Nepal Rastra Bank Advises Prudent Monetary Policy Approach Amidst Structural Challenges

Although the balance of payments and foreign exchange reserves are in a comfortable condition, Nepal Rastra Bank (NRB) has indicated not to show too much flexibility in the upcoming monetary policy. In the discussion on monetary policy organized by the Finance Committee under the House of Representatives (HoR) on Monday, NRB Governor Maha Prasad Adhikari indicated that the monetary policy cannot become too flexible due to the structural problems of the economy.

'The basis for building development and advancing economic growth has been imported. Imports are also the basis for increasing revenue,' Governor Adhikari said, 'As imports increase, there will be another pressure on the external sector. Trying to maintain balance on the one hand leads to imbalance on the other. Trying to improve on the other side will cause problems on the other side.' He said that due to the weak domestic production, there are frequent problems in the economy and structural reforms are necessary.

Governor Adhikari has indicated that it is not possible to continue the reforms in the external sector by making the monetary policy flexible, indicating that there is no need to adopt much flexibility in the monetary policy for the expansion of economic activities. The NRB governing officer said that even though the external sector is in a favorable situation now, it is a challenging situation to formulate the monetary policy, just like the post-Covid-19 situation.

The challenge is the same as when the monetary policy was formulated during the Covid-19 in 2077. The main challenge is how to protect the improved external sector," he said. "Even if imports increase, there will be pressure on the external sector. The domestic economy is sluggish. However, there is no shutdown like Covid.'

The governor official claimed that 40 percent direct investment has been arranged for the increase in domestic production. "Banks have 15 percent of the total loan in the agricultural sector, 15 percent in the small and medium enterprise business, and 10 percent in the hydropower, 40 percent of the total investment," said the governor officer, "Even though this is happening, how will the next monetary policy channel investments in the production sector? We need to focus on ensuring investment and increasing production.'

Executive Director of the Economic Research Department Dr. Prakash Kumar Shrestha said that other central banks of the world have continued with the direction of tight monetary policy. While giving a presentation to the committee, he said that the world economy is projected to improve only from 2024. He said that although inflation in the world economy is on the decline, it is still under pressure, so central banks around the world have continued to follow a tight monetary policy. Recently, the Bank of England, the European Central Bank, as well as Bangladesh in South Asia have also increased interest rates. He said that the central bank of most of the countries, except China, has continued the direction of tight monetary policy.

Even in Nepal, due to the different circumstances, he carefully made the monetary policy agenda flexible, but he indicated that there is no condition to show generosity like in the past.

He said that even though Nepal's inflation is on the decline, it is still high, so there is a challenge of monetary policy to reduce it. He said that the wholesale inflation has decreased significantly in Nepal as well as consumer inflation has decreased in India and the wholesale inflation is negative compared to the previous year, so inflation will continue to decrease in the future.

He said that as many young people go for foreign jobs and studies, there has been a decrease in domestic demand and the demand for loans has also decreased.

He said that the effect of the external sector reform was seen in the monetary sector and the interest rate is going to decrease with the improvement in liquidity along with deposits. He argues that remittances also contribute to it. "When the Nepal Rastra Bank gives 1 percent more interest on remittance deposits, 88 billion remittance deposits have been saved in commercial banks alone," he said.

He said that the main challenge in the upcoming monetary policy is to preserve the reform of the external sector. 'Inflation is decreasing but still high. It should be considered. The recovery of the financial sector is affected by the economic slackness and some series of activities,' he said, 'monetary policy should also consider financial stability and recovery. Credit should be utilized in the productive sector. '

He said that to increase investment in the private sector, deposits should also be increased and the real interest rate of deposits should be positive. If there is no real return on deposits, deposits are discouraged,' he said. He indicated that the weighted average interest rate of deposits should be higher than inflation.

Not only data, but policies need to be evaluated

Economist and Rastriya Swatantra Party MP Dr. Swarnim Wagle also argued that a balanced monetary policy with some flexibility would lead to another distortion when carrying a heavy weight in the monetary policy.

'Credit must go to the productive sector, there should be some control on the credit going to real estate, consumption and import in the unproductive sector,' he said, 'this should not affect the tax revenue too much. The policy taken by the Nepal Rastra Bank in the past should be honestly evaluated.' He said that the economics of the data that this year has happened compared to last year alone is not enough from the NRB.

The projection of the economy was unbelievable

Former finance minister and CPN-UML leader Bishnu Paudel said that he can accept the results but cannot believe the projections. He said that looking back at the past, any projection is not believable.

In response, the governor officer said that the world economy is currently in a state of uncertainty, so it is not possible to predict what will happen. He said in response to the argument of former finance minister Paudel, 'The situation has come to a surplus of 250 billion by the end of the financial year due to the formulation of the monetary policy with the projection of 10-20 billion net surplus. The projection of the world economy has become uncertain.'

Former Finance Minister Paudel said that there is a discussion of tight and flexible policy in the upcoming monetary policy and suggested that the indicators of the positive results obtained from the past monetary policy should be formulated with relative continuity and improvement in the areas where the monetary policy is flexible within the appropriate limits.

He indicated that the relationship between the Ministry of Finance and the Nepal Rastra Bank was not positive and said that there should be a cordial relationship between the Ministry of Finance and the Nepal Rastra Bank.

"If the message goes out that the relationship between the Ministry of Finance and the NRB is not good, it will not create an atmosphere of trust," he said.

In reply, the Governor Adhikari said that there is no uncomfortable atmosphere between the National Bank and the Ministry of Finance and they are working in a friendly environment.

Former finance minister Paudel said that the number of bad loans and blacklists of banks is increasing and suggested that the monetary policy should pay attention to it.

Banks are not very profitable

Some parliamentarians said that the banks are usurers by saying that even when all the businesses were stopped, the banks made billions in profit. MP Purna Bahadur Tamang said that the loan taken at 6.75 percent interest rate is now 12.5 percent. He said that the Nepal Rastra Bank should intervene in this.

Another member of parliament, Gyanendra Shahi, made a controversial statement saying that banks are focused on robbing people's money and because they are not Nepali but later became Nepali and got citizenship, they ran the bank and robbed it.

In response, the governor officer said that the average rate of return (return on equity) of the banks is only 11 percent and said that the banks do not have a high profit. In 2076, the total loan of banks was 30 billion and the profit of banks was 67 billion. Now, while the loans of the banks have reached 48 billion, the profit is only 67 billion. If the banks were allowed to earn any amount of profit, where would the profit be if there was so much increase in loans?' Governor Adhikari said, 'It is not the banks that will benefit from the interest rate, but the general public. When the interest rate increases, the depositors get benefit. If it decreases, the debtor will get it. When the interest rate decreases or increases, the bank can take only a spread rate of 4 percent.'

He said that banks should earn minimum profit. Banks' return on equity is not above 11 percent. It should not be taken otherwise. There should be some profit for the soundness of the banking sector,' said Governor Adhikari.

A separate body is needed to regulate co-operatives

The parliamentarians who spoke at the meeting emphasized that the problem of cooperatives should be solved by the Nepal Rastra Bank through regulation.

Parliamentarian Biraj Bhakta Shrestha said that the three-pillar economic policy, which states that the constitution also includes cooperatives, said that cooperatives should be regulated by the NRB.

MP Padam Giri said that the co-operatives that had invested in real estate are now sinking and now the bank will be affected.

Similarly, MP Bhagwati Chaudhary said that the problem of cooperatives is complicated.

In response, the governor officer said that the Cooperatives is not in the scope of regulation of NRB and he said that a separate specialized organization is needed for that.

In the budget itself, it has been said that a specialized organization will be created to regulate cooperatives. If there is a second level regulator, there will be no problem in the inspection of cooperatives,' he said, 'When the Rastra Bank regulates 14-15 thousand savings and loan cooperatives, the current operations have been affected. NRB will provide technical assistance in this. There should be monitoring of the cooperative through a separate organization.

Which MP said what?

In the meeting, Rastriya Swanatra Party MP Biraj Bhakta Shrestha said that it is necessary to adopt a policy to increase credit demand through monetary policy.

It is necessary to reduce the interest rate to increase the demand for loans. The price increase affects the poor people, attention should also be paid to this,' he said, 'monetary policy has not been able to focus on the productive sector. A policy should be adopted in such a way that the monetary policy that comes now will have an impact for 20 years.'

He said that it is necessary to make common people not have to go to landlords to get loans and get them easily from banks and financial institutions.

'Because of over-investment in real estate, banks have reached a situation where they are unable to raise loans themselves. When banks set interest rates arbitrarily, industrialists are in trouble, Shrestha said.

Another MP, Deepak Khadka, said that the policy of the NRB has prevented the country from an economic crash and said that the monetary policy should come in such a way that the economy gets the benefit of the reforms seen in the external sector.

"The Rastra Bank gave relief to the private sector that was in trouble after Corona, but now that relief did not go away, that's why the shutters were closed, there were suicides," he said.

MP Bhagwati Chaudhary said that the rural economy has been devastated by the anti-cooperative and microfinance movement. She said that not only microfinance should do social banking, but banks and financial institutions should also have social responsibility for the rural economy. She also pointed out the need for a national microfinance policy.

MP Purna Bahadur Tamang said that the 8 billion bank is a syndicate and should open a bank for 2 billion. He argued that he should punish the bank for increasing the interest rate by saying that the loan taken by him at 6.75 percent interest rate has increased to 12.5 percent.

He accused the bank of cheating by converting the interest into loan without paying the interest in three months. "It is corruption to say that the bank has benefited so much," he said."

(Disclaimer: This is a translation based on an original article. Consistency in information has been maintained for accuracy.)

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Featured Illustration Courtesy: Ratna Sagar