Friday, 3 December, 2021

Follow Fiscal Discipline

The national economy, battered by COVID-19, is now limping back to normalcy. In the last more than one-and-a-half years when the pandemic raged, almost every sector came to a grinding halt with the imposition of extended lockdown and strict prohibitory measures. The economic fallouts of the pandemic remained severe as millions of Nepalis living at home and abroad lost their jobs. Though the risk of COVID-19 has not fully subsided, cases are going down of late and the economy is seemingly coming full circle to the big respite of citizens. Transport, business, tourism, industries and education sector, among others, have resumed their activities. The people have adjusted to the new normal by applying all necessary health precautions. As the focus has been shifted to the fast economic recovery, the role of banks and financial institutions (BFIs) has come to limelight.

BFIs form the crucial ingredients of sound financial system, which in turn contributes to GDP and overall economic growth. In the least developed nations like Nepal, the BFIs’ have significant role in boosting capital formation and investment in productive areas. They primarily ensure liquidity that is necessary to fuel economic activity by giving credits, stabilising markets and pooling risks of clients. At a time when the country is struggling to achieve sustained economic growth, the BFIs must play their proactive role in breathing a new life into the moribund economy. They require supporting the manufacturing sector to create jobs for the unemployed youths forced to leave the country in search of their bright future in foreign land. The media have reported that scores of banks have made good profits and distributed dividends to their shareholders.

It sounds strange how they ran in profit during the COVID-induced economic downturns. The BFIs have drawn flak for flouting the fiscal discipline and focusing on the short-term gains. During the pandemic, they got engaged in aggressive credit mobilisation as there was increasing demand for loans but such faulty drive caused the liquidity crisis in the financial sector. Nepal Rastra Bank (NRB) had to intervene in some FBIs as they were involved in unhealthy competition to make immediate profits. The other day, NRB Governor Maha Prasad Adhikari warned them against their unhealthy competition and aggressive credit mobilisation. Adhikari said that the banking sector’s growth should match the growth in the economy, and stable interest rate is necessary for this, according to a news report published in this daily.

It is imperative that the banks and financial institutions thriving on the back of liberal economic policy must adhere to the institutional discipline, rule and regulations. If one bank flouts the fiscal rules, this will impel others to indulge in more unethical acts, causing harm to the entire fiscal realm. The central bank must ramp up its supervision to ensure a sound fiscal system. The BFIs should support the NRB’s relief measures to rehabilitate the businesses hit hard by the pandemic. For the purpose, the loan recovery has been also delayed due to the extension of repayment date by six months. They should not charge exorbitant fees for their services. At the same time, the central bank is required to formulate policy conducive for minimising the risks in the banking sector. Since financial development and economic growth reinforce each other, the government and the private sector should work in tandem for the attainment of common prosperity.