Tuesday, July 26, 2011

Nepal’s Monetary Policy for FY 2011-2012

I forgot to post it even though I wrote it few days back. So, here it is, my take on the monetary policy for fiscal year 2011-2012.

Major highlights:

  • CRR to be 5 percent (decrease by 0.5 percentage points)
  • Growth rate target of 5%
  • Inflation target of 7%
  • BoP surplus target of Rs 5 billion
  • Forex Reserve targeted to finance at least 6 months of imports
  • Broad money supply target 12.5%
  • Domestic credit growth target 13.7%
  • Credit growth to private sector target 14%
  • Banks deposits growth target of13 percent growth, up by Rs 87 billion to Rs 756 billion
  • Bank rate (policy rate) unchanged at 7 percent. The penal rate, which NRB has been charging while issuing finances to the BFIs, has been left unchanged at 3 percent of over 91-day Treasury Bill rate or bank rate, whichever is higher.
  • NRNs allowed to open dollar account.
  • Foreign exchange facility raised to US$ 2,500 at one instance and up to US$ 5,000 in total in a year by showing relevant document (mainly passport). NRB has also allowed Nepalis returning from foreign country to carry up to US$ 1,000 on behalf of Nepalis residing abroad for giving it to their family members back home.
  • Deprived sector lending for BFIs increased by 50 basis points. Commercial banks, development banks and finance companies would need to lend 3.5%, 3% and 2.5% respectively of their total loan portfolio to the deprived sector.They will need to raise such loans by 50 basis points every year for the next three years.
  • The central has bank agreed to let BFIs issue loans in foreign currency in priority sectors like hydropower and infrastructure.
  • Intensify actions against willful defaulters that took loans of Rs 10 million or more from BFI
  • To strictly enforce prudent corporate governance in the BFIs and punish players that flout its norms
  • Legal actions against borrowers that use loans, taken for one stated purpose, to run different unproductive businesses
  • Loans of Rs 1.5 million at zero interest rate to the micro-finance institutions--the category D financial institutions--if they opened branches in 9 remote districts where access to finances is pretty low.

More highlights here. Here is the full text in Nepali language.

Quick comments:

  • A sudden decline in BoP deficit and a surplus of Rs 1 billion due to reimbursement of foreign aid (grant and loan), pension of Gurkhas, and government expenditure is expected for FY 2010/11. The deficit was around Rs 12 billion in the first eleven months of FY 2010/11.
  • Bringing down CRR by 0.5 percentage points will not solve the liquidity crisis, whose roots lie in the number of BFIs, which meant that the more they are, the more money they need to keep up their deposit and loan targets.
  • GDP growth, inflation and BoP targets are very unlikely to be achieved. These targets are follow up of the targets mentioned in the budget. It is NRB’s religion to do that. But, it should be more honest in advising the government on what can be achieved and what not. GDP growth target is hard to achieve due to loss in productivity and power outages and other non economic constraints. High and sticky inflation has more to do with supply-side constraints and the NRB can do very little to tame it. Partly, it is also due to rising food prices, which are unlikely to come down. BoP target is hard to achieve because we are in the same mess as we were two years ago.
  • It is very disappointing that the NRB has not brought clear policy framework to incentivize BFIs to go for merger or acquisition. Nepal’s financial sector needs consolidation and the BFIs will not do it on their own and will wait till the last moment when the NRB will be forced to step in.
  • The bank rate should have been lower (it should be always lower than inter-bank rate). Since inter-bank rate is very high, it would not hurt to lower bank rate below 7%. The lower the bank rate, the higher will be credit withdrawal by banks from NRB. This would have reduced strain in short term liquidity in the market.  
  • Emphasis on channeling credit to deprived sectors and in rural areas is noteworthy of this monetary policy.
  • Overall, it is a weak policy that will do very little to bring Nepali economy out of the mess it is in right now.