The Monetary Policy this year is "Cautiously Accomodative", neither too expansionary nor too contractionary; Interview with Nara Bahadur Thapa, Research Head of NRB

Nara Bahadur Thapa, Research head of Nepal Rastra Bank, is the man of vision and absolute dedication to his work. He completed his Masters in Economics from Mumbai and M. Phil. in Monetary Economics from Scotland. In his career, he has been the part of Nepal Rastra Bank from the year 2046 in different departments. He worked at IMF for 2 years representing NRB and has been in the Research department for 3 years now.

The NRB brings out Monetary Policy every year and that in a way determines a lot about where the economy will head this year. Where NRB is carrying such huge responsibility, it’s research department plays an important role in collecting, compiling and analyzing the facts so that every decision made is backed well by the facts. On this back drop Sandeep Rana, Aakriti Thakali and Dheerusha Tiwari from ShareSansar visited Mr. Nara Bahadur Thapa. The excerpts of the interview are:

What are the major functions carried out at the Research department of NRB?

The major functions of the research department of NRB can be categorized as following:

1. Macro-economic data collection, compilation and dissemination
2. Monthly report of macro and financial situation of the country
3. Preparation and publication of quarterly economic bulletin
4. Annual report for government
5. Economic studies on specific topics like FDI survey report, Free visa free ticket report, Preparation of profile of 7 provinces etc...
6. Pre-budget survey report for government prior to Budget speech in full confidentiality
7. Coordination with international financial bodies like IMF, World Bank, Asian Development Bank etc. for data sharing and reporting in regular manner.
8. Annual and semi-annual economic activity report
9. Quarterly review of monetary policy

As the budget seems expansionary, will the monetary policy be strictly implemented?

Characterizing it further, we have maintained firm adherence to the Macro-economic anchors and we’ve provided some flexibility in the Monetary Policy Tools.

The macroeconomic anchors are CCD ratio (which is fixed at 80%), currency peg (which is fixed at Rs 1.6 for IC 1), foreign exchange reserve (which is fixed at 8 months), broad money growth target (which is fixed at 18%), private sector credit growth rate at (which is fixed at 20%) and so on. Thus, on these anchors we’ll make no compromises and maintain firm adherence.

Similarly on Monetary Policy tools we’ve provided some flexibility like the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), refinancing limit etc. has been relaxed. Similarly we’ve also opened up the way for banks and microfinances to bring in foreign loan.

“Regarding this year’s Monetary Policy, rather than expansionary I’d like to use the word “Cautiously Accommodative”. Not Hawkish, but dovish in nature.”

The target for this year states economic growth at 8% while maintaining the inflation under 6.5%, are you confident that this number is attainable?

Yes I think the economic growth target of 8% is attainable. Being the economic advisor of the government, NRB also has the responsibility to frame a monetary policy that will work in perfect coordination with the budget plan and also will assist in achieving the budget’s goals. Like I mentioned earlier, we’ve provided flexibility in various monetary tools. The CRR, SLR, Standing Liquidity Facility (SLF) and – the Lender of last resort (LOLR) rate have been decreased. Similarly the refinancing limit has been pushed up to Rs 35 billion from Rs 20 billion. So the relaxation on these factors will help spur the economic growth and increase our GDP.

The other reason why I believe its attainable is because this is the third year after the devastating earthquake. The earthquake brought lots of damage and to rise up from that the government had brought a five-year plan. On the first year, a lot of time was spent on procedure development and details of what, how and where the construction should take place. Since this is the third year, I believe that the reconstruction will pick up the pace and a lot of expenditure will take place as Rs 151billion has been set aside for it, eventually boosting the economic growth rate.

The third reason is the new constructions and infrastructural developments that have been planned for the year. Various projects like Gautam Buddha airport, Pokhara airport, Bheri-babai tunnel, Highways, Fast track, Rani Jabara irrigation and so on are planned for the year and this surely will induce economic growth from the creation of employment and from the increased capital expenditure of the government.

The fourth reason I believe so is because the monsoon this year turned out pretty good and has potential to generate 4.5% growth in the agricultural sector. So if we can achieve 9.5% growth in non-agricultural sector then we’ll easily attain the 8% economic growth rate.

We’re still depending on a lot of Ifs, what if government expenditure doesn’t happen in time? What if the private sector growth is not as expected? But still we need to remain optimistic.

Similarly regarding the inflation, it is true that we’ll have to face pressure on price because 1. The inflation last year was very low 2. The size of budget has increased 3. Price of international commodities like petrol, cement, steel etc. has increased. However, despite that we’ve aimed to maintain our inflation this year below 6.5% because of our currency peg with India and our huge dependency in India for Imports. India has determined it inflation rate corridor for this year between 2% to 6%, with the projected inflation rate of 5.2%. Since the projected inflation rate of India is low and factoring into the fact that we’re a landlocked country, we have predicted our inflation rate to be around 6.5%.

“The economic growth rate of 8% and the aim to contain inflation under 6.5% is attainable because we’ve framed this year’s policy in perfect harmony with the budgetary goals”

The growth in remittance is in a downward trend. Will it bring decline in economic growth rate? Currently Japan along with Korea has agreed to take more Nepali workers, do you think it will make a sizeable impact on the remittance growth?

After the year 2015, the year of earthquake, the number of people going abroad for work has decreased, which was in increasing trend prior to 2015. So this is the major reason why the growth of remittance has been stagnated now. Although a few countries have opened up their doors for our labors, looking at the present trend the remittance growth rate will remain stagnant for 8 to 9 more years.

Foreign employment was a charm and more money back in the day, but people these days prefer to stay in our own country. Some people who were in fence regarding whether to go or not go, are also choosing to stay because a lot of new employment opportunities have been created through the reconstructions and new constructions.

Capital Expenditure by Government has always been slow and a huge chunk of it is spent only near the end of the FY (i.e. near Ashad end). Do you think the trend will continue this FY too?

“Asarey Bikas” as it is commonly heard in media, however that is not the full truth. The actual reason behind this is, the contractors are working throughout the year using bank loans, but the budget closes in Ashad and they have to settle their receipts before that. So although the works have been going on, they claim their amount in Ashad because of which huge transactions are seen in this month.

If we see the trend of last 2 years, the shortage of loanable fund is seen in the banking sectors after the end of Bhadra (might be due to slow government spending and aggressive tax collection by government) and near Ashad such shortage is eased a bit and banks’ interest rates starts to fall. What is the probability that the same thing will happen this FY too and if it does what measures will NRB take?

Yes NRB is well aware of this trend, and I think the government is too. Our economy’s size is small and in every economy the ups and downs are bound to happen. However in case this happens again the NRB will use the Open Market Operation (OMO) tools to ease or tighten the liquidity in the market. Similarly, to insure the liquidity in market is flexible throughout the year, we’ve increased the refinance limit, decreased CRR and SLR rates – all these increase the liquidity in the market and hopefully will cater to the trend you’re mentioning.

We’ve commonly seen that banks are fast to increase their rates when the liquidity tightens but when the liquidity in market eases they are a lot slower to decrease it. What is NRB’s role in this?

The thing here is NRB can’t directly interfere with the BFIs’ interest rates. They were given the freedom of quoting their own rates from August 31, 1989 and the basic notion was to let the market decide the rates on their own. However we’ve had complaints and have also absorbed the type of problem you are quoting, thus to address the same NRB has come up with ways to indirectly influence the BFIs’ rates. Such tools/ways are:

• The interest rate spread has been fixed at 4.5%
• CCD ratio of 80%
• Interest rate corridor for short-term rate stability
• Base rate which is calculated from cost of fund, CRR, SLR, Operating costs and 0.75 of total assets. Here we can only influence CRR and SLR and we have done it too.

So if all these work in coordination we can create a holistic management environment in the financial market.

Do you think all the banks will be able to bring loan from foreign banks including India? The Monetary policy had not given the specifics regarding the hedge fund that is to be created for the funds coming from abroad as loans to commercial banks. Could you enlighten us on that matter? Is it similar to the hedge fund that is going to be created for infrastructural development project?

About 8/9 banks are moving ahead to bring in the loan and as we’ve been informed the process in ongoing. Similarly Microfinance companies have also the opportunity to bring in loan from India. So we’ll have to wait for 2-3 months to have any definitive answer.

NRB won’t provide hedging for funds coming in as loans taken by BFIs, the hedge fund we’ve mentioned in Monetary policy is for the funds coming in as investments known as the infrastructural development projects.

Could you tell us something about OMO and how it works?

Open Market Operation (OMO) comprises of tools that is used by NRB to increase or decrease liquidity in the banking system, thereby increasing or decreasing the money supply in the economy. Currently NRB uses two types of OMO tools. The first one is the pure OMO which includes:

• Outright purchase auction
• Outright sale auction
• Repo auction
• Reverse repo auction
• The NRB also uses OMO instruments such as deposit collection auction and NRB bonds to mop up liquidity from the system

Similarly, the NRB has the Interest rate corridor (IRC) in place to manage liquidity and the short term interest rate. The upper bound for IRC is given by the SLF which stands at 6.5% and the lower bound is given by two week’s deposit collection rate which stands at 3.5%. So when there is liquidity shortage in market, the interest rates will start to climb. As soon as it touches the policy rate, NRB conducts Repo auction at 5% and inject liquidity in the market and vice versa.

Government of Nepal is promoting digital economy and encouraging digital payments but on contrary why NRB is restricting limits on fund transfers of BFI’s and digital wallets?

Basically the payments are of two types, retail and large value. So the transaction limits that we’ve put is on the retail transaction and the prime reason for it is its frequent nature of occurrence. So when the frequency is high, the risk of error also increases. If you put in Rs 30,000 instead of Rs 3000, your fund might be restored after a lot of trouble but that incident might make you skeptical of using e-payment measures next time. So for security reasons we’ve introduced new transaction limits.

What is your view on the growth of Capital Market? Why the BFI’s are not using debt instruments like bond and debentures as capital fund?

Capital market in Nepal is still in developing phase and is heavily dominated by the equity instruments, which is because of the NRB’s directive whereby BFIs have to issue a minimum of 30% shares to general public after 2 years of operation. So apart from equity, we rarely get to see other instruments like bonds and debentures.

A capital market, actually any capital market, must comprise of:

Equity based securities like shares

Debt based securities like bonds and debentures

Derivatives

Capital market institutions

So of all the 4 components, equity market has flourished well. The debt market is yet to emerge and it applies for both Government and Corporate Bonds. Similarly we are way back in terms of derivative market, so that is something we can be innovative with. Finally we have capital market institutions, which is a very important component of capital market, but capital market institutions are limited to Citizen Investment Trust (CIT), Employee Provident Fund (EPF) and Insurance Companies. Thus until and unless all four facets are opened and improved, the capital market won’t be able to fully flourish.

NRB is the first choice for a lot of aspiring bankers. Recently for an opening of 96 seats NRB received 4000 applications, so what is your message to those aspirers?

Like any organization, NRB wants to bring in quality manpower who can contribute to the economic and financial stability and development of our economy. For that particular reason, NRB has specified a syllabus, which is kept on our website. So the potential candidates who have knowledge in that field are the ones we’re looking for.

So I want to appeal to the youths that if you want to join NRB, please thoroughly read the specified courses. This will help you recap what you’ve already learnt and also will add new information to your knowledge repository. The recruitment is based on merit, so the better you prepare the better are the chances – all you need to be is COMPETITIVE.