Blaming NRB and Monetary Policy is Inappropriate « Khabarhub
Thursday, June 20th, 2024

Blaming NRB and Monetary Policy is Inappropriate



It’s worth noting that the target for foreign exchange reserves has been adjusted to cover a minimum of seven months of goods and services imports, a significant increase from the previous level of about 12 months.

Similarly, while a target of 12.5 percent was set for the money supply, it currently hovers around 14 percent, with expectations to remain within 13 to 14 percent by the end of the financial year. These objectives have been satisfactorily met.

Projections anticipated a private sector credit increase of 11.5 percent, yet it has only reached approximately 5.5 percent thus far.

Additionally, the targeted economic growth rate of 6 percent relied on a higher credit flow to the private sector, which hasn’t materialized as anticipated, with current estimates suggesting it may only reach 7 percent by year-end.

Sustaining stability across these sectors is paramount for fostering future growth.

Without effective inflation control, any achieved growth lacks substantive meaning. Likewise, instability within the financial sector could precipitate future crises, echoing global precedents rooted in banking systems.

Open discussions and joint decision-making foster a strong relationship between fiscal and monetary policies. Thus far, I haven’t identified any significant coordination lapses between these policies.

A balanced external sector is equally critical, as imbalances in current account deficit or surplus can trigger additional complications.

Hence, the Nepal Rastra Bank’s on these areas and its policy adjustments aimed at achieving stability and supporting overall economic equilibrium are paramount. We’re confident that the policies within our mandate are effectively serving their purpose.

Comparing the policies of the past two years with the current situation, we faced considerable challenges during the COVID-19 pandemic.

In an effort to safeguard others and sustain the banking sector, the Central Bank adopted a slightly different and unconventional approach, which yielded positive results.

In the year following the onset of the pandemic, there was a negative growth rate, but the subsequent year saw a commendable five percent economic growth.

Last year, this growth increased to 6 percent. However, the growth was a mere 1.97 percent in the preceding year, with projections indicating a rise to 3.87 percent this year.

Questions arise regarding the alignment between the monetary policies implemented by the Central Bank to bolster economic growth and the financial policies outlined by the government.

More than mere practice, the concern lies in the lack of harmony and coordination.

Reports suggest disconnect and lack of coordination between these entities.

It may become convenient in the future to attribute shortcomings to the NRB’s oversight in budgetary matters or claim that certain monetary policies fall outside the budget’s purview.

Nevertheless, the Central Bank is intricately involved in the budgetary process from its blueprint stage.

This involvement ranges from financial surveys to report compilations for governmental institutes, and finance ministers routinely consult with the governor during budget finalization.

The Finance Secretary also sits on the Central Bank’s monetary policy board, fostering open discussions and finalizing policies collaboratively.

Throughout this process, every aspect mentioned in the budget is meticulously incorporated into the annual action plan and executed accordingly.

Therefore, suggestions of a lack of coordination between fiscal and monetary policies are not entirely accurate.

While practical discrepancies may occur, such as the recent reduction in credit extended to the private sector, it’s crucial to recognize that this isn’t a flaw in the monetary policy per se.

The policy has set a target lending rate of 11.5 percent, which has been maintained despite a reduction in the budget size. From a practical standpoint, the subdued demand for loans is multifaceted.

One glaring reason behind this diminished demand is the prevailing chaos within the financial sector.

Instances of loan forgiveness and intimidation tactics against debt recovery efforts have created an atmosphere of uncertainty and deterred borrowing activity.

Until these issues are addressed, the recovery of lending momentum may remain stymied.

Debt recovery is an essential process, and we’re actively implementing various departments and mechanisms to safeguard consumers during this phase.

However, the prevalence of certain activities, driven by political motivations, raises concerns.

Why does the bank continue to extend loans amidst such challenges, which in turn exacerbate our problems?

We’ve brought this issue to the government’s attention, submitting a detailed report from the board as evidence.

Action must be taken against such individuals to instill confidence in the banking sector.

If loans issued yesterday aren’t recovered, what assurance do we have regarding future lending?

We tend to acquire loans without fully comprehending the implications. However, if loans are acquired judiciously according to genuine needs, many issues can be alleviated.

This trend not only jeopardizes the recovery process but also impacts the overall credit demand and flow.

As the Finance Secretary sits on the Central Bank Board, we have supervisory committees where the Ministry of Finance actively participates.

Open discussions and joint decision-making foster a strong relationship between fiscal and monetary policies. Thus far, I haven’t identified any significant coordination lapses between these policies.

However, there have been instances where implementation faced challenges.

For instance, two years ago, a budgetary allocation of five billion rupees was earmarked for a microfinance fund without a thorough feasibility study or clear objectives.

Consequently, without a concrete plan, implementation proved unfeasible. We could only pledge support if the government established the fund.

Contrary to some perceptions, the Central Bank didn’t provide excessive facilities during the COVID-19 crisis.

Rather, it addressed liquidity concerns and ensured business continuity by extending necessary support.

I recall visiting a sugar factory in Kanchanpur, where the owner, visibly frustrated, suggested that the NRB should oversee all government projects to enhance national development. However, I politely explained the impracticality of such a suggestion.

This was a deliberate policy decision aimed at protecting businesses from collapse due to cash flow disruptions or capital loan constraints.

While this policy offered relief to many, it’s essential to acknowledge that any misuse by borrowers and banks alike should not indict the policy itself.

It was a well-intentioned effort to assist those in need. However, as the crisis abates, these facilitative measures have been phased out accordingly.

Refinancing is no longer on the table, as banks can now offer cheaper alternatives without central bank intervention.

Insisting on the continuation of these facilities would be illogical given the current circumstances.

We tend to acquire loans without fully comprehending the implications. However, if loans are acquired judiciously according to genuine needs, many issues can be alleviated.

We are firmly committed to policy coherence. Although monetary and fiscal policies are being harmonized, minor conflicts persist.

The Central Bank prioritizes monetary stability, while the government emphasizes growth.

Yet, efforts are underway to strike a balance. Thus far, our policies have been formulated with this objective in mind.

It seems somewhat awkward to blame the NRB and monetary policy when desired outcomes aren’t achieved.

I recall visiting a sugar factory in Kanchanpur, where the owner, visibly frustrated, suggested that the NRB should oversee all government projects to enhance national development. However, I politely explained the impracticality of such a suggestion.

(Edited excerpt from remarks by Governor Maha Prasad Adhikari at an interaction program on ‘Correlation between Monetary Policy and Fiscal Policy,’ organized by Khabarhub and the Institute for Strategic and Socio-Economic Research (ISSR)

Publish Date : 10 May 2024 06:14 AM

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