We need perhaps a sophisticated computer to keep an account of our current domestic and external problems.

Basically, to be precise, we are bogged down by three pressing problems:
(1) Political problems, which are too complicated involving too many leaders;
(2) economic problems (output is stagnating, price increasing, balance of payments deteriorating and poverty increasing); and
(3) financial problems which, not withstanding the seriousness of the problem to be discussed here, were confined, until now, to the fight between political parties to select, by hook or by crook, a governor of the central bank from their own party.

Though the three issues are not unrelated, it still has not been made clear to the general public the reasons for the problems and the policies and programs to be pursued by the policy makers because, it appears, they are not clear about the problems. They give speeches which hardly mean anything, and, financial problems have continued to develop.

The most important issue that has been widely discussed in the press is the so-called liquidity problem, the reasons for which have not been clarified by the monetary authority. Sometimes, the border trade with India is blamed where only Indian currency is used. And some other external reasons, including import of gold or other goods, are also cited most of which do not make any sense in a economy following liberal policy.

The interest rate has reached up to 18 percent with the spread rate reaching as much as 7 percent, perhaps the highest in the world! The difference between interest rate on inter-bank loan and treasury bill rates differ dramatically. It is well known that in a normal economy the two rates differ very little. A large difference means that banks do not trust one another.

Banks are run on public trust meaning they can run smoothly as long as the public trusts them. Once they lose it and the public starts withdrawing their deposits from the concerned banks, the banking system and the national economy itself can collapse like a house of cards as we have seen in the 1930’s in the US and many countries in Europe.

A close analysis of the speeches of the policy makers of the monetary authorities and the analysis published by them on current problems show that the central bank is behaving as if it can control any thing it wants and the public will support all of their activities however undemocratic they may be.

The central bank, as we all know, is maintaining fixed exchange rate with the Indian currency, and the exchange rate with other currencies move with that currency. In such circumstances, the central bank cannot control both liquidity and balance of payments problem of the country.

If the liquidity is increased, naturally balance of payments will deteriorate and vice-versa. The central bank can control either the liquidity in the economy or the balance of payments; it cannot control both because of fixed exchange rate system that it is maintaining.

In the first six months of the current fiscal year, for example, broad money liquidity increased only by 5.4 percent compared with a growth of 12.4 percent the same period last year due to increase in domestic credit at a rate much higher than last year. As a result, domestic demand increased at a rate much higher than the increase in the domestic production of goods and services. As expected, trade deficit increased at a very high rate and the country witnessed a deficit in the balance of payments.

The main problem with monetary policy of Nepal is that the authorities are not sure what monetary policy can or cannot do and how it should be operated. As a result, the economy is where it was before. On the other extreme, it is moving in the line to follow a controlled regime, for example, in the import of gold. Similarly, it has imposed severe restrictions on the purchase of Indian currency.

The total reserve of Indian currency with the commercial banks was just Rs.33.9 billion or 14. 1 percent of the total compared with Rs. 206.9 billion of convertible currency. The Indian currency is sufficient just for four months of import. According to press reports, the exchange rate of Indian currency in the Tarai region, and even in Kathmandu, the capital city, is higher than the official rate.

As I said earlier in a paper presented in a seminar organized by the Nepal Rastra Bank (NRB), the Indian currency is slowly emerging as optimum currency in Nepal (in that it is more preferable for the citizens at large, given the current policy of the central bank of Nepal, to use Indian currency not only for external but domestic transactions as well).

It is amazing that NRB is trying to hide all these problems, which are deteriorating at a very fast rate, from all sources. Recently, it has started to stop publishing some important information in its monthly publication – a regular feature since the past two decades. It may be recalled that NRB used to publish about 46 tables with detailed information of deposit of the commercial banks, sectors and security wise details of credit flows of commercial banks, position of Indian currency and several other information on the economy.

Now it has decided to produce just some information. This procedure will enable NRB to provide wrong information, if they so want, to the public – a usual practice followed by the central bank even in the past.

The new management has killed the public right to information. I am amazed how this was approved by the Board of NRB, which also consists of a few so-called democrats. If such wrong policies continue for, say, even six months, I have no doubt that Indian currency will emerge as optimum currency. Against this background, it is safe to conclude that there is cancer growing in the financial sector.

It is growing daily and at a compound rate.

Writer is associated with Institute for Development Studies

courtesy: DR RAGHAB D PANT ,myrepublica