Flexible Monetary Policy

Nepal has been grappling with financial and economic problems gradually since the outbreak of COVID-19 as restrictions imposed by many nations to contain the spread of the viral disease disrupted supply chains globally. The economic problems seem to have been aggravated in the aftermath of the pandemic. During the last fiscal year, Nepal went through a spate of economic issues and challenges like low revenue generation and high recurrent expenses and rising volume of trade deficit, low investment and growing rate of unemployment. However, the federal government had adopted various measures to revive the economy. But the government was unable to realise its economic growth target due to such obstacles. Nevertheless, the nation’s foreign exchange reserves remained quite encouraging owing to a gradual recovery of tourism activities and an increase in the inflow of remittance. The government has now been making every possible effort to take the country out of such a tricky situation. 

In its annual budget statement for the current fiscal year 2023-24, the government has aimed at achieving an economic growth of six per cent.  For this, it has come up with necessary policies and strategies. It plans to meet the target of revenue collection, boost domestic production and create more jobs.  Meanwhile, the Nepal Rastra Bank (NRB) has unveiled a monetary policy for the current fiscal year 2023/24 to help realise high economic growth sustainably while maintaining price and external sector stability. The flexible monetary policy is expected to fully support the government’s plan for bringing the economy on track. The monetary policy has laid high emphasis on increasing domestic production capacity by mobilising the financial resources in the productive sector in order to attain the six per cent economic growth. Announcing the monetary policy on Sunday, Governor of the NRB Maha Prasad Adhikari said that the policy was adopted carefully to keep the economy running while maintaining price and external stability. 

The central bank has embraced regulatory policies to monitor, regulate and supervise large loans effectively, to reduce over-centralisation of loans, prioritise small and medium productive loans and promote financial stability by increasing the quality and accessibility of loans. It has minimised the policy rate keeping the bank rate unchanged at 7.5 per cent while it has reduced the deposit collection action rate to 4.5 per cent from 5.5 per cent. When the weighted average inter-bank interest rate taken by the NRB as an operational target is higher than the bank rate and lower than the deposit collection rate, the monetary policy will allow the opening of the secondary market transaction and deposit collection. To make the interest rate corridor effective, the monetary policy has a provision to make arrangements for providing fixed deposit collection facilities at its lower limit. The monetary policy also includes the provision of keeping the mandatory cash reserve ratio and statutory liquidity ratio unchanged.

The monetary policy proposes that the policy rate will be determined based on the ability of the foreign exchange reserves to support imports and the annual target inflation. For keeping the inflation within 6.5 per cent, the central bank aims to make monetary management in such a way that monetary expansion does not put pressure on the prices. The NRB projects the growth rate of broad money supply to be 12.5 per cent while the credit from banks and financial institutions to the private sector is estimated to remain 11.5 per cent. Likewise, the limit of first residential house loans is going to be increased from Rs. 15 million to Rs. 20 million. The central bank will also make necessary arrangements for the revival of troubled borrowers. It will also review the existing risk burden provisions of share mortgage loans, real estate loans and hire purchase loans.