NRB seeks to solve the current economic problems through a strict monetary policy; the measures adopted are not enough: Analysts – myRepublica

KATHMANDU, July 25: Last Friday, the Governor of the Nepal Rastra Bank (NRB), Maha Prasad Adhikari, announced the monetary policy for the financial year 2022/23, a document on which everyone had pinned their hopes. expecting him to come up with magic solutions for a number of problems facing the country, including the persistent problem of liquidity and the stability of the external sector.

Unlike monetary policies announced in recent years, this policy unveiled by the NRB, the country’s apex monetary institution, was under pressure to provide a wide range of solutions with a single policy framework. The private sector expected continuity of the relief measures announced earlier by the NRB to mitigate the impacts of COVID-19 amid calls to restrict excess money supply to control rising inflation , excessive bank lending and surging imports.

The central bank has also had the challenge of checking the rapidly depleting foreign currency reserves. While the banking sector suffered from a prolonged shortage of liquidity, one of the main causes was the evident slowness of capital spending, and the NRB needed to do something about this as well.

The central bank was also under pressure to maintain investor aspiration in the equity market at a time when the secondary market index had already fallen nearly 37% in recent months. Moreover, he also had to save face and apply a policy that does not contradict the budget which announced ambitious programs, including a high economic growth rate, propelling the economy towards a path of recovery in the aftermath of the pandemic.

“Good but not enough”

While all these problems are in place, the NRB has announced a restrictive or restrictive monetary policy, which the majority of the country’s and private sector economists have described as “good, but not adequate” to solve the economic problems the country is facing. confronted. .

The NRB kept the threshold for private sector lending at a maximum of 12.6%, down from the previous 19%. The central bank has tried to control broad money expansion to a maximum of 12% from last year’s 18% target.

For the next financial year, the cash reserve ratio has been increased to 4% from the existing 3%, while the statutory liquidity ratio (SLR) has also been increased to 12% from the existing 10% for banks. commercial. NRB raised the discount rate from 1.5% to 8.5%.

Similarly, the maturity of the Standing Liquidity Facility (SLF) was reduced from seven days to five days. All of these measures will contribute to reducing the money supply, which will eventually increase interest rates, which in turn will reduce economic activities of the private sector, the stakeholders said.

Governor Adhikari said the central bank raised the policy rate only to curb consumer spending while encouraging people to save more. “As rising market prices don’t have much impact on domestic consumption, monetary policy has tried to force people to cut spending,” he said.

NRB Executive Director Prakash Shrestha said the measures to reduce the money supply will not affect the interest rate in a wider band as it will not affect the lending capacity of banks due to the alternative measures imposed by monetary policy. According to him, the central bank will ensure the continuity of the refinancing facility with certain restrictive measures, allowing banks to consider debentures in their credit-to-deposit (CD) ratio and to defer the establishment of countercyclical buffers.

The private sector, however, said monetary policy would reduce economic activities. “As the money supply helps to raise interest rates, it will be a herculean task to achieve eight percent economic growth and limit the inflation rate to seven percent,” read a statement from the company. press published by the Nepal Chamber of Commerce.

Vishnu Kumar Agrawal, Chairman of the Confederation of Nepalese Industries, said that monetary tools this time will help to increase interest rates and inflation rate. “However, the differential interest rate for manufacturing could help promote manufacturing activity within the country,” he said.

Economist Rameshwor Khanal has expressed his positive note on the central bank’s attempt to raise interest rates. “While tight monetary policy is desirable at this time of economic woes, the measures are however still not sufficient to address the lingering problems of current account deficit, soaring imports and higher inflation rate” , Khanal added.

Analysts, however, say the new measures in the stock market and real estate business are commendable. NRB has removed the lower limit of Rs 40 million on loans against shares, while the upper limit of Rs 120 million is still in place. NRB said the provision will particularly benefit small investors.

Possible impacts of monetary policy on various sectors

Consumers:

NRB has adopted measures to reduce aggregate demand which is considered to be one of the main factors triggering consumer price inflation. To this end, the central bank has attempted to reduce the money supply largely.

But on the other hand, rising interest rates are likely to trigger cost inflation, making investments expensive for the private sector and goods and services more expensive for consumers.

While inflation has already exceeded eight percent now, the NRB claimed that the country could face inflation of up to 14 percent in the coming days. In addition to a rise in the cost of funds, traders are likely to raise the prices of goods and services in Nepal’s poorly regulated market.

Producers:

Since the NRB has given producers some breathing room through the differential interest rates, it could benefit producers to some extent, analysts say.

Traders:

As monetary policy aims to restrict imports, traders in importing companies are likely to be negatively affected.

Investor shareholders:

The NRB has removed the lower limit of Rs 40 million on loans against shares, while the upper limit of Rs 120 million is still in place. Also, the monetary policy is talking about reducing the risk weighting to 100% from 150% on margin loans up to Rs 2.5 million. This will likely benefit small investors rather than large investors, NRB officials say.

Real estate company:

Monetary policy reduced the margin rate on land as collateral to 30% in the Kathmandu Valley from 50% previously. This is likely to negatively affect real estate activity.

Liquidity situation:

Monetary policy said liquidity with banks and pressure on interest rates may not improve until there is an improvement in internal production and external sector balance. However, NRB officials say the policy has adopted alternative measures to maintain liquidity, so it will not further worsen bank liquidity and interest rates.

The private sector, on the other hand, has stated that the tightening of the money supply will have an obvious impact on bank liquidity and interest rates.

Balance of payments and foreign exchange reserves:

The NRB is setting up an “automatic route” channel for foreign investors and amending related regulations to facilitate repatriation, which could help promote foreign direct investment. Revise existing provision to facilitate receipt of remittances, revise rules on derivatives to minimize foreign exchange management risk for banks that will mobilize foreign exchange lending and card-to-card payment of remittances issued by Nepalese banks and financial institutions, among others, have been maintained to attract foreign currency inflows into the country. However, the actual implementation of these provisions remains to be seen.