Thursday, July 30, 2020

Reimagining GDP and measures of economic prosperity

Joe Stiglitz on the usefulness of GDP as a measure of wellbeing:

[...]After six years of consultation and deliberation, we reinforced and amplified our earlier conclusion: GDP should be dethroned. In its place, each nation should select a “dashboard”—a limited set of metrics that would help steer it toward the future its citizens desired. In addition to GDP itself, as a measure for market activity (and no more) the dashboard would include metrics for health, sustainability and any other values that the people of a nation aspired to, as well as for inequality, insecurity and other harms that they sought to diminish.
These documents have helped crystallize a global movement toward improved measures of social and economic health. The OECD has adopted the approach in its Better Life Initiative, which recommends 11 indicators—and provides citizens with a way to weigh these for their own country, relative to others, to generate an index that measures their performance on the things they care about. The World Bank and the International Monetary Fund (IMF), traditionally strong advocates of GDP thinking, are now also paying attention to environment, inequality and sustainability of the economy.

OECD's Better Life Initiative lists 11 indicators to gauge the quality of life: housing, income, jobs, community, education, environment, civic engagement, health, life satisfaction, safety, and work-life balance.

Stiglitz argues that the use of prices as a proxy for value- believing that in a competitive market prices measure relative value of goods and services- is problematic. 

[...]Over time, as economists focused on the intricacies of comparing GDP in different eras and across diverse countries and constructing complex economic models that predicted and explained changes in GDP, they lost sight of the metric's shaky foundations. Students seldom studied the assumptions that went into constructing the measure—and what these assumptions meant for the reliability of any inferences they made. Instead the objective of economic analysis became to explain the movements of this artificial entity. GDP became hegemonic across the globe: good economic policy was taken to be whatever increased GDP the most.
[...]It would have been nice, of course, if we could have come up with a single measure that would summarize how well a society or even an economy is doing—a GDP plus number, say. But as with the GDP itself, too much valuable information is lost when we form an aggregate. Say, you are driving your car. You want to know how fast you are going and glance at the speedometer. It reads 70 miles an hour. And you want to know how far you can go without refilling your tank, which turns out to be 200 miles. Both those numbers are valuable, conveying information that could affect your behavior. But now assume you form a simple aggregate by adding up the two numbers, with or without “weights.” What would a number like 270 tell you? Absolutely nothing. It would not tell you whether you are driving recklessly or how worried you should be about running out of fuel.
That was why we concluded that each nation needs a dashboard—a set of numbers that would convey essential diagnostics of its society and economy and help steer them. Policy makers and civil-society groups should pay attention not only to material wealth but also to health, education, leisure, environment, equality, governance, political voice, social connectedness, physical and economic security, and other indicators of the quality of life. Just as important, societies must ensure that these “goods” are not bought at the expense of the future. To that end, they should focus on maintaining and augmenting, to the extent possible, their stocks of natural, human, social and physical capital. We also laid out a research agenda for exploring links between the different components of well-being and sustainability and developing good ways to measure them.


Tuesday, July 28, 2020

What will post-COVID-19 economic recovery look like?

The World Economic Forum's latest Chief Economists Outlook includes views of 40 chief economists on post-COVID-19 pandemic recovery. The focus is on pace and pattern (or direction and quality) of economic growth, which needs to be inclusive, sustainable and provides opportunities for all. 

According to the report, the crisis has unraveled five specific outcomes:
  1. Too optimistic stock markets about the speed of recovery: Unemployment figures are a better indicator to global economic outlook than the upward swings in the financial markets.
  2. A unique moment to tackle inequality: COVID-19 pandemic has reinforced inequality as technological change and global integration have not been evenly distributed previously. It presents policymakers an opportunity to launch universal basic income, upgrade social protection measures and help to develop socio-economic mobility.
  3. Rethinking tax policy: Tax policy has a role in addressing inequality. Tax architectures need to curb tax evasion, set an international agreement to fairly tax digital activity, and rethink wealth taxes and higher marginal income taxes. 
  4. Supply chain disruptions could hamper developing economies: The pandemic has exacerbated existing uncertainty caused by trade disputes and technology standards. Firms may take critical parts of supply chains to their home country or procure them from difference countries to boost resilience. High likelihood of a reversal of international economic convergence due to the transformation of supply chains. But then there could be higher investment in human capital in emerging markets as remote working gains popularity and they can competitively price their services.
  5. New growth markets could emerge with right action: Crisis will impact innovation that will affect long-term economic progress. New frontier markets that are emerging are green energy, healthcare, education, etc.
The report also identifies three broad emerging challenges during the recovery phase:

Retooling economic policy to reduce inequality and improve social mobility (pandemic  is affecting jobs and income of the low-skilled workers, and wedge between high- and low-skilled workers is widening)
  • Transforming tax architectures: reduce tax evasion, fairly tax activity generated in the digital economy, wealth tax, higher marginal income tax
  • Supporting labor market transitions and social protection: wage subsidy, shorter working hours, social safety nets for those without long-term contracts, continuous retraining, upskilling and life-long learning, universal basic income 
Identifying new sources of economic growth (innovation and global integration, the two important drivers of inclusive long-term economic progress, are impacted, R&D investment is declining, multinationals are repatriating parts of their value chains, trade finance is becoming harder to access for countries with weak institutions)
  • Co-creating new frontier markets with active government support: green energy, ecotourism, circular economy, health, education, training, and care economy. Use of technology and market forces in these frontier markets could have transformative impact
  • Finding new paths for economic development and global convergence: dwindling comparative advantage of low-wage countries in global value chains as companies can automate them and repatriate the work to their HQs – it puts severe pressure on East Asian growth model; mobile payments and digital transactions alone are not going to be far-reaching to serve as the foundation of a new long-term growth model; greater resilience in supply chains is needed perhaps through greater self-sufficiency or parallel supply chains; competitively priced services based on wage differences across countries; higher investment in human capital 
Aligning on new targets for economic performance (a consistent set of targets is critical to create accountability and assess progress for both governments and firms; identify relevant business metrics of environmental, social and governance performance) 
  • Embedding stakeholder capitalism in business: embed greener and more inclusive growth in business model; pay attention to the well-being of employees, suppliers and customers; follow environmental, social and governance standards 
  • Building consensus on a new set of national economic policy targets: targeting GDP recovery alone will not be sufficient; update measures of GDP and include different dimensions of inequality; financial, physical, natural and social capital are important too; include the contribution of digital economy

Sunday, July 26, 2020

Accommodative monetary policy and implementation challenges

**This is a longer draft version of the previous article on monetary policy for FY2021. A Nepali version of this one is published in Nayapatrika.**

In his first monetary policy, unveiled on August 17, as governor of Nepal Rastra Bank, Maha Prasad Adhikari, rolled out an expansionary policy that aims to provide regulatory as well as immediate relief to struggling businesses and households from pending loan obligations. The healthcare and economic shocks owing to COVID-19 pandemic and subsequent lockdowns to contain its spread have been unprecedently disruptive. Given the extended period of lockdowns, supplies disruption and subdued aggregate demand, economic growth in fiscal 2019/20 is projected to be much lower than 2.3% estimated by Central Bureau of Statistics before the pandemic. The shortage of goods and services has increased inflationary pressures, and lending interest rates have remained in double-digits. The acute cash flow problems faced by businesses, and either layoffs or reduced working hours faced by individuals have increased the risk of a liquidity crisis morphing into a solvency crisis.

Against this backdrop, the monetary policy for 2020/21 aims to achieve the ambitious 7 percent economic growth target set by the government, maintain adequate liquidity, limit inflation to 7 percent, encourage merger of banks and financial institutions, enhance access to finance, and promote reliable digital transactions. The conventional monetary policy tools as well as macroprudential policies have been much more accommodative than what we have seen after the catastrophic earthquakes in 2015. The private sector and banking associations have welcomed the measures outlined in the policy.

Monetary instruments

Among the targets for 2020/21, the central bank wants to limit average inflation to 7%, ensure foreign exchange reserves adequate to cover 7 months of goods and services import, ensure adequate liquidity to facilitate economic recovery and to achieve 7% growth target, 18% growth in money supply, and credit growth to private sector of 20%. 

Since we have fixed our exchange rate with the Indian rupee, Nepal Rastra Bank cannot independently control inflation. Furthermore, supplies side constraints such as a lack of adequate and reliable infrastructure (electricity, road network, and irrigation among others), fuel prices, and market imperfections in the form of cartels or syndicates also affect inflation. That said, NRB can influence credit flows to sectors that are seeing sharp rises in prices. By setting inflation target of 7% NRB has adopted an accommodative monetary policy stance as it seeks to facilitate adequate liquidity and credit flows to sectors affected by COVID-19 pandemic.

To achieve these targets, the central bank is planning to use a number of monetary instruments at its disposal. Although controlling inflation is not fully within the domain of Nepal Rastra Bank, thanks to the fixed exchange rate regime, it nevertheless has accommodated a higher inflation target than last fiscal by rolling an expansionary monetary policy. For instance, it has reduced policy repo rate, which is the rate of interest charged by NRB on the repurchase of government securities, by 50 basis points to 3 percent. This essentially increases liquidity as BFIs can now borrow money at a lower rate from NRB by selling government securities they hold. NRB also uses repo rate to maintain interest rates within the interest rate corridor, which is aimed at reducing interest rate volatility. Similarly, it has reduced term deposit rate, which is the lower bound of interest rate corridor, by 100 basis points to 1 percent. This will discourage BFIs to deposit extra money at the central bank because the rate of return will be even lower. It has also committed to allow long-term repo facility if required as current repo operations are limited to two weeks. In March 2020, NRB had already reduced cash reserve ratio and bank rate by 100 basis points to 3 percent and 5 percent respectively, and lowered policy repo rate by 100 basis points. These measures are aimed at increasing liquidity and to lower interest rates.

In addition to these traditional monetary policy instruments, the central bank has also provided regulatory relief by tweaking macroprudential policies, which are designed to mitigate system-wise risk and to reduce asset-liability mismatches. For instance, it suspended two percent countercyclical buffer requirement, which commercial banks have been maintaining in addition to minimum 10% capital adequacy ratio. The additional buffer is imposed during normal times to lower systemic risk in case of a sudden deterioration in balance sheets. It has tweaked loan classification by allowing credit extended to healthcare sector to be counted as priority sector lending and waived off fees on online transactions.  It has increased credit-to-core capital cum deposit (CCD) ratio to 85 percent from 80 percent till 2020/21.

NRB has also extended moratorium on loan payments and allowed for restructuring as well as rescheduling of loans provided to COVID-19 affected sectors. Furthermore, the central bank has limited dividend payments and extended deadline for issuing debentures or corporate bonds equivalent to at least 25 percent of paid-up capital. Soon it will introduce a loan classification provision whereby good loans affected by COVID-19 may not be required to be classified as bad loans. For some loans that are not repaid by 2020/21, loan loss provision could be just 5 percent. 

Similarly, it has capped loan-to-value ratio for residential home loan at 60%. For real estate, it has maintained the earlier 40% cap in Kathmandu valley and 50% outside of Kathmandu valley. For margin lending, it has increased the cap to 70% from 65%, and the valuation is to be based on the average value in the last 120 days, down from earlier 180 days. BFIs can also extend an additional working capital loan equivalent to 20% of the value as of April 2020.  

Directed lending

Another important aspect of the monetary policy is its emphasis on directed lending, especially to agriculture, energy, tourism, and micro, small and medium enterprises (MSMEs). The central bank has mandated commercial banks to lend at least 15%, up from 10%, to agriculture sector by 2022/23. It has also proposed to transform Agriculture Development Bank Limited as a lead bank for credit to agriculture sector. ADBL is allowed to issue agricultural bond, which commercial banks can purchase to fulfill their own credit requirement to the sector. It has also proposed issuing ‘kisan credit card’ through ADBL, and to simplify existing credit swap facility among BFIs pertaining to agricultural loans. 

Meanwhile, commercial banks will have to lend at least 10%, up from 5%, to energy sector by 2023/24. Commercial banks with experience in energy sector lending are allowed to issue energy bond, which will help to raise long-term capital to finance hydroelectricity projects. For export-oriented hydroelectricity projects and reservoir type projects, BFIs will have to extend loans at rate that is just one percentage point higher than the base rate. Similarly, the NRB has given priority to travel and tourism sector in working capital and subsidized loans (at 5% interest), and in refinancing facility. Commercial banks are required to lend (each loan less than NRs 10 million) at least 15% of total loans to MSMEs by 2023/24.  

Total directed lending has shot up to 40%, up from 25%, for commercial banks. Development banks and finance companies are mandated to lend at least 20% and 15%, respectively, to agriculture, MSMEs, energy and tourism sectors by 2023/24. 

Refinancing facility

The NRB has committed to increase refinancing facility by 5-fold to support economic recovery. Of the total refinancing pool offered by NRB, 20% will be offered as per the individual evaluation of clients, 70% through BFIs, and 10% through microcredit institutions. Depending on the nature of business and the effect of COVID-19 pandemic, refinancing loans attract interest between 2% and 5%. For those refinancing loans offered by BFIs, micro and small enterprises can avail a maximum Rs 1.5 million, and the rest can avail between Rs 50 million and Rs 200 million. 

Merger and acquisition 

The NRB has continued its merger and acquisition policy by providing additional incentives. For instance, BFIs merger by FY2021 will see 0.5 percentage point lower CRR requirement and one percentage point lower capital adequacy ratio, increase in institutional deposits thresholds by 10 percentage points, and lower cooling off period for executive board members and high-level staff, among others.

Implementation challenges

These policies are appropriate given the scale of the crisis we are facing. However, as in the past, the main challenge lies in fully and timely implementing the regulatory relief and concessions. The central bank will also have to be ready to deal with some of the unintended consequences as a result of the policies it has adopted. 

First, monetary policy has addressed the supply of credit part by facilitating availability of liquidity and taking policy measures to keep interest rates down. However, this does not mean all of it will be taken up. The demand for loans for business recovery is contingent on the overall investment climate and growth prospects. Not many businesses will take additional loans just to keep employees in payroll and to pay cost rent and operations costs when there are already substantial losses piled up since the lockdown started. Soon liquidity crisis faced by firms and households may turn into solvency crisis, which will increase the share of bad assets of BFIs and eventually squeeze credit flow. The uncertainty over the likely path of economic recovery further complicates the matter. At this stage, the government should have guaranteed additional working capital loans offered through the banking sector to COVID-19 affected businesses. This would have increased demand for credit and also prevented business closures and layoffs. 

Second, BFIs are generally risk averse amidst lack of improvement in investment climate, growth prospects and governance. They may not be willing to extend credit to new or existing borrowers without being confident about timely repayment. Consequently, the additional liquidity facilitated by NRB may end up back in its own vault because BFIs will see it safer to park funds there even if the rate of return is much lower. BFIs could also purchase government securities and bonds if they are unwilling to increase lending to borrowers in fear of default risk. It will drive down the interest on government security and bonds. 

Third, extending moratorium on payments simply postpones the inevitable, if economic activities do not pick up: a rise in non-performing assets. Subdued business activities and tepid cash flows, and lower income of households due to job losses might lead to unserviceable loans, which eventually are classified as non-performing assets. Despite the commitment by NRB to reschedule and restructure troubled loans, the risk is still there. Note that concerns have been raised repeatedly by International Monetary Fund about the low level of non-performing assets due to the ever-greening and at times imprecise classification of risky assets. Higher levels of non-performing assets in the banking sector pose systemic risk, substantially lower credit growth, and affect economic growth. Perhaps, it is also a good time to deliberate with Ministry of Finance on a potential bad assets management strategy in case things do not turn as expected.

Fourth, the large refinancing facility may not be fully utilized if the banks and financial institutions do not see viable investment projects or creditworthy borrowers. Refinancing facility is offered by central bank but its eventual execution is through the banks and financial institutions. The past refinancing pool offered to households for reconstruction of residential houses destroyed by the earthquake have not been utilized fully. The central bank had offered Rs 2.5 million for households in Kathmandu valley and Rs 1.5 million for households outside the valley. The BFIs could avail the refinancing facility at zero percent interest rate and offer it to clients by levying a maximum two percent interest (excluding third party costs such as insurance, collateral evaluation, loan security fund, etc) for period between 5 to 10 years. Refinancing facility details will be clear after the central bank releases standard operating procedures to execute the policy. 

Fifth, the aggressive push on directed lending— constituting over 40 percent of total loans, up from 25 percent last fiscal— could increase banking sector inefficiencies if proper due diligence is not followed through when extending credit to such sectors. Forcing BFIs to extend credit to particular sectors if they do not have expertise in evaluating soundness of projects is not a good strategy. It invites political interference and fosters moral hazard behavior. For instance, what happens if BFIs are forced to meet the mandatory share of lending to energy sector if hydro projects fail to finalize a viable power purchase agreement with the off-taker? Similarly, what happens if farmers fail to pay debt on time (in the past, the government waived them off with taxpayer funded fiscal rescue). Half-baked and poorly governed directed lending might further exacerbate asset-liability mismatches. Note that NRB started priority sector lending for commercial banks in 1974. It was phased out in 2005 as a part of financial sector reform program as banking sector inefficiencies and political interference bloated non-performing assets as well as misuse of priority sector lending. However, it was again reintroduced in 2012 with 10% minimum lending to agriculture and energy sectors. It was increased to 12% in 2014 and then again to 25% in 2018. Priority sector lending includes credit to agriculture, tourism, MSMEs, pharmaceutical, cement, garment and tourism.  

Sixth, the current incentives for merger may be insufficient as it is primarily held back by differences in ownership and appointments after merger. Nepal has too may BFIs for the size of its economy and there is cut-throat competition without much innovation to attract deposits and to extend loans. In the past, this has led to deterioration in quality of loan approvals, asset-liability mismatches, and sectoral bubbles, which eventually led to a financial crisis in 2011 as real estate and housing bubbles burst. Subsequently, the NRB imposed a cap on lending to the sector. 

Seventh, the plan to transform ADBL, a commercial bank, into a lead bank for agricultural sector may need to thought out well before execution. Initially, it was founded as a separate development bank catering to the agricultural sector, especially in rural areas. After the endorsement of Bank and Financial Institutions Act (BAFIA) in 2005, it operated as a public limited company licensed as a ‘class A’ financial institution by NRB. As a part of rural finance sector development cluster program, they government reduced its share in ADBL to 51% through divestment, and restructured its capital and management (including voluntary retirement of excess staff). The main problem in ADBL before its restructuring was political interference, management inefficiencies, and politically-backed loan or subsidy schemes that government pushed through it. Without clear guidelines on absorbing any risk of default and identification as well as targeting of actual beneficiaries, the new ‘kisan credit card’ may actually increase ADBL’s burden. This kind of credit scheme is used to help farmers meet immediate operational or capital needs such as purchase of fertilizers and seeds before sowing, and tractor or motorcycle after the harvest. After disbursing credit to farmers, it is difficult to monitor if they used it as they said they will during the application process. 

अनुकूल मौद्रिक नीति

**An English version of this is here.**


व्यवसाय एवं घरपरिवारले झेलिरहेको तरलता संकट छिट्टै दिवालियाको संकटमा फेरिने सम्भावना छ

गभर्नर महाप्रसाद अधिकारीले आफ्नो कार्यकालको पहिलो मौद्रिक नीतिमा विस्तारकारी नीति समेटेका छन् । यसबाट जारी कोभिड–१९ को महाव्याधिले थला परेका व्यवसाय र घरपरिवारले ऋण एवं नियमनका दायित्वबाट तत्कालै राहत पाउने भएका छन् । लामो लकडाउन, आपूर्ति शृंखलामा अवरोध र समग्र मागमा कमीका कारण भर्खरै सकिएको आव ०७६-७७ को आर्थिक वृद्धि केन्द्रीय तथ्यांक विभागले गरेको २.३ प्रतिशतको प्रक्षेपणभन्दा पनि कम हुन सक्छ । वस्तु तथा सेवाको अभावले मुद्रा स्फीति दबाबमा छ । ब्याजदर दोहोरो अंकमै छ । यी कारण व्यवसायहरू नगद प्रवाहको समस्यामा छन् र नागरिकले बेरोजगारीको सामना गरिरहेका छन् । जसबाट विद्यमान तरलताको संकट दिवालियामा परिणत हुने जोखिम बढ्दै छ ।

यस्तो पृष्ठभूमिमा आएको मौद्रिक नीतिले पर्याप्त तरलता कायम गरी, मुद्रा स्फीतिलाई ७ प्रतिशतभित्र सीमित राखेर, बैंक तथा वित्तीय संस्थालाई मर्जरका लागि प्रोत्साहित गर्दै, वित्तीय पहुँचमा वृद्धि र भरपर्दाे डिजिटल कारोबारको प्रवद्र्धन गरेर सरकारले राखेको ७ प्रतिशतको महत्वाकांक्षी वृद्धि लक्ष्यलाई हासिल गर्न सघाउने उद्देश्य लिएको छ । विनाशकारी महाभूकम्पपछि पुनर्निर्माण तथा आर्थिक पुनरुत्थानलक्षित भनिएको सन् २०१५ को मौद्रिक नीतिभन्दा यसपटकको मौद्रिक नीति धेरै हदसम्म अनुकूल छ । यसले समेटेका परम्परागत मौद्रिक नीति उपकरण एवं अन्य विस्तारकारी नीतिहरू समस्या सुहाउँदा छन् । यसैकारण, निजी एवं बैंकिङ क्षेत्रले खुसी हुँदै स्वागत गरेका हुन् ।

यो मौद्रिक नीतिले मुद्रास्फीतिलाई औसत ७ प्रतिशतमा राख्न र कम्तीमा सात महिना वस्तु तथा सेवा आयात गर्न पुग्ने गरी विदेशी विनिमय सञ्चिति सुनिश्चित गर्न खोजेको छ । वृद्धिको लक्ष्य र आर्थिक पुनरुत्थानलाई सहजीकरण गर्न विस्तृत मुद्रा प्रदायको वार्षिक वृद्धिदर १८ प्रतिशतमा सीमित राख्ने लक्ष्य लिएको छ । निजी क्षेत्रको ऋणमा २० प्रतिशतले वृद्धि लक्ष्य राखेर आर्थिक गतिविधि बढाउन खोजेको छ । यद्यपि, भारतीय रुपैयाँसँग हाम्रो स्थायी विनियम दर रहेकाले राष्ट्र बैंकले स्वतन्त्र रूपले मुद्रास्फीतिलाई नियन्त्रणमा राख्न भने सक्नेछैन ।

यसबाहेक, पर्याप्त र भरपर्दाे पूर्वाधार (विद्युत्, सडक सञ्जाल, सिँचाइ आदि)को अभाव, इन्धन मूल्य र कार्टेलिङ एवं सिन्डिकेटजस्ता आपूर्तितर्फका अवरोधहरू पनि छन् । तिनले पनि स्फीतिलाई असर गर्छन् । तर, केही क्षेत्रमा तीव्र कर्जा प्रवाहले गर्दा हुने मूल्य वृद्धिलाई प्रभावित गर्न भने राष्ट्र बैंकले सक्छ । ७ प्रतिशतको मुद्रास्फीति लक्ष्य राखेर राष्ट्र बैंकले सबैलाई समेट्ने अनुकूल विस्तारकारी मौद्रिक नीति अख्तियार गरेको छ । र, महाव्याधिबाट बढी प्रभावित क्षेत्रमा पर्याप्त तरलता र कर्जा प्रवाह गर्न खोजेको छ । 

यी लक्ष्यहरू हासिल गर्न रिपो दर ५० आधार बिन्दु घटाएर ३ प्रतिशतमा झारिएको छ । यसो गर्दा, बैंक तथा वित्तीय संस्थाले सरकारी ऋणपत्र बेचेर राष्ट्र बैंकबाट कामदरमा सापटी लिन सक्ने भएकाले निश्चय नै तरलता बढ्नेछ । त्यसैले, राष्ट्र बैंकले रिपो दरलाई ब्याजदरको अस्थिरता घटाउन पनि प्रयोग गर्न खोजेको छ । बैंक तथा वित्तीय संस्थालाई पैसा लगेर राष्ट्र बैंकमा थुपार्न निरुत्साहित गर्न ब्याजको तल्लो सीमालाई १ प्रतिशत बिन्दुले घटाएको छ । रिपोको अवधि लामो बनाउने प्रतिबद्धता गरेको छ । गत मार्चमै राष्ट्र बैंकले नगद मौज्दात अनुपात र बैंकदरलाई क्रमशः ३ र ५ प्रतिशतमा झारेको हो । यी उपया तरलता बढाउन र ब्याजदर घटाउन लक्षित छन् । यी परम्परागत मौद्रिक नीति उपकरणबाहेक, म्याक्रो पु्रडेन्सियल नीति ल्याएर केन्द्रीय बैंकले नियमन खुकुलो बनाई राहत दिएको छ । म्याक्रो प्रुडेन्सियल नीति प्रणालीगत जोखिम निवारण एवं सम्पत्ति–दायित्व मिसम्याच कम गर्नमा प्रयोग ल्याइन्छ ।

उदाहरणका लागि, यो मौद्रिक नीतिले बैंक तथा वित्तीय संस्थाले पुँजीको १० प्रतिशत अनिवार्य नगद मौज्दातबाहेक कायम गर्नुपर्ने थप दुई प्रतिशतको काउन्टर साइक्लिकल बफरसम्बन्धी व्यवस्था हाललाई स्थगन गरिदिएको छ । डिजिटल कारोबारलाई प्रवद्र्धन गर्न अनलाइन कारोबारको शुल्क हटाएको छ । स्वास्थ्य क्षेत्रलाई प्राथमिकताको वर्गीकरणमा राखेर कर्जा विस्तारका लागि सहज बनाएको छ । सिसिडी (कर्जा–स्रोत परिचालन अनुपात)लाई ८० बाट ८५ प्रतिशतमा वृद्धि गरेको छ । त्यसैगरी, डिभिडेन्डको सीमा तोकिदिएको छ । चुक्ता पुँजीको २५ प्रतिशत डिबेन्चर जारी गर्नुपर्ने समयसीमा पर सारिएको छ । कोभिड–१९ अघिका असल ऋणी अब कर्जा तिर्न नसक्दा पनि खराब ऋणीमा वर्गीकृत हुने छैनन् । यसैगरी, आवासीय होम लोनको कर्जा–सुरक्षण मूल्य–अनुपातको सीमा ६० प्रतिशत र रियल स्टेटमा उपत्यकामा पहिलेकै ४० प्रतिशत र उपत्यकाबाहिर ५० प्रतिशतको व्यवस्थालाई निरन्तरता दिइएको छ । सेयर धितो राखी प्रदान हुने मार्जिन प्रकृतिको कर्जाको सुरक्षण अनुपात ६५ बाट बढाएर ७० प्रतिशतमा वृद्धि भएको छ । 

यो मौद्रिक नीतिको महत्वपूर्ण पक्ष के हो भने यसले विशेषगरी, कोभिड प्रभावित कृषि, ऊर्जा, पर्यटन तथा घरेलु, साना एवं मझौला उद्योगमा कर्जा लगानी प्रोत्साहित गर्न खोजेको छ । कृषि विकास बैंकलाई कृषि क्षेत्रको कर्जा लगानीमा अग्रणी बैंकका रूपमा अघि बढाउन प्रस्ताव गरेको छ । कृषि विकास बैंकमार्फत जारी हुने ऋणपत्र खरिद गरेर अन्य वाणिज्य बैंकले क्षेत्रगत लगानीको सर्त पूरा गर्न पाउने भएका छन् । कृषकलाई वित्तीय साधनका साथै कृषि सूचना उपलब्ध गराउन कृषि विकास बैंकमार्फत ‘किसान क्रेडिट कार्ड’ जारी गर्ने व्यवस्था गरेको छ । त्यसैगरी, वाणिज्य बैंकहरूले ऊर्जा क्षेत्रमा सन् २०८० असार मसान्तसम्ममा अनिवार्य कर्जा प्रवाह बढाएर १० प्रतिशत पु¥याउनुपर्ने भएको छ ।

ऊर्जा क्षेत्रको लगानीमा अनुभवी बैंकहरूले ‘ऊर्जा बन्ड’ निस्कासन गर्न पाउने भएका छन् । यसले जलविद्युत्मा दीर्घकालीन पुँजी लगानी विस्तार हुनेछ । निर्यातलक्षित जलविद्युत् परियोजना एवं जलाशययुक्त परियोजनामा वित्तीय संस्थाबाट आधार ब्याजदरभन्दा केवल १ प्रतिशत बढीमा कर्जा पाउनेछन् । त्यसैगरी, पर्यटन क्षेत्रलाई ५ प्रतिशतमा सञ्चालन पुँजी र सहुलियतपूर्ण कर्जा दिनुपर्ने गरी प्राथमिकताको क्षेत्रमा राखेको छ । त्यस्तै, वाणिज्य बैंकले साना एवं मझौला उद्योगमा समग्र कर्जाको कम्तीमा १५ प्रतिशत प्रवाह गर्नुपर्नेछ । प्राथमिकताको क्षेत्रमा अनिवार्य कर्जा प्रवाहलाई २५ प्रतिशतबाट बढाएर ४० प्रतिशतमा पु-याएको छ । कृषि, ऊर्जा, पर्यटन र साना एवं मझौला उद्योगमा विकास बैंक र फाइनान्स कम्पनीले समेत क्रमशः २० र १५ लगानी गर्नुपर्ने म्यान्डेट दिइएको छ । त्यसैगरी, यो मौद्रिक नीतिले आर्थिक पुनरुत्थानलाई सहयोग गर्न पुनर्कर्जाको सुविधालाई पाँच गुणा बढाउने प्रतिबद्धता गरेको छ । व्यवसायको प्रकृति र कोभिडको असरलाई हेरेर २ देखि ५ प्रतिशतको ब्याज पुनर्कर्जाको व्यवस्था गरिएको छ । त्यस्तै, राष्ट्र बैंकले मर्जर एवं प्राप्तिलाई प्रोत्साहित गर्न खोजेको छ । 

हामीले साक्षात्कार गरिरहेको संकटको स्तरलाई हेर्दा मौद्रिक नीतिले अख्तियार गरेका यी नीति उपयुक्त नै छन् । तर, विगतमा झैँ, मौद्रिक नीतिले व्यवस्था गरेका व्यवस्थाको समयमै पूर्ण कार्यान्वयन भने मुख्य चुनौती हो । केन्द्रीय बैंकले अख्तियार गरेका यी नीतिका केही अनपेक्षित परिणामका लागि भने तयार रहनुपर्नेछ । पहिलो, मौद्रिक नीतिले कर्जा आपूर्तिको पक्षलाई तरलता र ब्याजदर न्यून राख्ने नीति उपायद्वारा सम्बोधन गरेको छ । यद्यपि, यसको अर्थ यी सबै कार्यान्वयन हुन्छन् भन्ने छैन । व्यवसाय पुनरुत्थानका लागि कर्जाको माग समग्र लगानीको वातावरण र वृद्धिको परिदृश्यमा भर पर्ने कुरा हो ।

अधिकांश व्यवसायले कर्मचारीको तलब दिन, भाडा र सञ्चालन खर्च धान्न भनेरै थप अरू कर्जा लेलान् भन्न सकिन्न । व्यवसाय एवं घरपरिवारले झेलिरहेको तरलता संकट छिट्टै दिवालियाको संकटमा पुग्न सक्ने सम्भावना पनि छ । जसले बैंक तथा वित्तीय क्षेत्रको निष्क्रिय सम्पत्तिमा वृद्धि गर्ने र कर्जा प्रवाहलाई नै खुम्च्याउने देखिन्छ । पुनर्बहाली अनिश्चित बन्दै गयो भने त्यस चरणमा सरकारले कोभिड प्रभावित व्यवसायमा बैंकिङ क्षेत्रमार्फत अतिरिक्ति सञ्चालन पुँजीको सुनिश्चितता गरिदिनुपर्छ । यसले कर्जाको माग बढाउन र व्यवसाय बन्द हुने अवस्था केही हदसम्म रोक्न सक्छ । 

दोस्रो, लगानीको प्रतिकूल वातावरण, वृद्धि र सुशासनको अभाव हुँदा जोखिम उठाउन बैंक तथा वित्तीय संस्था अनिच्छुक हुन सक्छन् । समयमै तिर्ने विश्वास नभएसम्म तिनले नयाँ एवं पुराना ग्राहकलाई थप कर्जा नदिन सक्छन् । यस्तोमा, बैंकहरू तिनले सरकारी धितोपत्र र ऋणपत्र किन्ने छन् । यसले सरकारको धितोपत्र र ऋणपत्रको ब्याजदरलाई थप घटाइदिन सक्छ । तेस्रो, ऋण तिर्ने भाका सारिदिँदा संकट केही पर धकेलिनेछ । तर, आर्थिक गतिविधि बढेन भने निष्क्रिय सम्पत्तिमा वृद्धि हुनेछ ।

आर्थिक गतिविधिमा सुस्ती, न्यून नगद प्रवाह र परिवारिक आयमा कमीले ऋण तिर्न थप कठिन बनाउनेछ । बैंकिङ क्षेत्रमा निष्क्रिय सम्पत्तिको स्तर उच्च हुँदा प्रणालीगत जोखिम थपिन्छ, कर्जा प्रवाह खस्किन्छ र आर्थिक वृद्धि प्रभावित हुन्छ । निश्चय नै, अर्थ मन्त्रलायले सम्भावित खराब सम्पत्तिको व्यवस्थापन रणनीतिबारे सोचविचार गर्नुपर्ने समय आएको छ । चौथो, बैंक तथा वित्तीय संस्थाले उपयुक्त लगानी परियोजना एवं कर्जायोग्य आसामी भेट्टाएनन् भने यति ठूलो पुनर्कर्जाको सुविधा पूर्ण सदुपयोग नहुन सक्छ । भूकम्पपछि पुनर्निर्माणका लागि दिने भनिएको सहुलियतपूर्ण कर्जा पनि उपयोगहीन बनेकै हो । तर, बैंक एवं वित्तीय संस्थाहरूको अनिच्छाकै कारण त्यो असफल बन्यो । 

पाँचौँ, प्राथमिकताको क्षेत्रमा अनिवार्य कर्जा प्रवाह २५ बाट ४० प्रतिशतमा आक्रामक वृद्धि गरिएको छ । तर, यस्ता क्षेत्रमा कर्जा विस्तार गर्दा पर्याप्त सावधानी आपनाइएन भने बैंकिङ क्षेत्रको अक्षमता बढ्छ । विज्ञता नभएको क्षेत्रमा कर्जा विस्तारका लागि बलजफ्ती गर्नु पक्कै राम्रो रणनीति होइन । यसले राजनीतिक हस्तक्षेप निम्त्याउने र नैतिक विचलनलाई प्रश्रय दिन सक्छ । निश्चित प्रतिशत जलविद्युत् क्षेत्रमा लगानी गर्नैपर्ने बाध्यकारी सर्त पूरा गर्न पिपिए सम्झौता गर्न असफल परियोजनामा लगानी गर्नुपर्ने अवस्था आयो भने के होला ?

किसानले समयमै ऋण तिर्न नसके के हुन्छ ? राष्ट्र बैंकले वाणिज्य बैंकले प्राथमिकताको क्षेत्रमा कर्जा प्रवाह गर्नुपर्ने व्यवस्था सन् १९७४ बाट सुरु गरेको हो । जसलाई राजनीतिक हस्तक्षेपले निष्क्रिय सम्पत्ति बढाएको, प्राथमिकता क्षेत्रको कर्जा दुरुपयोग भएको भन्दै २००५ मा वित्तीय क्षेत्र सुधार कार्यक्रमअन्तर्गत फेजआउट गरियो । तर, १० प्रतिशत कृषि र ऊर्जा क्षेत्रमा लगानी गर्नुपर्ने व्यवस्थासहित सन् २०१२ बाट फेरि सुरु गरियो । जुन २०१४ मा १२ प्रतिशत र सन् २०१८ बाट २५ प्रतिशत बनाइएको थियो । छैटौँ, मर्जर प्रोत्साहित गर्ने प्रयास पनि असफल हुन सक्छ । किनकि स्वामित्व र नियुक्तिको विवाद गहिरो छ ।

नेपालको अर्थतन्त्रको आकारका हिसाबले वित्तीय संस्थाको संख्या निकै धेरै हो, त्यसले अस्वस्थ प्रतिस्पर्धा बढाएको छ । तर, उनीहरूमा कर्जा विस्तार र निक्षेप आकर्षणमा खासै नवप्रवर्तन छैन । यही कारण विगतमा कर्जाको गुणस्तर कायम राख्न नसक्दा, सम्पत्ति–दायित्व मिसम्याच र क्षेत्रगत मूल्य फोका बढ्दा सन् २०११ मा त्यो मूल्य फोका फुट्दा वित्तीय संकट नै सिर्जना भएको थियो । लगत्तै राष्ट्र बैंकले घरजग्गाको लगानीमा सीमा लगाएको थियो । 

सातौँ, कृषि बैंकलाई कृषि क्षेत्रको अग्रणी बैंकका रूपमा लैजाने योजनालाई कार्यान्वयनमा लैजानुअघि सोचविचार जरुरी छ । सुरुमा ग्रामीण भेगमा कृषि क्षेत्रमा सेवा प्रवाह गर्ने गरी छुट्टै विकास बैंकका रूपमा यसलाई स्थापना गरिएको हो । सन् २००५ मा बाफिया ल्याएपछि यो ‘क’ वर्गको वित्तीय संस्था र सार्वजनिक कम्पनीका रूपमा सञ्चालित छ । ग्रामीण क्षेत्र वित्तीय क्षेत्र विकास कार्यक्रमअन्तर्गत सरकारले आफ्नो सेयर ५१ प्रतिशतमा घटाउँदै यसको पुँजी तथा कर्मचारीलाई भिआरएसमार्फत पुनर्संरचना गरेको थियो । जसअघि यो संस्था राजनीतिक हस्तक्षेप, व्यवस्थापकीय असक्षमता र राजनीतिक अभीष्टका अनुदान एवं ऋण कार्यक्रमबाट तहसनहसको अवस्थामा थियो ।

खराब कर्जाको जोखिम कसरी कम गर्ने भन्ने प्रस्ट निर्देशिकाको अभाव एवं वास्तविक लाभग्राही लक्षित हुन नसकेको अवस्थामा किसान कार्डको नयाँ कार्यक्रमले बैंकलाई फेरि बोझ बढाउन सक्छ । यसखाले कर्जा योजना किसानलाई मलखाद, बिउबिजन खरिद, कृषि उपकरण खरिद आदिका लागि सञ्चालन पुँजी प्रवाह गर्न उपयोगी नै हुन्छ । तर, जुन प्रयोजनमा कर्जा दिइएको होे त्यहीँ खर्च भए नभएको अनुगमन गर्न भने कठिन छ । 

Tuesday, July 21, 2020

Accommodative monetary policy

It was published in The Kathmandu Post, 21 July 2020.



Half-baked and misguided lending directives might further exacerbate asset-liability mismatches.

In his first annual monetary policy announcement as a governor of Nepal Rastra Bank, Maha Prasad Adhikari rolled out expansionary measures that aim to provide a healthy regulatory environment as well as immediate relief to businesses and households struggling due to the pandemic. The healthcare, economic and employment shocks have been unprecedentedly disruptive. Given the extended period of lockdowns, persistent supplies disruptions and subdued aggregate demand, economic growth in 2019-20 is projected to be much lower than the 2.3 percent estimated by the Central Bureau of Statistics before the virus took hold in Nepal. The shortage of goods and services has increased inflationary pressures, and lending interest rates have remained in the double-digits. The acute cash flow issues faced by businesses, and either layoffs or reduced working hours faced by individuals, have increased the risk of a liquidity crisis morphing into a solvency crisis.

Against this backdrop, the monetary policy for 2020-21 aims to achieve the ambitious 7 percent economic growth target set by the government, maintain adequate liquidity, limit inflation at 7 percent, encourage the merger of banks and financial institutions, enhance access to finance, and promote reliable digital transactions. The conventional monetary policy tools, as well as macroprudential policies, are much more accommodative than what we saw after the catastrophic earthquakes in 2015.

Accommodative measures

In addition to the targets mentioned above, Nepal Rastra Bank wants to ensure adequate foreign exchange reserves to cover seven months worth of imports of goods and services, adequate liquidity to facilitate economic recovery, 18 percent growth in money supply, and 20 percent credit growth to the private sector. To achieve these targets, it is planning to use a number of monetary instruments at its disposal.

Although controlling inflation is not fully within the central bank’s domain, thanks to the fixed exchange rate regime, it nevertheless has accommodated a higher inflation target than last fiscal year by rolling an expansionary monetary policy. For instance, it has reduced the policy repo rate, which is the rate of interest charged by Nepal Rastra Bank on the repurchase of government securities, by 50 basis points (bps) to 3 percent.

This essentially increases liquidity as banks can now borrow money at a lower rate from the central bank by selling the government securities they hold. Nepal Rastra Bank also uses the repo rate to maintain interest rates within the intended corridor, which is aimed at reducing interest rate volatility. Similarly, it has reduced the term deposit rate, which is the lower bound of the interest rate corridor, by 100 bps to 1 percent. This will discourage BFIs to deposit extra money at the central bank because the rate of return will be even lower. It has also committed to allowing long-term repo facility, if required, as current repo operations are limited to two weeks. In March 2020, it had already reduced the cash reserve ratio and bank rate by 100 bps to 3 percent and 5 percent respectively and lowered policy repo rate by 100 bps. These measures are aimed at increasing liquidity and lowering interest rates.

It has also provided regulatory relief by tweaking macroprudential policies, which are designed to mitigate system-wide risk and to reduce asset-liability mismatches. For instance, it suspended the 2 percent countercyclical buffer requirement, which commercial banks have been maintaining in addition to a minimum capital adequacy ratio of 10 percent. The additional buffer is imposed during normal times to lower systemic risk in case of a sudden deterioration of balance sheets. Further, the central bank has increased credit-to-core capital cum deposit (CCD) ratio to 85 percent from 80 percent till the next fiscal year.

NRB has also extended the moratorium on loan payments and allowed for restructuring as well as rescheduling of loans provided to Covid-19 affected sectors. Moreover, the central bank has also limited dividend payments and extended the deadline for issuing debentures or corporate bonds equivalent to at least 25 percent of paid-up capital. Soon it will introduce a loan classification provision whereby good loans affected by Covid-19 may not be required to be classified as bad loans. For some loans that are not repaid by the fiscal year 2020, loan loss provisions could be just 5 percent.

Always a question of implementation

The challenge now is to ensure the measures outlined in the monetary policy are fully implemented in a timely fashion so that it reaches the ultimate beneficiaries—the affected household and businesses—and that it stimulates economic activities.

The monetary policy has addressed the supply of credit by facilitating liquidity availability. However, this does not mean all of it will be taken up. The demand for loans is contingent on the overall investment climate and growth prospects. Not many businesses will take additional loans just to keep employees in the payroll and pay variable costs related to rent and operations when there are already substantial losses piled up. The uncertainty over the trajectory of recovery further complicates the matter.

Banks and financial institutions are generally risk-averse due to a lack of improvement in the investment climate and governance. They may not be willing to extend credit to new or existing borrowers without being confident about timely repayment. Consequently, the additional liquidity facilitated by Nepal Rastra Bank may end up in its own vault; banks may see it safer to park funds there even if the rate of return is much lower.

The central bank should be ready with a contingency plan regarding a possible rise in non-performing assets after the interest moratorium period is over. Subdued business activities, tepid cash flows and potential job losses might lead to unserviceable loans. Despite Nepal Rastra Bank’s commitment to reschedule and restructure troubled loans, the risk is still there. Note that concerns have been raised repeatedly by international financial institutions about the low level of non-performing assets in Nepal. This is largely due to the ever-greening and at times imprecise classification of risky assets. Higher levels of such assets in the banking sector pose systemic risk, substantially lower credit growth, and ultimately affect economic growth.

Furthermore, the large refinancing facility may not be fully utilised if banks do not see viable investment projects or creditworthy borrowers. For instance, the past refinancing pool offered to households for the reconstruction of residential houses destroyed by the 2015 earthquakes has not been utilised fully.

Finally, the aggressive push on directed lending—constituting about 40 percent of total loans, up from 25 percent last fiscal—could increase banking sector inefficiencies if proper due diligence is not followed through when extending credit to such sectors. Forcing banks and financial institutions to extend credit to particular sectors if they do not have expertise in evaluating the soundness of projects is not a good strategy. It invites political interference and fosters moral hazard behaviour. For instance, what happens if banks are forced to meet the mandatory share of lending to the energy sector if hydro projects fail to finalise a viable power purchase agreement? Similarly, what happens if farmers fail to pay their debts on time (in the past, the government waived them off with taxpayer-funded fiscal rescues). Half-baked and poorly governed lending might further exacerbate asset-liability mismatches.

Friday, July 17, 2020

Monetizing government debt: Trade offs between inflation expectations and risk premium

In VoxEU column, Jean-Pierre Landau argues that low interest rate and inflation rate create a conducive policy space for financing public expenditures in response to the COVID-19 shock. This is an optimal policy mix given the very low and stable inflation expectations. However, for this to be sustainable, central bank independence must be respected and reinforced. Monetizing government debt involves taking on future risks. For instance, financing instruments such as debt and money creation entail default risk and inflation risk, respectively. The process of monetizing debt involves managing the trade-offs between the two risks.

He states that post-COVID-19 monetary and financial landscape is characterized by: (i) high level of public debt in all countries; (ii) very large balance sheets of central banks; and (iii) a strong and immediate link between debt and monetary policy as a large part of government debt is held by central banks themselves. 


Together, low interest rates and low inflation create, prima facie, a large policy space. It can be exploited to absorb the COVID-19 shock on public finances without fear of destabilising the economy. That space looks even larger if, in the years to come, central banks allow themselves to slightly overshoot their mid-range target of 2% inflation, to compensate for years of undershooting. 
[...]At the moment, monetary policy operates through the purchase of government bonds. It changes the structure of the liabilities of the consolidated government, but not its size. It essentially amounts to transforming one form of liability into another. Doing so, it simply substitutes one form of risk to another. In the current policy environment, ‘monetisation’ is just a transformation of risks: from a credit and funding risk to an inflation risk

[...]The curve moves up with the amount of financing that is needed. It moves down and left when growth expectations improve (as risk premium get smaller). Remarkably, it also moves left and down (and the slope decreases) if inflation expectations are lower or are better anchored (a sign of the credibility of the monetary authority). For given financing needs, monetisation is just a leftward move along the curve.  
It seems safe to assume that most advanced economies are today positioned on the right part of the curve (around point C). There is an apparent sensitivity of risk premia to any news on debt. On the other hand, inflation expectations have not yet reacted to the monetary policy impulse that results from the expansion of central banks' balance sheets.  If true, it is hard to escape the conclusion that current policies are close to optimal.  In a rare moment of perfect fiscal - monetary coordination, governments are issuing bonds and central banks are buying government bonds and issuing money. Contrary to 2008–09, a large part of these purchases result in the creation of broad money in the hands of the general public (Lane 2020). Governments have the ability to lock in very low interest rates while central banks can expand their balance sheets without fear of missing their inflation objectives and mandates
[...]In the post-COVID-19 environment, interactions between public debt and monetary policy will become more immediate and more intense. Fiscal and monetary authorities will have to pay greater attention to what the other is doing. There may be periods, as the one we are now going through, where close coordination will be appropriate and necessary. But conflicts may emerge in the future and the situation must be managed with that perspective in mind.
[...]In modern economies, inflation is mainly driven by expectations of future actions by the central banks. In a conventional environment, independence is meant to solve the time inconsistency problem by removing any incentive for the monetary authority to create an inflation surprise. Today, in an environment where high public debt interacts with a large monetary balance sheets, the justification for independence is more basic, even brutal: to protect the ability of the central bank to act in all circumstances. 
The expectations that matter are not those relating to central banks' intentions, but those that concern the institutional environment in which they will operate. For inflation expectations to be durably stable, there must be no doubt that central banks will be in a position to raise interest rates should inflation pressures materialise, whatever fiscal (and public debt) situation exists at the time. 

Thursday, July 16, 2020

Post-COVID-19 opportunities for India: Talent, technology and trust

In an op-ed in Mint, Kelkar, Mashelkar and Rajadhyaksha argue that India's self-reliant movement (Aatmanirbhar Bharat Abhiyan) should not be a protectionist agenda. They assert that the organizing principle for global supply chains will be now “just-in-case" scenario in addition to “just-in-time" usual scenario.

India can play an important role in this quest if it remains open to the flow of knowledge and ideas, partly by participating in multilateral institutions and partly by being a centre of trade and investments. The world is unlikely to go all the way back to techno-nationalism. A more likely outcome is selective techno-globalism, with patterns of trade and technology favouring nations that are seen as trustworthy. For example, Britain has proposed recently a “D10 Alliance", which is a club of 10 democracies comprising G7 nations plus India, Australia and South Korea on 5G and emerging technologies. Such a shift will certainly favour India.
It is very likely that the global economy will be reconfigured in the aftermath of the ongoing pandemic. The need for resilience from shocks could mean “just-in-time" will be flanked by “just-in-case" as an organizing principle for global supply chains. It is in our national interest to take advantage of this anticipated reset, by deepening our engagement with the rest of the world rather than sliding towards protectionism. 
One way to think of the opportunities is in terms of the three Ts—talent, technology and trust. India is well placed in terms of talent and technology. It needs more trust, not just in others but also in itself; or more self-confidence. The goal of atmanirbharta (self-reliance) will be meaningfully met if it is complemented with atmavishwas (self-confidence).
A confident India, which is already a lower middle-income country, and which needs to avoid the middle-income trap, should not be afraid to engage with the world, for trade, for investment, for ideas, for innovation. Embracing economic isolation at this turning point in the global system will be a strategic mistake.

Ben Bernanke on economy recovery in the US

In an op-ed published in The New York Times, Ben Bernanke argues that the US government should not repeat the mistakes made during the Great Recession. The federal government should provide more aid to state and local governments in addition to the social protection measures for the unemployed people. This is crucial to stabilize aggregate demand and restore full employment.  

Many other states face ominous budgetary outlooks, too, implying the need for draconian reductions in essential services to state residents and large potential job cuts. Furloughs have already begun in New Jersey. Since February, state and local governments collectively have laid off close to 1.5 million workers.
We have been here before. I was the chairman of the Federal Reserve during the global financial crisis and the subsequent Great Recession. As part of the recovery effort, Congress responded with a stimulus package of nearly $800 billion. But that package was partly offset by cuts in spending and employment by state and local governments. Like today, with sharp declines in tax revenue as the economy slowed, states and localities were constrained by balanced-budget requirements to make matching cuts in employment and spending. This fiscal headwind contributed to the high unemployment of the Great Recession, which peaked at 10 percent in late 2009. Together with a subsequent turn to austerity at the federal level, state and local budget cuts meaningfully slowed the recovery.
In the current recession, unemployment rates have been much higher than 10 percent, and even with recent job gains the Congressional Budget Office estimates that, without further action from Congress, the unemployment rate at the end of 2020 will most likely be close to 11 percent. Those numbers are particularly dire for people of color. Black, Latinx and Native American communities not only face a far greater health risk from Covid-19; they also face higher rates of unemployment than white families. States and localities are in desperate need of additional federal intervention before the bulk of the CARES Act funding expires this summer. Budget gaps like the one in New Jersey cannot be closed by austerity alone. Multiply New Jersey’s problems to reflect the experiences of 50 state governments and thousands of local governments and the result, without more help from Congress, could be a significantly worse and protracted recession.
The CARES Act allocated $150 billion to state and local governments. This new aid package must be significantly larger and provide not only assistance for state and local governments but also continued support for the unemployed, investments in public health and aid as needed to stabilize aggregate demand and restore full employment.

Monday, July 6, 2020

Rural resurgence in India and impact of QE on emerging markets


Shantanu Nandan Sharma writes in The Economic Times that rural economy will drive overall recovery and that a normall monsoon raises the prospects of bumper Kharif harvest as well as higher consumption demand. Also, tractor sales have are up while auto sector is in a slump. 

But a good monsoon is not the only reason why policymakers and India Inc alike are anticipating a rural resurgence. They point out to three things: First, farming continued even during the lockdown that started March 25, while manufacturing languished. Second, more land has been under cultivation this year, according to preliminary assessments by government agencies. Third, many factory workers who returned to their rural hometowns as jobs evaporated in the cities are now involved in farming activity. These factors, and the lack of any other positive sentiment in the near-term, have convinced corporate India, particularly those with a wider rural portfolio, to focus on consumers in Bharat.
[...]The consensus that rural India will lead the nation’s economic revival has been backed by recent sales numbers, too. Tractor sales — seen as an important barometer of the rural economy — were up in May. In June, numbers released by companies so far have shown a massive demand for tractors. Escorts Ltd, for example, said it saw a 23% sales growth in the domestic market. Mahindra & Mahindra reported a 10% rise in sales in June. Even the tax numbers have a rural flavour. A simple analysis of the June numbers of the goods and services tax (GST) shows shrinkage of revenue in Delhi, Haryana and Gujarat — states with a substantial urban population. A comparatively robust growth was registered in the predominantly rural states. For example, in June, Madhya Pradesh and Chhattisgarh saw an impressive GST growth of 24% and 22%, respectively, from a year ago.

Impact on emerging markets of unconventional monetary policy in advanced economies

In an op-ed published in Mint, Amandadeep Mandal and Neelam Rani argue that the long-term assets purchase program (quantiative easing, QE) of advanced economies have lowered bond yield, which can boost India's growth prospects provided that the economy is operating below capacitieis. Central banks in the US, the UK, Australia, Canada, EU, Japan, New Zealand, and Sweden have announced QEs aimed at purchasing assets (either sovereign or corproate bonds or mortgage backed securities or all). These have spillover effects in emerging markets-- higher volatility in capital flows, currency and financial markets. In case of QE exit, emerging markets may see capital outflows, volatility-spikes in financial markets, currency depreciation, and increase in government yields.

In restricting the pandemic and the related economic downturn, many developed economies faced short-term interest rates nearing zero, or even slipping to negative. Several central banks around the world engaged in unconventional monetary policy interventions in the form of long-term asset purchase programs, commonly referred to as quantitative easing (QE). Since March, eight central banks of the developed economies made QE announcements. Notably, US initially announced a $700 billion purchase on 16 March, followed by an announcement of ‘unlimited’ purchase on 23 March. UK announced a purchase on $200 billion on 19 March.
[...]While the central banks of developed economies aim to mitigate the dysfunctionalities in their targeted markets, the QE interventions will have spillover effects linked with higher volatility in capital flows, currency and financial markets in developing economies, including India. An impulse study of QE-triggered US and UK interest rate shock on Indian 10-year sovereign bonds suggests that the spillover effect is immediate and the associated implied volatility subsides in 10 days. The impact primarily depends on the cyclical position of the Indian economy and the stability of its financial system, in other words the scale of its market imperfections.
The lower bond yields, resulting from QE of developed economies can boost India’s growth opportunities, provided we are operating below capacities. In contrast, they can overheat the economy if we are working above capacity, which we are certainly not. Nevertheless, the spillover of QE interventions in developed economies can potentially destabilise the currency and the financial markets. This is primarily because of the incapacity of the growing economies to absorb the capital and the potential speculations in the markets, leading to excessive credit growth and pricing bubbles. Such market volatility fuels financial turmoil. However, with increased Indian financial market depth and regulations in the recent time, we expect to contain such speculative bubbles in the near future.
[...]Starting from October 2020, we can anticipate a potential exit of QE programs by the developed economies. This can lead to an outflow of capital and volatility-spikes in the financial markets. We are most likely to witness depreciation in currency and fall of equity prices due to portfolio rebalancing. Government yields are also expected to go up.
The degree of the impact of a QE exit on the Indian economy and its financial stability will depend on several factors: i) the scale of India’s exposure to the developed economies, through financial linkage and trade, ii) India’s cyclical economic position, i.e. if we are slowing down, then reversal of capital flows will widen the output gap, iii) size of current account deficits, i.e. higher debt levels will make an economy more vulnerable, iv) the depth of Indian financial markets – greater the depth, greater will be its sensitivity to movements of assets in the developed economies, v) the policy interventions that will be aimed to mitigate the effects of capital outflows and vi) the economic impact of the policies taken to prevent the spread of the covid-19, such as the lockdown measures.

Here is an ADBI working paper by Bhattarai, Chatterjee and Park on the same topic but looking at the effect of QE in the US on emerging market economies before 2015. They show that an expansionary US QE shock appreciates the local currency against the US dollar, decreases long-term bond yields, and increases stock prices of emerging market economies. They do not find significant and robust effects on output and consumer prices in the emerging market economies. Capital inflows and exchange rate appreciation might have opposite effects on output. 
  

Friday, July 3, 2020

Policies to help recovery in Asia and the Pacific

The IMF’s Chang Yong Rhee argues that Asia’s growth is projected to contract by 1.6% in 2020 due to weaker global conditions and more protracted lockdown measures in several emerging economies. Since Asia is heavily dependent on global supply chains, a slowdown in global economy would automatically slow the region too. Assuming that there is no second wave of infections and with the ongoing unprecedented policy stimulus to support recovery (especially private demand), the IMF projects growth to rebound to 6.6% in 2021. Still, output will be 5% lower compared to pre-COVID-19 projections. 

However, this outlook may be optimistic due to: 
  1. Slower growth in trade as supply chains continue to be affected (reorienting Asia’s growth model towards domestic demand and reducing its reliance on exports may take time)
  2. Protracted lockdowns (physical distancing to reduce contagion will depress economic activity)
  3. Rise in inequality (past pandemics led to higher income inequality and lower employment prospects for less educated population) as informal sector workers get hit
  4. Weak household and corporate balance sheets (negatively affect investor sentiment or amplify uncertainties) 
Significant fiscal and monetary policy support is helpful, but they may not last long as a potential correction of the disconnect between financial markets and the real economy could exacerbate the already high borrowing costs for many Asian economies. A close coordination between monetary and fiscal policy measures (to support liquidity and demand); resource reallocation (streamlining the restructuring and insolvency frameworks, adequately capitalized banks, and facilitation of equity injections into viable firms and risk capital for new firms); and addressing inequalities (enhancing access to health and basic services, social safety nets, informality, etc) may be some policy options to respond to the emerging crisis

Meanwhile, Gita Gopinath argues that “in the absence of a medical solution, the strength of economic recovery is highly uncertain and the impact on sectors and countries uneven”. Many countries are reopening amidst a surge of cases. The June edition of WEO sharply downgraded global output growth forecast to -4.9% in 2020 followed by a partial recovery with growth at 5.4% in 2021. In absolute terms, the cumulative loss to the global economy comes to be around $12 trillion over two years. Upside risks to the forecast include availability of vaccines and treatments, and additional policy support. Downside risks to the forecast include further waves of infections (which could reverse mobility and spending), and rapidly tightening financial conditions (which could trigger debt distress). Geopolitical and trade tensions could further affect growth outlook.

The crisis is affecting export-dependent economies and jeopardizing prospects for income convergence. The staggered reopening of economies has also meant that the pick-up in activity is uneven. Some sectors have seen a surge in spending due to pent-up demand (retail), but contact-intensive services remain depressed. Lower-income and semi-skilled workers are particularly affected as work from home norms do not apply fully to them. 

Fiscal and monetary policy support has helped to check the downturn to some extent. 
  • Advanced economies have a larger fiscal space, so they rolled out larger fiscal packages. 
  • Emerging market and developing economies are somewhat constrained by fiscal space.
  • The IMF estimates that global fiscal support is over $10 trillion in addition to accommodative monetary policy measures such as interest rate cuts, liquidity injections, and asset purchases. 
  • The strong backing by central banks have contributed to rebounding of equity prices, narrowing of credit spreads, stabilization of portfolio flows to emerging and developing economies, and strengthening of currencies that sharply depreciated previously. 
These support measures may have to continued in the near future too. However, the IMF recommends countries to ensure proper fiscal accounting and transparency, and to keep independence of monetary policy intact. 
  • The first priority is to respond to the health crisis through building health capacity, widespread testing, tracing, isolation and practicing safe distancing. 
  • Affected people should be provided with unemployment insurance, wage subsidies, cash transfers. 
  • Affected businesses should be provided with tax deferrals, loans, credit guarantees, and grants. 
  • Digital payments will be helpful. 
Over the medium-term, policy support should facilitate reallocation of workers to sectors with growing demand and away from shrinking sectors. This could require worker training and hiring subsidies. Policies should also be designed to repair balance sheets and address debt overhangs (requires strong insolvency frameworks, and mechanisms for restructuring and disposing of distressed debt). Economies could also increase green public investment, and expand social safety net spending. 

The international community can support developing countries through concessional financing, debt relief and grants. Emerging market and developing economies could require larger access to international liquidity (through central bank swap lines, global financial safety net, and ensuring financial market stability). Since public debt is projected to shoot up, economies will need to roll out sound fiscal frameworks for medium-term consolidation (cutting back on wasteful spending, widening tax base, minimizing tax avoidance, and progressive tax system).