Maha Prasad Adhikari has faced a mountain of challenges in terms of addressing Nepal’s economic problems stemming from the global health emergency through monetary measures. He has been hailed by the country’s business community for the Monetary Policy for FY2020/21, which lends a hand to the pandemic-stricken business sector and aims to boost the economic recovery. In an interview with New Business Age, Adhikari talked about the pace of the revival, macroeconomic stability, all the challenges ahead and the role of the central bank in the whole process. Excerpts:

What is your assessment of the implementation of the current fiscal year’s Monetary Policy so far? How is the Monetary Policy providing support to take the country’s economy out of the deep slump?
The Monetary Policy for FY2020/21 has come into effect amid the Covid-19 pandemic which has affected the entire world. Our economy has also suffered from this unprecedented crisis. The major goal of the Monetary Policy is to support economic recovery, while maintaining macroeconomic stability. For this, the policy introduced a number of relief measures ranging from interest rebate to loan restructuring and rescheduling. Such measures have supported businesses in managing their cash flows, minimising job losses, reviving business confidence and channeling additional credit to the Covid-19 affected areas. Besides, the policy has focused on mobilisation of credit to economic sectors to support in creating employment, substituting imports, and ensuring food and energy security.

I believe that the implementation of the monetary policy is moving in the right direction. Immediately after the policy was announced, we directed BFIs to adopt the measures mentioned in the policy. The moratorium and grace period, rescheduling and restructuring facilities and provision of no penalty for overdue loans are some of the provisions that have been very helpful to revive business confidence.

More importantly, the refinancing programme has been aimed at Covid-19affected sectors with a focus on decentralised disbursement. Similarly, the concessional credit programme has been broadened and financial consumer protection unit has been strengthened.

The cautious implementation of the Monetary Policy has paved the way for fast recovery of the economy. The country’s macroeconomic fundamentals are strong despite the uncertainty posed by the Covid-19 pandemic; inflation has been contained, the external sector is in a comfortable position, the banking system has adequate liquidity and economic activities are resuming. These indicators broadly support the thrust of the monetary policy.

What problems has Nepal Rastra Bank (NRB) identified in implementing the Monetary Policy in the present turbulent times?
The major problem is the uncertainty and lack of confidence stemming from the Covid-19 pandemic. Once we come to a stage of containing the spread of coronavirus, we will be in a more predictable position. Though the lockdown has been lifted, health and business operation risks are still there. The perceived uncertainty has led to a decline in consumption and credit demand. Large number of firms and consumers are still not in a position to optimise their resources. BFIs still have to operate partially due to the increased risk of coronavirus spread.

Nevertheless, there is a huge demand for refinance facility, business continuity loans and concessional credit. These indicate a positive development in the effective implementation of the Monetary Policy.

Despite the lifting of the restrictions by the government, business activities and investment demand have remained sluggish. How is NRB working to boost the economic recovery?
NRB has been supporting economic recovery right from the onset of the pandemic. The first set of directives, issued in March 2020, was focused on lowering interest rates, and increasing the availability of the fund. NRB issued another directive in April to provide liquidity support to businesses, loan deferrals, and loan limit extensions and interest concessions by 2 percentage points to the specified sectors.

The Monetary Policy for FY2020/21 came with the same spirit to reinforce economic recovery with a number of policy measures focused on enhancing credit to the Covid-hit areas, supporting the MSMEs, making available sufficient liquidity, stabilising interest rates, generating employment and promoting entrepreneurship. Recent data suggests that the economy has started to recover. The festive season has provided a demand boost supporting the economic revival. And, NRB stands ready to take judicious and balanced decisions as the situation evolves.  

As the governor of the central bank, how do you think the country’s economy will recover from the COVID-19 pandemic in the coming months? Will it be a ‘V’-Shaped recovery as claimed by the newly appointed finance minister? If so, based on what?
The full-fledged recovery of the economy depends on how quickly the pandemic is contained. As efforts are placed to save lives and continue livelihoods, the economic damage will be contained quickly. Recent news on the effectiveness of the Covid-19 vaccine(s) has brought new hope to the investors, consumers and policy makers around the world. Our policy efforts since the onset of the pandemic have been focused on retention of supply capacity to the pre-crisis level and boosting demand accordingly. The International Monetary Fund (IMF) has projected that the world economy will contract by 4.4 percent in 2020 before expanding by 5.2 percent in 2021. Though the IMF has projected a 2.5 percent growth for Nepal in 2021, recent data resumption of economic activities indicate to a slightly better picture.

What challenges according to NRB lie ahead on the road to recovery?
As said earlier, the Covid-19 pandemic has caused multifaceted challenges. Boosting business confidence and creating additional demand, more employment, higher income and better supply capacity are the major challenges. Moreover, reviving the highly affected sectors such as tourism, MSMEs and education needs to get the top priority. Inflationary pressure could also hit the pockets of the poor and the middle class as we recover. Remittances, which have been fairly stable even during the peak of the pandemic, could fall as we are facing a decline in the number of outbound migrant workers.

Channelising more resources to the employment generating sectors remains another challenge. Strengthening every facet of the economy is a sustainable way to recover which could make it more resilient in the coming days. Lastly, as the central bank of the country, we have traced these aspects and have been focusing and advising for stability, while formulating macroeconomic policies.

NRB has emphasised for a stable interest rate in the Monetary Policy. Is this policy approach of the central bank for the short term, i.e. during the current difficult times, or is NRB going to stick with this policy over the long term?
Interest rate stability is one of the prerequisites of financial and macroeconomic stability. Interest rates in Nepal have been somewhat volatile in the past leading to uncertainty in the investment environment. Thus, NRB has focused on keeping interest rates stable. The interest rate corridor has been implemented to reduce the volatility in the short term interest rate and thereby guide the stability of long term rate.  Recently, the concept of fixed interest rates in specified sectors has been introduced; it also applies to individual term loans. The provision of fixed interest rate will be helpful to create certainty to the fixed income borrowers, sustenance of demand and will be the basis for interest rate stability in the long run.  

For interest rate stability, a facility to prepare the yield curve is cited as very necessary. What is NRB planning as a policy so that the market will have a yield curve?
NRB has been facilitating the development of a bond market in Nepal. Instrumental diversification is taking place after the policy of encouraging commercial banks to mobilise financial resources through the long-term debentures. The listed debentures issued by different commercial banks, development banks and finance companies have gone up. As the bond market develops, we will have sufficient information such as market price and coupon rate of bonds with various maturities to calculate the yield to maturity (YTM). I am confident that the YTM will be available soon and support liquidity management and interest rate stability.  

One of the major reasons for the interest rate volatility has been the power of the institutional depositors to dictate the interest rate. Can’t the institutional depositors be forced to park most of their funds in bonds issued by banks so that their power to dictate interest rates is curtailed and the market interest rate would be relatively much stable?
The bond market is relatively new in Nepal. Despite that, BFIs are not facing difficultly in issuing long term debentures. Large proportions of the bond issues are subscribed by institutional depositors. So, it seems that institutional depositors have been investing in the bonds issued by BFIs. Given that, forcing institutional depositors to invest in bonds in this difficult time would not be a good idea. We believe that developing the bond market would render better results than forcing institutional depositors. NRB is facilitating the instrumental diversification to accommodate the participation of all tiers of savers as well as investors in the bond market.  

It has been two years since NRB introduced the exchange rate hedging facility for foreign investors in infrastructure projects. How effective has the hedging facility been in terms of attracting foreign investments? Are there any changes NRB is seeking to make in the facility?
The government introduced Hedging Related Regulations, 2019 via the decision of Cabinet of Ministers in February 2019. The Regulation has the provision to provide hedging facility for lenders of foreign loans in hydropower projects having a capacity of 100 MW or more; transmission line projects longer than 30 kms and capacity of 220 KVA or more; railways, metro and mono-rail construction projects more than 10 kms long; express-ways projects longer than 50 kms; and other projects as decided by the Cabinet.

The regulations are expected to attract more foreign loans to finance the much-needed development projects in the nation by assuring foreign currency at a fixed exchange rate. However, this facility is not being effectively utilised by any foreign investor so far.

NRB has also envisioned to accommodate commercial hedging and to promote hedging services through specialised institutions, which has also been mentioned in the Monetary Policy of the current fiscal year. For this and other related amendments in the regulations, the central bank has advised the government and the amended regulations is expected to be rolled out shortly.

Despite sitting on a huge pile of investment-grade liquidity, BFIs are unable to lend money due to the significant decline in investment demand as the Covid-19 pandemic has created massive constraints in trade, commerce and industrial sectors. What would it take to revive the demand?
During a period of economic hardship, decline in investment demand is expected. Further, having enough liquidity is better than scarcity in times like these which maintains the hopes for a revival. We are hoping that after the end of the festivities and gradual uplifting of all restrictions imposed by authorities, business activities will pick up pace. It will certainly take some time; however, this will progressively increase the investment demand. As the central bank, we are watchful about excess liquidity and we are also absorbing the excess liquidity from the financial system through open market operations.

NRB has given emphasis to agriculture sector lending which is in line with the arrangements announced by the government in the fiscal policy. However, financial institutions, particularly commercial banks are finding it difficult to meet the targets set for them. Though the banks can buy agriculture bonds for a deficit amount, they are concerned that this bond is not going to be available to buy at the end of every month. How is this concern being addressed?
We believe that the development of agriculture is a key to our economic development. Thus, the agriculture sector has always been our priority since the past, as well. Agriculture Development Bank Limited (ADBL) shall issue the bond periodically and provision of agriculture bond is launched as support for those BFIs which are not being able to, maybe due to their specialisation in some other sectors, meet the targets set by the central bank.

We don't want BFIs to be solely dependent on bonds issued by ADBL to meet the regulatory requirements; rather it should be treated as a complementary element to agriculture lending to meet the target. Further, after being listed in the secondary market, these bonds can be traded as well.   

How can ADBL use the money collected from the sales of agriculture bonds as this bank has been effectively weaned away from agriculture and has become a full-fledged commercial bank for a long time now?
In the Monetary Policy for FY2020/21, we have already floated our idea that we are envisioning ADBL as an agriculture specialised bank, though as you've said, it moved away from being a specialised bank to a full-fledged commercial banking entity. Despite this change to its nomenclature, the bank is still specialised in agriculture financing compared to other banking institutions. We have conducted a series of discussions with the leadership of the bank to identify their intent, commitment and ensure their committed support in this regard. Agriculture sector is full of opportunities that BFIs are yet to tap. Thus, ADBL with its organisational knowledge, infrastructure and past experiences shall use the proceeds from bonds in those sectors. They have also presented their commitments that the money raised from agriculture bonds will be invested in the agricultural sector.

Banks are reporting a slump in their profits as their income sources have shrunk and bankers say that they are working with a high interest spread rate. This has given rise to worries about the financial health of BFIs. Is this an indication that the Nepali banking system, which has stayed aloof from past crises, is getting badly affected from the Covid-19 fallout?
BFIs are still publishing their unaudited quarterly figures; thus, it will be too early to draw a conclusion on the total impact of Covid-19on them. Of course, it is obvious that the pandemic has seriously impacted the Nepali economy and so too the BFIs, though its degree of intensity and real loss from this impact is yet to be assessed. NRB has lifted several regulatory requirements and provided various relaxations as per the need of the domestic situation, which are so unconventional and even new for us. Regarding the soundness of our banking, the capital base and capital adequacy of our BFIs, is very strong which make them able to absorb losses that may arise in the course of general banking business. Due to this soundness and their health the banking sector as a whole is supporting the economy at this difficult time.

Considering our regulatory measures, banking practices and the state of the banking institution so far, Nepali BFIs are resilient to face the challenges posed by this crisis. The underlying risk that is being circulated from the events of the public health emergency, lockdown, uncertainty in business environment to banks’ credit quality is definitely a concern for us for which NRB, as a supervisor and regulator, is closely monitoring their activities and will certainly adopt required policy measures to maintain financial stability.

Besides, NRB requires each commercial bank to conduct ‘stress tests’ and submit their report to the central bank. This may not address scenarios like this pandemic; however, it covers normal banking stress so that we can focus on macro prudential policy accordingly. Based on the reports so far, the resiliency our system is helping us to face the stress.

The foreign exchange reserve has reached record levels following a drastic decline in the country's imports and high inflow of remittances. How is the central bank planning to utilise the foreign currency reserve?
Yes, the foreign exchange reserve has reached record levels in the first quarter end of the current fiscal year. The central bank's primary concern regarding management of the foreign exchange reserve has always been safety and liquidity, whilst profitability is only secondary, which is also in line with the practices of the central banks globally. The bank shall continue to manage the foreign exchange reserve such that it could facilitate the import of raw materials, plant and machineries, and other inputs, much needed for industries, construction and development projects, and to facilitate necessary financial obligations, among others.