At a time when the impoverished Nepali economy is fighting hard to escape another round of economic slowdown, Nepal Rastra Bank (NRB) has announced its annual Monetary Policy, which attempts to address some of the issues that the economy has been confronting since the last six months. The Policy has announced some commendable measures such as increasing banking investments to medium- and small-scale industries, which has the potential to curb both shrinking exports and worsening employment situation.

The Policy has also adopted a number of measures aimed at promoting investments in the rural areas, particularly to promote industries. For that purpose, it has asked development banks and finance companies to join commercial banks in extending cheaper loans to deprived sectors. This is a welcome step but given that such a measure has not produced the desired results in the past, it would be naïve to expect rosy outcomes immediately. We have seen banks choosing to pay penalty rather than take risks of non-recovery by extending loans to deprived sector.

We are also skeptical about the Policy’s target of achieving a Balance of Payments (BoP) surplus worth Rs 9 billion because it has not laid out a clear-cut strategy to deal with ballooning trade deficit, which is the main inciter of the record deficit in BoP. The Policy also has not done much in introducing measures to boost exports and promote domestic industries that can substitute imports.

The policy to provide interest-free loans to establish branch offices of financial institutions in 22 districts with the aim of increasing financial accessibility of rural people to modern banking system is laudable. But NRB must make sure that the branch offices sustain and continue to operate even after three years when they will cease to provide interest-free loans. Likewise, the policy to encourage mergers and acquisitions among financial institutions is another welcome announcement. We urge the central bank to do more on this issue as this is a perfect remedy to problems that have cropped up because of an overcrowding of financial institutions. Along with some rewards that the Monetary Policy has outlined, we urge the government to provide some rebates on tax to those financial institutions that opt to buy financially weak institutions.

All said, in the lack of a timely announcement of a fiscal policy that comes with the annual budget – one of the two pillars of a national economic policy – it is hard to imagine a remarkable turnaround on the economic front. At this juncture, we can only pray that politics would take a positive turn and a full-fledged budget would be announced soon.

source: republica(2010),"Monetary Policy: A mixed bag",republica,31 July 2010