As with previous tradition of brining out monetary policy after the Government presents the budget Nepal Rastra Bank (NRB), has made public the monetary policy for 2012/13. The Monetary Policy for the fiscal year 2012/13 unveiled by Nepal Rastra Bank has given priority to the productive sector to meet the economic growth target of 5.5 percent in the current fiscal year.

The former President of the World Bank had said that though Government may come up with best financial and monetary policy but if the country is not managed by good governance, the objectives laid down by the financial and the monetary policy cannot be achieved. This remark is still relevant in the present day context of Nepal and the Nepali monetary sector. The formal launching of the monetary policy in Nepal has a very limited history probably less than a decade.

In the international community of central bankers, there is widespread consensus that the primary goal of monetary policy must be domestic price stability. Price stability, however, is only a means to an end, and not a final goal of overall macroeconomic policy. The ultimate goal is determined by governments and is normally linked to the objective of maximum economic growth, development and the creation of more employment opportunities.

Contemporary economic theory supports the view, however, that financial stability, as measured by a low rate of inflation, is a precondition for the attainment of optimum economic development. Furthermore, monetary policy, being only one of the sub-elements of overall macroeconomic policy, is tasked with the responsibility to create and maintain such a stable financial environment that will be conducive for sustainable economic growth at an optimum rate in the medium and longer term.

Monetary policy is the process by which the government,  central bank, , or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of  interest, , in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is generally referred to as either being expansionary policy, or a contractionary, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment and a recession recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy should be contrasted with the fiscal policy, which refers to government borrowing, spending and taxation.

New monetary policy is truly impressive not because it contains well perceived monetary policy, and the detailed programmes for implementation, but because of the fact that it does not promise, like the regular budget, something for everybody.

The most important question has never been raised. It is: Can an open economy like Nepal that is maintaining a fixed exchange rate with its major trading partner follow an independent monetary policy and inflation rate? Our routine answer is, no. Unfortunately, the policymakers will never learn, notwithstanding comments in the past from several institutions and individuals. It may be recalled that the International Monetary Fund (IMF) has explained as early as January 2001 how monetary policy in Nepal should be conducted.

A look at the highlights of the monetary policy, inter-alia, includes: Targets for FY 2012/13 for GDP growth has been put at 5.5 percent, Inflation: 7.5 percent, Money supply growth: 15 percent, Deposit growth: 15.1 percent (Rs 1160 billion), Credit growth to private sector: 16 percent, Foreign exchange reserve:  sufficient to finance eight months of imports.

The Policy changes envisaged to achieve the above targets are: As per the policy to give priority to productive sector, the refinancing rates has been reduced to 6 percent from 7 percent in the sectors like agriculture and hydropower that is provided to the banks and financial institutions (BFIs). Under the facility, the BFIs are not allowed to issue the loans at the interest rates more than 9 percent to the customers. Similarly, the policy has also fixed the refinancing rate at 1.5 percent for sick industries, small and cottage industries, foreign employment while the BFIs are barred to re-loan at interest rates more than 4.5 percent from the customer under the facility.

Likewise, the commercial banks, development banks and finance companies should compulsorily lend 4 percent, 3.5 percent and 3 percent of the total loan portfolio to the deprived sector, as per the policy. The policy has raised the ceiling of US$25,000 in the imports of goods from the third countries to US$30,000 through draft/TT. Similarly, the central bank has also raised the foreign exchange to maximum US$10,000 from the previous US$6,000 for the individuals and firms travelling for different purposes.

For overseas travelers, foreign currency facility for each travel increased to US$2500 for public and US$5000 for entrepreneur. Earlier, there was a cap of US$5000 for a year.

CRR increased to 6 percent for commercial banks, 5.5 percent to development banks, and 5 percent to finance companies. Earlier, it was 5 percent for all BFIs. Bank rate increased by one percentage point to 8 percent. Deposit insurance of up to Rs 300,000 from Rs 200,000. Deprived sector lending by BFIs increased by 0.5 percentage points. Refinancing rates for agriculture and hydropower lowered to six percent from seven percent. BFIs to initially issue loans under the facility at rates of up to 9 percent.  Refinancing facility to migrant returnees on loans take for commercial purposes. National Financial Literacy Policy and Financial Sector Development Strategy to be formulated. Financial Stability Unit to be set up at the central bank and it will bring out Financial Stability Report. Commercial banks allowed to invest up to 30 percent of the amount parked in agency banks abroad in low risk instruments such as call deposit and certificate of deposit. Interbank lending transaction set at maximum of 7 days. PAN number mandatory while taking loan more than a set limit.

Private’s perspective

It has been reported in the press that the  private sector  people were expecting to get some relief in the form of interest rates reduction due to Monetary Policy measures,” The increase in CRR will increase cost of fund of the banks and financial institutions. The private sector fears that the interest rate — that has increased the cost of doing business — might not come down as expected due to excess liquidity in the financial system because of the hike in CRR.

private sector finance association are of the view that at time when there is no demand for the credit due to high inflation are of the view that the interest rates, the Monetary Policy has also prescribed deposit insurance of up to Rs 3 lakh from the current Rs 2 lakh that will again increase the cost of fund of the banks and financial institutions as the Deposit and Credit Guarantee Corporation has not yet reduced the deposit insurance premium.. “The increase in deposit insurance will boost the confidence of depositors on the financial system but at the same time the banks and financial institutions’ expenses will rise,” he said, asking NRB to help reduce premium rate.

After the NRB Act 2002 gave the central bank an autonomous status, it started to formulate sound comprehensive monetary policy and strategies to stabilize financial sector, inject money for the economy that could help grow as targeted by the fiscal policy and check inflation. But it is the second time that NRB has brought monetary policy in the absence of full-fledged budget.

Among others, the monetary policy has also mentioned the definition of agriculture would soon be made more inclusive, by including agricultural inputs, feeds, irrigation and storage, and selected agricultural product processing units in the sector.

(Singh is general manager of Nepal Stock Exchange (NEPSE). Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

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