Nepal

Balancing act

Jul 11, 2017
The Nepal Rastra Bank has unveiled its annual Monetary Policy (2074-75) which has drawn mixed reactions. Monetary policy, among others, aims to control inflation within desirable limits, to look after money supply in the economy, to help the economic growth rate (currently targeted at 7.2 per cent) set by the government, to encourage the flow of banking credit to desirable sectors in desirable degrees, etc. Bankers have alleged that the new policy has not done much to expand the sources of money for the level of credit to be extended. They have wanted the central bank to reduce the level of net liquid assets they have to maintain, particularly in view of the liquidity crunch the banking sector has been facing for some time. On the contrary, Chiranjibi Nepal, the NRB Governor, has claimed that the new policy will help achieve the government’s economic growth target as the policy has tried to address the concerns of all sectors.
 
A strong indicator of the liquidity problem is that in the past few months the bank interest rates have doubled. They opine that the new policy will encourage the interest rates to go up further. Their happiness that they no longer need lend two percent of the total credit directly to the deprived sector seems to have been overshadowed by their unmet demand on the cash reserve ratio. At a time when the utilization of the government’s development expenditure has been very slow, banks’ liquidity position is unlikely to improve significantly in the coming three or four months. The reduction in the ratio of institutional deposits in banks has been criticized too for narrowing the sources of money for the banking sector. The recent increases in interest rates have not been able to boost deposits substantially. This is a point to ponder. High interest rates tend to discourage investment. But on the other hand, the new policy has nearly doubled the refinancing fund from 10.5 billion rupees to 20 billion.
 
The specifying of productive sectors and the percentages of total banking credit they should receive are indeed necessary measures to guide the flow of investment. Bankers’ main concern in this seems to be over the increase in the percentage of credit to agriculture at 10 percent, which, they say, is not feasible for practical reasons. Other priority sectors include hydropower, tourism, export, small and medium industries, and pharmaceuticals. The government has also relaxed caps on auto and home loans significantly, which should make those concerned happier. But reasonable controls over bank credit to unproductive sectors should always be there. In Nepal, banks have generally made high profits, and their main focus has been sectors as real estate, auto loans, and share market. But the ratio between productive and unproductive sectors should always be maintained at desired levels. Despite some criticisms, the new policy will take effect, and revisions could be made if in practice any provision of the policy warrants a change to attain the stated objectives. As the central bank, NRB has to take into account the legitimate concerns of all sides and sectors.
 
Smooth supply
 
With a decline in consumption of kerosene as fuel two reservoirs for it with a storage capacity of 2,100 kilolitres each are now being used to store petrol. The Nepal Oil Corporation (NOC) has increased thestorage capacity of petrol by almost five-folds to 5,300 kiloliters. Because of this, the NOC can meet demands for fuel in the capital city for 10 more days. The demand for petrol in the valley is 450 kilolitres daily and 600 kilolitres of diesel. Therefore, the NOC would be able to provide the required fuel even if the Indian Oil Corporation stops the supply of fuel for one day or two for various technical reasons.
 
Previously, the NOC was able to store only 1,100 kilolitres of petrol in its depot at Thankot. Then the NOC could meet the demands for fuel for only two days. This depot used to meet the need for fuel in the Kathmandu Valley. Let us hope that there will be no scarcity of petroleum products now that the NOC can store more fuel. The capital city perennially suffers from the lack of fuel. Now consumers expect that there will no longer be shortage of this commodity.
 
The Himalayan Times, July 12, 2017

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