Monetary Policy Amid Covid-19 Crises

Corona’s (Covid-19) transitional state may delay the release of the monetary policy for the fiscal year 2077/78 by a few days. The main thing is what kind of monetary policy to bring during the transition period. Prior to the constitution, monetary policy was introduced the week after the budget was tabled in parliament. Let’s hope that even in this complex situation, monetary policy will come in a way that will be optimistic for the region to be addressed.

Monetary policy plays an important role in expanding economic activity in the country. Monetary policy is directly linked to the economic activities of the country’s private sector. This is because the private sector operates various industries, trades and businesses by taking loans from banks and financial institutions and monetary policy directs and regulates those banks and financial institutions. Therefore, banks and financial institutions and the private sector are very interested in monetary policy.

In an open economy like Nepal, the main objective of monetary policy is to control inflation. Nepal Rastra Bank Act 2058 has also made such provision. However, as Nepal’s economy is based on imports, monetary policy has not played a significant role in controlling inflation.The inflation rate of an import-based economy is also imported. Therefore, the central bank does not have to do much to control inflation. But despite the limited role of the central bank in controlling inflation, the central bank must be sensitive to that extent. Another important objective of monetary policy is the regular flow of liquidity required by the economy each year. The central bank has failed in this regard in recent years. But this does not mean that the central bank has not done anything about it. However, due to the limited capacity of the central bank, these efforts have not been relatively successful. Despite these efforts, there is still a lack of liquidity in the market. The private sector has not been able to get loans as per the demand on the one hand and the interest rate on the loans has been high on other.

As Nepal’s economic situation is based on remittances, its contribution to GDP is huge. The rate of remittance inflows has been declining since last year. It remains to be seen what kind of monetary policy Rastra Bank will come up with in a way that addresses the problem created by the corona virus at a time when specific areas of monetary policy are unsettled. Now, remittances are set to decline further after this crisis.The global impact of the corona virus has made it difficult for employers to run their own businesses, and young people who send remittances abroad have returned or lost their jobs. The commercial tourism sector is silent, which will certainly affect bank deposits and the government’s foreign exchange reserves. Even if there is no immediate demand for loans in the bank, long-term demand will continue to increase. That remains to be seen. Considering the complex situation, it seems necessary to strike a balance between bank deposit interest rate and loan investment interest rate.

Even in the current complex situation, some liquidity has started flowing in the market and the deposit collection has also increased. Now, even after the hailstorm, the demand for loans will not increase accordingly even if the money is deposited in the investment fund. The main reason for the lack of liquidity in the winter months is that large installments of income tax (30-30 percent) have to be paid to the government in advance in mid-December and mid-April, but the government has not been able to spend that amount (capital budget).In the current crisis, the government has not been able to spend the development budget, but at the end of the year, there is a tendency to spend some development budget in a hurry. More consistent development budget expenditure could have alleviated the problem of lack of liquidity in the market. In the current transitional period, there has been a reduction in capital budget spending, so there is no liquidity in the market for a few months now or there will not be much facilitation. This is also confirmed by the fact that towards the end of the fiscal year, when the government starts spending in July, the level of liquidity in the market rises and deposit collection also starts increasing.It is a product of liquidity even at such times. This year has been exactly the same. Therefore, the problem of lack of liquidity is not a permanent problem of the economy. Now the government has to pay special attention to spending the capital budget. Then there will be no liquidity problem. In that case, the interest rate will also improve. However, the central bank should be constantly vigilant about the liquidity situation in the market.

In times of crisis, next year’s monetary policy should focus on the following three areas:

(1) Bringing balance and stability to the financial sector,

(2) Improving the declining balance of payments, and

(3) Expanding credit flows to the export and productive sectors.

Especially in the winter months, the lack of liquidity in the market and the consequent rise in interest rates, which has been seen in the market for the past few years, has become inevitable.

The market is also being affected due to high interest rates of industrialists and investors in the capital market. At the same time, investment is being frustrated by high interest rates at a time when investment in the economy needs to be increased as much as possible. And, as banking services become more expensive, these services are becoming thicker and weaker in other economic sectors. Therefore, the monetary policy should place special emphasis on increasing the liquidity flow as well as significantly reducing the current interest rate by increasing the efficiency of the banks. Due to excessive import growth, the current account deficit has been increasing for a long time and such deficit has been increasing in recent years.

There is no doubt that the number of banks should be reduced as they are more than required, but it is important to give time to mentally prepared banks with some incentives.

Now for some time, the current account will increase when goods are imported for consumption. Due to this, Nepal’s foreign exchange reserves are declining. If such depreciation is not mitigated in the coming days, it will not take long for Nepal to fall into a serious economic crisis. Therefore, the government and the central bank need to be serious about this issue.

This monetary policy should announce effective measures to control foreign exchange expenditure and increase revenue to improve the current account deficit. Under the spending cuts, first of all, there should be a massive cut in government, business and private foreign trips. Students with low marks in basic level examinations should be barredfrom studying abroad. As the recent Indian budget increased the customs duty on gold imports to 12.5 percent, gold imports to Nepal will now increase rapidly. In otherwords, the possibility of importing gold to meet the demand of India has increased. That must be controlled. In addition, imports of high value alcohol, perfumes, private two-wheelers and four-wheelers and other similar consumer goods should be controlled. Expenditure on other foreign exchange expenditure headings should also be extensively reviewed.

Similarly, towards income, the tradition of sending remittances from abroad mainly through hundi should be strictly controlled. The business of money changers should be strictly monitored. Foreign investment should be specially encouraged. A package with special facilities should be brought to promote exports. It is seen that the arrival of foreign tourists is decreasing now. However, it seems that a similar package has to be brought to attract foreign tourists.

There was talk of double digit economic growth in Nepal, but now the economic growth rate is estimated to be around 2.27. For which the interest rate of the bank should not be allowed to go up. And, the central bank is in a position to do nothing. Entrepreneurs, on the other hand, are forced to borrow from banks at high interest rates. In this situation, double digit economic growth rate cannot be achieved. Therefore, if the central bank is to contribute to achieving double- digit economic growth, the current monetary policy should at least provide credit to the entire export and productive sector at low interest rates (6-7 percent) as per the demand.

In times of crisis, the demands of various industrialists and businessmen should be addressed through in-depth discussions. To address this does not seem possible from the prevailing interest rate system of banks. Therefore, the scope of refinancing activities should be expanded until the prevailing interest rates are significantly improved, and the amount set aside by the central bank for refinancing should be significantly increased from the current Rs 60 billion.The merger of banks is not only a big deal but also how to run them in healthy competition and how they have provided services within the policy of the regulatory body. Open competition in the name of merger should not be underestimated. At present, when there is competition, banks and financial institutions have reached the villages. At the same time, banking literacy is a condition that has reached the maximum number of citizens.

Monetary policy should not make this the main agenda. There is no compelling need to immediately reduce the number of banks providing services. And, it’s not a hasty and taxing thing to do. There is no doubt that the number of banks should be reduced as it is felt that the number of banks in Nepal is more than required. But banks should be given time to prepare mentally by giving some incentives for this. Sensitive banking sector can be disturbed by hasty and tax mergers. If the banking sector loses credibility, the economy could plunge into crisis.

-Prakriti G.C -Research Assistant with Institute of Foreign Affairs

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