Monetary Policy For Economic Remedies

Nepal’s economy is not in a good shape at the moment. The fast declining foreign reserves, soaring inflation, trade deficit and unemployment, food insecurity and corruption cases, among others, have risked the country to plunge into serious economic crisis. Of late, the people are bearing the brunt of the rising prices of essential commodities in the wake of Russia-Ukraine war that has disrupted the supply of fossil fuels and foods, and increased their prices exorbitantly. The country has been gradually recovering from the COVID-induced economic woes but the recent increase in the fuel prices has made the desired economic growth difficult. The government has adopted several measures such as restriction on imports and pro-business fiscal incentives to avoid potential economic downturns. 

There are growing concerns whether Nepal is set to face the fate of Sri Lanka whose economy has collapsed amid soaring inflation and foreign debts. But economists have ruled out the possibility of such thing happening in Nepal as it has far less external debt compared to Sri Lanka. Likewise, the structure of foreign loans is also different between the two nations. Nepal’s external debts mainly consist of soft loans with lower interest rates but Sri Lanka has mostly taken commercial loans that have naturally higher interest rates. However, there is no room to be complacent as the country is spending a large chunk of foreign currencies to buy expensive fuels. The continuous depletion of foreign reserves can invite economic crisis if the timely control measures are not taken.  

Against this backdrop, economists suggest adopting effective monetary policy to contain inflation, stabilise the country’s currency, maintain predictable exchange rate with foreign currencies and increase jobs. Expansionary monetary policy boosts economy by reducing the interest rate for short-term or by increasing the supply of money in the market. Under the contraction oriented policy, the central bank increases the short-term interest rate and slows down the money supply so as to check inflation.  According to the news report of this daily, the stakeholders asked the government to incorporate the policy of free floating exchange rate, equity financing for hydroelectricity and blended finance, and bring the large cooperatives within the ambit of the central bank’s supervision in the monetary policy of upcoming fiscal year. 

When the exchange rates are let floating free, the market forces – supply and demand or speculation decide them, which may eventually overcome short-supply of resources. Equity financing allows companies to raise capital by selling their shares. This economic instrument is beneficial to generate electricity and trade it abroad. Currently, projects with around 1500 MW generation capacity want to enter power purchase agreement. The Banks and Financial Institutions (BFIs) require mobilising resources for the development of hydropower sector. The blended finance is another tool to mobilise both public and private funds to fill the investment gap. It is a strategic funding that seeks commercial financing for realisation of the Sustainable Development Goals (SDGs). It may enable Nepal to pool resources for translating its climate commitment into reality.

The NRB should supervise and regulate the cooperatives with more than two billion rupees deposits to gain confidence of money market. It should also keep an eye on the possible misuse of grants and subsidised loans. Unveiling bonds and debentures can end the long-term resource paucity. The monetary policy should be framed in a way that resolves the liquidity crunch, external pressure, runaway inflation and imbalances in the Balance of Payment.