An Overview On New Monetary Policy

The Nepal Rastra Bank (NRB) has announced a new monetary policy for the fiscal year 2079/80. This policy has been unveiled amid the economic turmoil the country has been going through for the last few months. The foreign exchange reserves are dwindling, the banking sector is struggling with a liquidity crunch and the performance of the share market is not satisfactory. The monetary policy aims at improving the economic condition of the country by keeping inflation at seven per cent and helping achieve the economic growth of eight per cent.

The monetary policy aims at increasing the rate of interest so that huge imports can be discouraged. A gaping gap between imports and exports has resulted in a colossal trade deficit. Owing to ever-burgeoning imports and other factors, the stock of foreign exchange reserves is decreasing, which is a matter of worry. The monetary policy has increased the bank rate by 1.5 per cent to 8.5 per cent. Likewise, the policy rate has been maintained at seven per cent, and the deposit collection rate at 5.5 per cent. This provision is in line with the global trend of raising interest rates to curb inflation that has occurred consequent upon a hike in the prices of crude and commodities following the Russian invasion of Ukraine. 

Cash reserve ratio

The monetary policy has increased the cash reserve ratio (CRR) by one per cent to four per cent with effect from Bhadra. This will shrink the loanable funds of the banks and financial institutions (BFIs) by Rs. 51 billion and those of the commercial banks by Rs. 45 billion. The BFIs have deposits of Rs. 5,083 billion, and the commercial banks Rs. 4,478 billion. This will further lead to a credit squeeze. The monetary policy has a target of expanding credit by 12 per cent flow against last fiscal year’s 19 per cent. However, the credit flow stood at 12.3 per cent only last fiscal year. 

The monetary policy has also increased the statutory liquidity ratio (SLR). As per the monetary policy, the commercial banks will have to maintain the SLR at 12 per cent by the end of Poush. Likewise, the development banks and finance companies will have to maintain the SLR at 10 per cent by the same period. Previously, such a ratio was 10 per cent for the commercial banks, eight per cent for the development banks and seven per cent for the finance companies. This provision will further tighten the liquidity of the BFIs. 

The monetary policy has extended merger-related privileges to the commercial banks and microfinance companies merging by the end of Poush 2079. Previously, such privileges were valid only for the financial institutions merging by the end of Asar 2079. There is, however, no mention of the development banks and finance companies. Perhaps the NRB thinks that the number of such financial institutions is reasonable and need not be retrenched. The monetary policy has announced an important provision: the share transactions of the financial institutions in the merging process will not be suspended. This has given respite to share investors. 

The monetary policy focuses on improving the productive sector. Now, there will be two rates of interest for commercial and productive sectors. The rate of interest for the commercial sector will be higher than that for the productive sector. The commercial sector is responsible for increasing the trade deficit through huge imports. A hike in the rate of interest will discourage imports and this is what the monetary policy intends to happen. The monetary policy has retrenched the privileges being provided for the COVID-affected sectors. The effects of COVID-19 on the economic sector are gradually wearing off. Refinancing will, however, be provided for agriculture and the most affected sectors. 

The monetary policy has tightened real estate lending. As per the new provision, only a loan equivalent to 30 per cent of the valuation of the property can be obtained in the Kathmandu valley, while such a percentage will be 40 outside the Kathmandu valley. This provision aims at halting unnaturally-burgeoning transactions in land and buildings. Owing to such transactions, the property prices are increasing day by day beyond the reach of the general public.       

The monetary policy has amended the 12-4 crore provision applicable to margin lending. Now, individuals and institutions can avail themselves of loans of up to 120 million from a single bank or multiple banks. Previously, loans of up to 120 million could be obtained from multiple banks with the limit on loans from a single bank not exceeding Rs. 40 million. This has boosted the morale of small and medium investors.  

The monetary policy has restored the provision of a two per cent counter-cyclical buffer. A counter-cyclical buffer is an instrument used to counter possible systemic risks in the financial system. The provision will be implemented by Asar 2080. The provision, which was introduced in the 2076/77 monetary policy, was postponed because of the COVID-19 pandemic. At the time, the provision was put off as there was a need for increasing loans to counter the effects of the pandemic on the economic sector. 

Regulatory body

The monetary policy has announced a second-level regulatory body for the regulation of cooperatives. A task force set up in 2068 suggested such a regulatory body. But nothing has happened on this front. There are over 30,000 cooperatives throughout the country. The regulation of these cooperatives has been assigned to the federal, state and local governments. But the regulating functions have not been effective.

The monetary policy has tried to revamp the remittance sector by providing various facilities and privileges for the Nepali migrant workers sending money back home through the banking channels. The monetary policy aims at expanding the scope of remittance business. Similarly, the monetary policy seeks to encourage IT and other service sectors by formulating an appropriate policy. In a nutshell, the monetary policy is a tight policy aiming at increasing the rate of interest, creating a credit squeeze, encouraging the productive sector, decreasing the trade deficit, increasing the forex reserves and maintaining price and external-sector stability, among others. But what matters is it should be implemented in earnest to achieve the goals. 

(Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)