Monetary Policy 2083/84: Key Facts You Need to Know
Image source, NRB
The Nepal Rastra Bank announced the monetary policy on Tuesday, considering the possibility of achieving the government’s set economic growth target of 7 percent for fiscal year 2083/84.
In its 25th monetary policy publication, the central bank claims that although the economic growth target is ambitious, it is achievable.
“…As a result of economic reform programs initiated by the government, the investment climate in the private sector is expected to improve, government capital expenditure capacity to increase, and if external economic conditions remain favorable, the expected economic growth rate can be achieved,” the policy document states.
Governor Bishwanath Paudel said that the monetary policy aims to maintain overall monetary stability, keeping inflation within the target of 5.5 percent.
“To achieve this target, institutional reforms in banks and financial institutions will be undertaken, reducing their capital operational costs and simplifying the process of borrowing from savers,” he explained.
Loan Management
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The governor highlighted new arrangements for stricter personal collateral requirements from institutional borrowers, reducing the number of defaulters on the blacklist, management of inactive loans, and new instruments to revive pressured loans.
The policy also focuses on reforming deposit institutions to protect depositors’ interests and stipulates that interest rates will not be allowed to fall excessively by considering economic conditions.
“The monetary policy emphasizes providing safe savings and easy loans at reasonable interest rates to everyone from depositors across the country to the economically disadvantaged and industrialists,” Paudel noted.
Targets have been set for an 11 percent expansion in loans to the private sector and a 14 percent increase in money supply for fiscal year 2083/84.
Due to supply-related reasons, prices of petroleum products and food items have increased, impacting inflation slightly for a few months, but it is expected to decline from the fourth quarter and remain within 5.5 percent.
Supporting Economic Expansion
According to the central bank, liquidity levels and interest rates in the monetary sector are likely to support economic expansion.
Since the fiscal policy includes public expenditure expansion, income tax cuts, and economic reform initiatives, overall demand is expected to increase, resulting in expanded economic activity.
Additional liquidity is expected from remittances, tourism income, and public spending, but liquidity management challenges remain.
Although banks and financial institutions have satisfactory financial stability, close monitoring is necessary due to rising non-performing loans and capital pressures in some institutions.
“While economic activity growth will increase imports, remittances will remain high and expansion of service exports such as tourism will help maintain a good current account balance and increase foreign exchange reserves,” the policy states.
Although there is some inflationary pressure, it is expected to gradually ease, and inflation is forecast to remain within the bank’s set limits next year.
“If inflationary pressures rise and pose challenges to overall economic stability, the monetary policy will be reviewed, and the interest rate corridor will be adjusted as necessary,” the policy adds.
Open Market Operations
With foreign exchange reserves currently comfortable and appropriate from a macro perspective, a flexible operational approach has been maintained to boost private sector morale.
The monetary policy plans to maintain the interbank weighted average rate of banks and financial institutions while conducting open market operations around the policy rate.
During operations, tools with various tenors will be employed depending on the type of liquidity.
“To facilitate liquidity management arising from foreign currency purchases, commercial banks will be encouraged to invest in foreign government securities with a sterilized intervention policy implemented among this group,” the policy states.
Regulatory measures will be applied based on completed classification studies of banks and financial institutions to promote corresponding service expansion.
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Banking Sector’s Response
Santosh Koirala, President of the Nepal Bankers Association, stated that this year’s monetary policy is different from previous ones.
He noted that the monetary policy and the central bank’s circulars are distinctly different this time and that the monetary policy has made no changes to any bank rates.
“The monetary policy simply states that access to foreign government securities will be eased, liabilities on the blacklist will be limited, and the investment environment will be supported,” he said.
“Only after the central bank issues further circulars will banks’ concerns be addressed. It is a more accommodative monetary policy than usual.”
He added that the monetary policy aligns with the budget passed by both houses of parliament on Tuesday.