New Monetary Policy To Cure Economy

When a central bank implements its monetary policy, it has six basic objectives to achieve. These objectives include economic growth, price stability, interest-rate stability, stability of financial markets, stability in foreign exchange reserves and high employment rate.

To achieve these goals, the central banks adopt various monetary tools so that the economy of the country is kept afloat by addressing all financial and monetary problems. Bearing these goals in mind, the governor of the Nepal Rastra Bank (NRB), Maha Prasad Adhikari, the other day, unveiled the monetary policy for the fiscal year 2022/2023. 

The new monetary policy has differed in terms of credit expansion and money supply in the market. In the last two years, when the nation was gripped by the COVID-19 pandemic, the central bank adopted a liberal policy of expanding credits to reinvigorate the pandemic-hit economy. But as the situation has changed now, the central bank has introduced new measures to rein in credit expansion to control ballooning inflation and ultimately give a boost to economic growth.

In the latest policy, the NRB has lowered the loan target to 12.6 per cent from the earlier 19 per cent. The new policy aims to limit the growth of money supply through liquidity such as cash, demand deposits, and non-cash assets to 12 per cent from last year's 18 per cent 

To keep the inflation rate at 7 per cent, all the above mentioned measures have been adopted. Record low credit expansion and money supply mean the new measures would check the possibility of increased inflation and achieve the growth of economy by 8 per cent.  To address the issue of pressure on prices and foreign exchange reserves, the rates under the interest rate corridor have been raised by 1.5 percentage points for macroeconomic stability, while the bank rate has been maintained at 8.5 per cent, the policy rate at 7 per cent and deposit collection at 5.5 per cent.

NRB requires keeping foreign exchange reserves at a convenient level for a country like Nepal with a small and import-based open economy. The goal of monetary policy is to help our economy achieve targeted growth without putting pressure on prices from the demand side while keeping the foreign currency reserve that can support the import of goods and services for up to seven months. 

However, it has been found that credits issued to enterprises were utilised as import finances that contributed to the ballooning of the balance of payment deficit and a sharp decrease in foreign currency reserves. Some external and internal factors are also causing inflation to swell. Global inflation owing to rising fuel prices and war, supply-side constraints, a surge in domestic demands, decrease in remittance inflows, and increase in salary for government employees and expansion of social security net will make it a challenging task to keep inflation at 7 per cent.

To achieve the targeted goals spelt out in the new policy, the authorities must aim to expand credits to productive and export-oriented sectors while redirecting refinances to the sector hit hard by the pandemic. Meanwhile, in the context of Nepal, the new monetary policy will be regarded as successful if it helps achieve targeted growth of the economy, reduces our ever-increasing balance of payment deficit, rising imports and depleting foreign currency reserves by regulating banking, financial and monetary sectors strictly.