If credit is the driving force of a modern economy, the latest banking data released by Nepal Rastra Bank marks the point when this engine spluttered, and the economy is now about to slide downhill. Data shows that total domestic credit increased by 2.2 percent during the first five months of the current fiscal year -- the slowest in recent years -- whereas it was 8.6 percent during the same period last year.

Only a few individuals seem to have noticed that the net domestic credit available to the economy has in fact been squeezed by over seven percent when the close to 10 percent inflation is taken into consideration. This is alarming for an economy that is struggling hard to recuperate from long-running sluggishness. The slowing rate of money supply growth that has declined close to zero has also defied the well-accepted theory of negative correlation between money supply and inflation, indicating that the effect of monetary policy on domestic prices in Nepal is far weaker than what classroom theories would suggest.

Undoubtedly, slow credit growth helped save the economy from a possible burst of the realty bubble last year. And Nepal Rastra Bank must be praised for the tactfulness it displayed in averting that impending crisis. But since then, a lot has changed and the possible threat of crisis has subsided. We believe it is high time the Ministry of Finance and the central bank paid attention to the pleas of the private sector to relax some of the tough policies that have now started to impact negatively on economic growth. We believe the private sector’s argument is valid and there is an urgent need to review some of the policies in order to spur those sectors that are least affected by the worsening electricity shortage. There is no need to explain here that power shortage along with insecurity have stymied the development of sectors such as industry that can generate mass employment.

In this regard, there is room for relaxing some of the credit polices imposed previously on promising sectors like housing and infrastructure construction, which have strong multiplier effects in creating jobs in many sub-sectors, ranging from cement and brick manufacturing to carpentry. Agriculture is also another sector that can thrive even at a time of acute power crisis. Though the government, in its fiscal policy, announced many policies to promote this sector, the outcome so far has been pessimistic. We believe that the above-mentioned are some of the sectors that can at least anchor Nepal’s economic growth prospects against going flat.

And, we are optimistic that the new prime minister, who has listed economic development as one of his four priorities, will pay due attention to this matter.

source: republica:editorial(2011),"Revise credit policy", republica, 10 feb 2011