Dilli Raj Khanal
The frequent abrupt shocks, economic stagnation or recession and high unemployment amidst rising property prices and too much wealth concentration are generating big debate now in the advanced capitalist countries on the efficacy of the ongoing monetary policy that is grounded on monetarism. Based on both theoretical and empirical grounds, questions are being increasingly raised, among others, on the rationales of central bank independency. Such a debate has become more urgent in countries like Nepal where a similar policy even without reference to country conditions has been followed and intensified since many years.
A quick review of the monetary policy in the form of some key targets and achievements give a rough idea on how it is working in Nepal. In 2010/11, the broad money supply was 9.5 per cent against the 15 per cent target. But the inflation rate was 9.6 per cent against the target of 7 per cent. Interestingly, the private sector credit expanded at a rate of 11.7 per cent against the target of 16.4 per cent during the same period. This raises the questions on the bases of targets and their correlation with money supply, credit expansion and prices. In the last fiscal year, the gap between the target and realization widened further. Despite a decline in the banking sector credit noticeably, both broad money supply and prices went at a high rate than the target. Prices rose at a rate of 9.9 per cent in eleven months of the last fiscal year against the annual target of 7 per cent. Compared to Rs 5 billion capital account surplus target, the surplus was about Rs 113.2 billion in eleven months. Announcement of policies and abrupt withdrawals have been a common phenomenon of monetary policy in Nepal, more so in recent years. Reckless cheap credit policy to the real estate, housing and consumer durables followed by abrupt imposition of lending cap after crisis, removal of priority sector credit followed by the introduction of deprived sector credit policy and again recent re-thrust on priority sector credit are some of the examples of monetary policy behavior in Nepal.
Despite knowing no strong linkages between money supply and prices, an illusion is given to justify the monetarism. Similarly, opposite to the ground realities, impressions are given as such that there is strong inverse relationship between interest rate and demand for money to justify it as a strong policy variable. Interestingly, contrary to the efficiency argument in favor of financial liberalization, the interest rate spread has gone up to 12 to 13 percent in the urban areas where there is stiff competition added by huge liquidity. The situation is more pervasive in the rural areas. This means that the financial imperfections have augmented further amidst financial deepening as the ratio of financial asset to GDP has now exceeded 1.5 times. So much so, this year’s monetary policy raising so called basic rate has implicitly encouraged banks to raise lending rates further. As an offshoot, it has also raised cash reserve requirement ratio on the pretext of excess liquidity and likely price escalating grounds. However, as noted in the policy statement itself, the excess liquidly is due to remittances inflows, not internal credit expansion.
A policy of minor interest rate rebate in the name of priority or deprived sector lending is now being used as a tactic to counter the likely criticism on the encouraged lending pattern that has been highly detrimental to enhance financial inclusiveness, promote growth and ensure sustainable price stabilization. Otherwise, drastic reforms in policy, structural and institutional fronts could have been initiated. If recalled, the maximum interest spread was fixed at 5 per cent many times in the past without any concrete results.
Now, instead of attempts at correcting past mistakes boldly, a deliberate attempt to liberalize capital account has been initiated by the new policy without proper consultation and assessment of likely ramifications. Likewise, the merger and acquisition of financial institutions is being pushed in a way that as if all the lapses inherent in the banking and financial system will be automatically solved once this is done. It is worth noting that in the west there are now new initiatives to split the big banks that are functioning as oligopolies which are considered to be the roots of the problems or crisis.
The important point based on our experience is that the monetary policy making and implementation must be the subject of democratic oversight and accountability. As is well known, in the democratic set up, the government is accountable to the parliament. The banks and companies are accountable to their share holders or investors. In this context, the new central bank Act passed in March 2012 by the Argentinean government is worth mentioning. The bill incorporates both growth and stabilizing role of the monetary policy consistent with social democratic principles of the state and obligates the monetary authorizes to set targets in conjunction with the fiscal policy more concretely. This has also set borrowing upper and lower limits to prevent not only inflationary but also deflationary tendencies. The time has come to prevent non-responsive or anarchistic tendency in the realm of monetary policy.
The Himalayan Times, 7 August 2012