Without good governance, monetary policy will not be effective – myRepublica
The most important question has never been raised: Can an open economy like Nepal conduct an independent monetary policy and inflation rate while maintaining a stable exchange rate with its major trading partners? My answer is a “no”. Unfortunately, decision makers never know, despite comments in the past from many organizations and individuals.
The former president of the World Bank said that if the government can come up with the best financial and monetary policies, the goals set by these policies cannot be achieved if the country lacks good governance. This remark is still valid in the current context of Nepal and the Nepalese monetary sector.
After presenting the budget, the government made public the monetary policy of 2078/79 as in the previous tradition of bringing monetary policy. It is monetary policy to fight diseases caused by the second and third waves of Covid-19. The monetary policy for fiscal year 2078/79 made public by the Nepal Rastra Bank (NRB) has been given priority and the objective is: Agricultural investment, promotion of the energy growth sector and minimum impact of Covid-19 on micro, small and medium enterprises (MSME).
The main priority of the Nepalese government for this exercise is economic recovery through various relief measures, modernization of agriculture and job creation in the areas affected by the pandemic. Among the areas most affected are tourism and hospitality and airlines as well as small and medium enterprises.
Priority has been given by monetary policy to working capital inflows, concessional loans and refinancing for the revival of aviation, transport, hotels, restaurants and other tourism businesses severely affected by the Covid-19. To address the lack of capital to complete construction of projects related to the tourism sector, arrangements have been made for easy loans from banks and financial institutions for such projects. After analyzing the financial condition of these debtors, it is also time to keep the maturing interest separately until mid-July 2079 as per the requirement, and no additional penalties or penalty interest should be charged on these amounts. After the tourism industry, the most affected sector is public transport.
It looks positive that monetary policy has also brought some relief to the sector. Indeed, the provision of loans for the maintenance of public transport can be expected to bring some relief to the affected areas. At the same time, the encouragement of monetary policy in mergers to strengthen the capital base of banks and financial institutions also appears to facilitate the merger of banks and financial institutions.
Banks and financial institutions seem to have some relief in terms of maintaining liquidity, as the ratio of loan-to-resource mobilization long since increased by banks and financial institutions has been phased out and the loan-to-deposit ratio has been removed. increased to 90. percent.
The main features of monetary policy are as follows: As economic activity grows, it will be difficult to maintain an inflation rate of 6.5%. It was hypothesized that projecting a 19 percent credit expansion to the private sector would not meet the demand for resource mobilization. Among other features, the goal is to maintain sufficient foreign exchange reserves to support the import of goods and services for seven months.
The key rates are as follows: permanent liquidity facility rate 5%, mandatory cash ratio 3%, low statutory liquidity ratio, category AB and C 10%, 8%, 7% and bank rate 5%. Even national-level development banks, finance companies and wholesale microfinance institutions must issue bonds equivalent to 25% of their working capital. There is a provision to increase medium and small domestic loans up to Rs 10 million to 15 percent of the total loan. The provision of careful monitoring of credit flows to loss-making companies for two years will be extended from one year to three years. Likewise, the credit limit of some types of poor credit limit loans needs to be increased. Those who have lost their jobs in the tourism sector will receive 1.5 million rupees for self-employment.
The loan-to-deposit ratio is to be raised to 90 by 2079 BS and the current CCD ratio system should be abolished. The current bank CD ratio is 90.33%. The prescribed sector loan ratio is expected to be maintained by mid-July 2078 BS and by mid-July 2079 BS. Mergers, acquisitions and acquisitions of commercial banks will be further encouraged with certain concessions.
The current method of calculating the base rate will be reviewed. Monetary policy stipulates that loans up to Rs 10 million must be granted with a maximum premium of 2%.
Electronic payment activities will be encouraged. Payment service providers will need to reach customer numbers by July 2079. Digital lending guidance will be introduced.
Monetary policy is commonly referred to as either an expansionary policy or a contraction policy, where an expansionary policy increases the total money supply of the economy and a restrictive policy reduces the total money supply. An expansion policy is traditionally used to deal with unemployment and recession by lowering interest rates while a contraction policy should raise interest rates to fight inflation.
Within the international community of central bankers, there is a broad consensus that the primary objective of monetary policy should be domestic price stability. Price stability, however, is only a means to an end and is not the ultimate goal of overall macroeconomic policy. The ultimate goal is set by governments and is usually linked to the goal of maximizing economic growth, development and creating more employment opportunities.
The most important question has never been asked: Can an open economy like Nepal conduct an independent monetary policy and inflation rate while maintaining a stable exchange rate with its major trading partners? My answer is a “no”. Unfortunately, decision makers never know, despite comments in the past from many organizations and individuals. Recall that the International Monetary Fund (IMF) clarified in early January 2001 the conduct of monetary policy in Nepal.
Amid debate that there is no need to wait for the supplementary budget because the Nepal Rastra Bank is an autonomous body, monetary policy appears to have to address the problems of industrialists and business people affected by the crisis. corona.
Stating that monetary policy will have a positive impact on the post-Covid recovery, the development of entrepreneurship and the promotion of small and medium-sized enterprises, the private sector seems confident that the recovery, restructuring and rescheduling of fiscal year 2077 / 78 will contribute to the revival. The provision to increase the premium by up to two percentage points above the base rate for small and medium-sized entrepreneurs who take out loans of less than Rs 10 million will make it easier for entrepreneurs to access loans.
Banks and financial institutions will need to maintain the maximum loan-to-deposit ratio at 90% by mid-July 2079 BS. The federation suggested that the central bank manage liquidity because there is pressure on liquidity in the current fiscal year.
Affirming that the question of reducing cash transactions by promoting the use of electronic means in payment transactions is welcome, the federation mentioned that the mechanism for reviewing fees and limiting electronic payment transactions will help to maintain good governance. Likewise, the private sector believes that EKYC’s arrangement will also put the public at ease.
The mechanism put in place to promote credit to small farmers will have a positive impact on the agricultural sector. The limit of unsecured loans for women entrepreneurs has been increased from 1.5 million rupees to 2 million rupees and is expected to further contribute to the promotion of female entrepreneurship in the country.
The provision of a central office to facilitate credit at the local level would facilitate access to finance and the development of entrepreneurship in rural areas. Likewise, the existing system for blacklisting customers by banks and financial institutions will be reviewed.
Start-ups and small businesses are included in the project loan management policy. Providing a minimum interest rate of at least one percentage point for remittances deposited in banks and financial institutions will also help attract remittances through banking services and increase the liquidity. The impact of monetary policy does not seem to be felt immediately in any sector.
However, Covid-19 poses an unprecedented challenge to its goal of sustainable growth, and the key performance indicators of the Nepalese financial sector are satisfactory.
Several provisions of last year’s monetary policy have been renewed. However, it is now clear that some financial concessions will jeopardize the future. The CD ratio was maintained by keeping the CCD. However, only the calculation method was changed to 90. When the CCD ratio is removed, it is difficult to see which industry the loan went to. What is the effect? There is a need for a thorough follow-up study.