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August 2017 From the Editor

Published on: 2017-08-02 08:55:29     314 times read    0  Comments
Unclear and Inward Looking

It is the responsibility of central banks the world over to give suggestions to the government regarding economic management, management of public debt and financial management. Preparing the monetary policy is the fundamental task to perform these duties. The monetary policy is generally prepared with a view to achieve suitable stability in FOREX rates and internal market price levels. However, the monetary policy unveiled by Nepal Rastra Bank on July 9 does not include any of the two objectives. In this sense, the policy’s aim of financial sector management has been limited to the management of the country’s banking sector. 

At present, the Nepali economy has nothing to fear from the increase in the supply of money. Money supply increases inflation. The monetary policy states that inflation has dropped to 4.6 percent. The monetary policy in its 17th point has stated that the consumer price inflation remained minimal during the review period due to the base price effect and improvement in supply management. Economically, even low inflation is not desirable. In the context of developing countries, a 5-7 percent inflation rate is considered suitable. The monetary policy aims at keeping inflation within 7 percent in the fiscal year 2017/18. This means that the monetary policy should have included measures to increase inflation.

But, NRB hasn’t formulated any policy to increase the money supply to increase the inflation to the desired level. There should be sufficient flow of money in the economy (preferably but not only in productive sectors) to meet the target of economic growth and inflation. But presently, the banking system doesn’t have enough investible capital for this. In order to ensure this form of capital in the banking system certain steps must be taken such as easing the Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Credit-Deposit (CD) Ratio. But the monetary policy has failed to do this. If there is no inflation, the economy will move towards recession. NRB has given continuity to the revenue-oriented government policy by encouraging consumers to purchase vehicles. But the central bank has failed to describe on what basis the automobile sector now falls under the productive sector while it had gone on a considerable length in the past to prove that automobiles were unproductive. 

Besides that, NRB has tightened the loan provision for real estate in the Kathmandu Valley but this provision has remained unchanged for outside the Valley. The bank has not been able to furnish strong logic in this regard. One cannot believe that this policy will help decrease the demand for houses in Kathmandu and increase demand elsewhere. 

Those who want to construct or purchase a house in Kathmandu will not purchase one outside the valley just because the home loans have become expensive or house prices have increased. How can the central bank itself decide whether a person spends his money on a house or car? Only a system that allows a person to spend his/her money however she or he chooses is considered a democratic system. 

What is also certain is that, it is beyond the capacity of the commercial banks to lend the mandatory 10 percent of their total cash flow, as mandated by NRB, to the agricultural sector. Such a provision in the monetary policy will not yield the expected results. Neither do the commercial banks have the required and trained human resource and expertise to invest in the agriculture sector. And, it is expensive to prepare such human resource. The state-owned Agriculture Development Bank, which was established with the sole purpose of investing in the agriculture sector, has turned into a commercial bank. Commercial banks cannot invest professionally in the agricultural sector as long as the sector is not associated with the market. For example, commercial banks can easily provide loans to farmers by accepting the receipts of the stored harvests as collateral. This kind of loan will be invested in agriculture. But there are no such storehouses in the country. Had the central bank encouraged micro-finance companies to invest in agriculture, there could have been some achievements. Because such companies do have, to an extent, the human resources to invest in the agriculture sector.

Madan Lamsal
madanlamsal@gmail.com


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