Monetary Policy 2077/78 : Contextual Key Addressable Issues for Nepal

-Ravi Dhungel 

Nepal Bank Limited

Overview 

Monetary policy is a plan of action implemented by the central bank of any country for managing and control the money supply of the economy. It is a sister strategy to a national fiscal policy aimed at economic and price stability. The monetary policy of Nepal is governed ad controlled by Nepal Rastra Bank (NRB) under the provisions laid down by the Nepal Rastra Bank Act 2058. Within the compliance with the act, NRB has been publishing monetary policy every year since FY 2059/60. Monetary policy for FY 2077/78 is going to be a continuation of the annual routine. But this time around, the scenario and situation are more different than ever before in any fiscal year.

At present, COVID-19 has disrupted the global economy severely. The impact of which is distinctly significant in the banking and financial system of the world. The regular liquidity channel for banks is disturbed with the downsizing of the trading, industrial, and service sector. The situation is even worse as the more public fund has to go out through banks in the name of relief measures for health, industry, employment, and social security. This has contracted government deposits with banks. This situation is no different in both advanced as well as emerging economies. Only their hardship of impact is different. Hence, this is an alarming time for global banks and financial institutions to ensure their current existence and future subsistence within COVID has driven crisis circumstances.

In the context of Nepal, recent lockdown and widespread COVID-19 have not only exposed the vulnerability of the health system of Nepal. But also the exposure to prompt downfall of economic and financial activities of the country. Trade, public transportation, tourism, and the hospitality sector has been most severely hit with no proper revival measures for these sectors even with relaxation in lockdown. More than half a million have lost their job in domestic and foreign employment. Remittance has gone down remarkably. The moratorium period for interest and principal of bank loan fully or partially has reduced regular cash arrival into the banking channel. However, recent loose down of lockdown has seen a significant jump in cash arrival into the banking system as part of loan repayment. Most banks now have no new lending opportunities. Moreover, loan recovery from the most badly hit sector seems a huge challenge for Nepalese banks.

 

Key Addressable Issues 

The monetary policy for FY 2077/78 is not coming in a normal situation. It is coming at the periphery of the global health pandemic having a persisted impact on the Nepalese economic and financial system. It has to be drafted to attain economic revival and financial sector survival. It has to be supportive enough to facilitate the budgetary goals of the Government of Nepal for FY 2077/78. It has to be a good facilitator to achieve economic growth of 7% and inflation of below 7% for the next fiscal year. Considering global and national economic status, the target seems to be fairly unrealistic. Yet, monetary and financial arrangements have to be directed towards these goals through the forthcoming monetary policy of Nepal. The policy has to address the balance between such ambitious targets and the reality of possible monetary control and financial arrangements through different tools and techniques.

After the end of the immediate moratorium directed by Nepal Rastra Bank and relaxation in lockdown, liquidity has piled up in the banking system. This is due to individuals and businesses paying their dues on their bank loans. This has a distinct pressure on open market operation, required reserve and the bank rate to be addressed by new monetary policy to be issued by NRB. The market for buying and selling of bonds for liquidity adjustment is unpredictable. The required reserves can only be increased for a short period to absorb excess market liquidity. This cannot continue in the long run. Similarly, with piled liquidity with banks, bank rates can only go up. But this is a situation of lack of new lending opportunities which is bound to change favorably as the coronavirus crisis goes down steadily. Realistically, the downgoing of the COVID crisis is unpredictable. The new monetary policy is bounded to come out with immediate and long term strategies for the banking sector to go simultaneously with the adversity of the impact of such COVID driven economic and financial troubles of Nepal.  

There is a lack of new lending opportunities for banks despite piled liquidity after the end of a moratorium and loosed lockdown. There is no favorable scenario for giant industrial lending entrepreneurial promotion throughout the country. However, agriculture is a mere rare sector whose upliftment can assist in the faster revival of the Nepalese economy in terms of employment generation and self-reliance in agricultural products. This can act as a major contributor to the correction of the unfavorable balance of payment of Nepal in the future. Hence, more concessional and process simplified priority sector lending in agriculture ought to be addressed by a new monetary policy for FY 2077/78. The compulsory lending in the agriculture sector by BFIs has to be increased at least by 3 percent to make the additional promotion of the agriculture sector. However, the major focus should be on making it more specific and accessible for those truly deserving such credit facilities.

Recent lockdown and need for practicing physical distancing norms have proven the need and vitality of digitalized banking services in the context of Nepal. Primary digital banking services such as mobile banking, ATM, cash deposit machine, POS, and QR codes have to widen their brackets covering a much larger part of the financial system than the existing one. That’s why the new monetary policy should address such a need to promote banking digitalization and achieve the dream of cashless Nepal. A clear policy on the expansion of such services to individuals, retail and wholesale outlets, and the service sector must come. The transaction security enhancement and cost reduction per transaction must be addressed making them more trustworthy, reliable, and accessible. There is a need for increasing transaction numbers and volume per transaction in such digital platforms making them an easy and simple receipt and payment mechanism. Mobile banking and ATM card should be promoted as a compulsory part of any account rather than an optional service to be hired. Similarly, cash deposit machines must be made mandatory for all urban bank branches initially to avoid concentrated crowding inside bank premises at a time. Likewise, it must address the need for POS and QR code services at outlets with definitely registered capital bracket as a compulsory requirement at the time of their incorporation.

Apart from this, some of the banks of Nepal are urging for a relaxed monetary policy enforcing the measure to reduce or close their branches. This is playing around COVID-19 to shut down their branches incurring a loss. This has to be addressed rationally. This should not be promoted strategically by the forthcoming monetary policy for FY 2077/78. This must not be in the cost of the goal of broader financial accessibility throughout the country. Further financial literacy with physical distancing via online platforms directed towards digital awareness and customer skill enhancement should be supported by the policy. A fine financial action plan for maintaining a foreign exchange reserve must come addressing the worse scenario of reduced remittance and ruined tourism sector of Nepal.

The provisions and period for merger and debenture issues need a relaxed time extension. The loan repayment status of transportation and tourism businesses is very poor as they operate using flowing money rather than past saving. The new monetary policy must address such a situation. It should be addressed with a concessional loan arrangement or even subsidy to some extent. Only this can prevent these sectors from being bankrupt and dependents on these sectors to move to other sectors. The percentage bracket for priority sector and deprived sector lending has to be widened to include more needy individuals and businesses hampered by the current crisis. Loan provisioning for different categories has to be relaxed both time and percentage of provisioning wise. The content and percentage of CCD ratio must be relaxed without hampering the lending health of the financial system of banks and financial institutions of Nepal.

Along with these issues, the monetary policy for FY 2077/78 must address other regular monitoring and compliance issues in the banking sector of Nepal. The targeted spread rate of 4.4% set by the monetary policy of FY 2076/77 needs time extension to achievement which is worth addressable by the next version of the monetary policy of Nepal. Simplification of credit process in terms of documentation, time, and interest for project-based entrepreneurial activities must be guided to promote self-employment in the current disrupted Nepalese economy. Similarly, other issues like clients’ protection, existing loan recovery, the digital transformation of banking services, promotion of digital service systems, the security of the digital platform, refinance facilities, etc. have to be dealt with in the current COVID driven crisis more smartly than ever before by any previous monetary policies.

 

Conclusion 

The issuance of monetary policy is a regular annual phenomenon for Nepal Rastra Bank in the context of Nepal. It always has been a supportive strategy to facilitate the achievement of financial goals set by the Government of Nepal through control of money supply in the economic system. But this time around the normal economic and financial scenario for Nepal has changed to a new normal due to the persistence of the COVID crisis. It must suit the need for economic revival and financial sector survival in Nepal. It has to be a good facilitator to achieve the fiscal targets for FY 2077/78. This ought to be done through the relaxation of some of the existing policies and tightening of some other ones. In between these, NRB is compelled to come with some new financial sector related strategies to combat the calamities of the COVID era. There has to be effective coordination between monetary tools of open market operation, reserve requirement, and the bank rate to address the current hardship of Nepalese banking and the financial sector. The policy has to understand the changed need for liquidity adjustment, digital banking services, recovery of existing loan and loan provisioning, cashless banking, and financial literacy.

Moreover, the monetary policy for FY 2077/78 must address the changed banking perspectives in multiple aspects of the new banking environment of Nepal. Nepal Rastra Bank can opt for neither a very relaxed nor very rigid monetary policy for the next fiscal year. Very relaxed means supporting the deeds of those wanting to take favor of the situation misleadingly regarding bank branch closure, firing out of staffs injustice, heavy lending in non-productive and non-prioritized sector, etc. A very rigid policy means enhancing the illness of the banking and financial sector to severe infection with diversified sectoral damages. However, it must be understood that policy once set will need numerous revisions and ratifications during the next fiscal year depending upon the tendency of COVID-19 impact. Hence, the monetary policy for FY 2077/78 must come with justifiable changes in different monetary measures to set genuine trade-off between liquidity and lending bagged by controlled money supply and discount rate mechanism. With this, it must address the implementation of BASEL 3 and other financial norms and accords within the changed financial sector need of Nepalese banks and financial institutions without hampering current financial sector expansion and accessibility. Only with such strategic drafting of the new monetary policy can ensure the survival and sustainability of the Nepalese financial sector addressing the key contextual issues for Nepal to be economically sound and stable in challenging future ahead.