Holistic Analysis Needed

  3 min 15 sec to read
Holistic Analysis Needed

The general elections are over, and the private sector is likely to resume its protest against the banks and financial institutions demanding a reduction in interest rates. The protest is not the troubleshooter in the sensitive field. But, the agitation will surely force the parties concerned to rethink and find a solution to the problem.

The problem here is not with high rates, but fluctuating interest rates. The likelihood of the rates coming down to the level of two years ago is bleak. High interest rates on loans drive the production cost up, causing the price hike. Businesses, which commenced two years ago or even before that with loans based on the interest rates of then, are feeling the pain and some have closed down as well.

The central bank seems to have pacified the protests by including slight changes in its first quarterly review of the monetary policy. But, the business community may not be satisfied by these marginal changes.

As things stand, the private sector has to answer a fundamental question before they resume agitation. Interest rate is the price charged by one private sector, i.e. the bank to its customer on its lending, just as steel factories, flour mills and hotels charge to their customers. What if the biscuit factories and construction companies agitate against flour mills and steel factories demanding a reduction in the price of flour and steel?

 Apparently, the private sector and its players understand this. Why construction companies, biscuit factories and the likes have not come out on the street against their inputs providers is because they fathom it. Why have industrialists and entrepreneurs are agitating against banks and financial institutions that supply financial inputs? They think that interest rates have gone up due to Nepal Rastra Bank’s polices  and rates can come down if the regulator changes its polices. Indeed, the protest is targeted at the central bank and thereby the government.

The regulators seem to have exhausted available tools at their disposal to ensure adequate loanable funds in the banking system. Thus, the problem needs to be addressed in a different manner.

Rate hikes not only cause the prices to go up. Continuous rise in market prices over the past year or so has pushed up demand for business loans, on the one hand. On the other hand, price hikes have reduced saving capacity of the people nationwide. Depleting savings is one of the major reasons behind the stagnation in bank deposits. Therefore, the central bank is now facing the triple challenges of achieving triple objectives – inflation control, foreign exchange rate control and employment creation.  These are called impossible trinity as all of these cannot be achieved simultaneously. At least one has to be traded off to achieve the other two.

Inflation can be contained by reducing supply of bank credit and increasing supply of goods. The latter does not fall under the central bank’s direct control. Foreign exchange rate control or stability in the exchange rate of the local unit against foreign currencies can be achieved through import restriction and export promotion. But, restricting import results in price increase. For export promotion, the central bank has a limited power. It can intervene in the market and devalue Nepali rupee. But, that makes imports costly and causes inflation.

Difficulties the economy is facing are brought by factors beyond the government’s control, as they are international. Thus, stakeholders need to delve into depths to figure out solutions to the troubles facing business community and general public. One solution could be to hold a tripartite meeting of government, central bank and independent experts and explore way-out palatable to all the parties involved.

Madan Lamsal
[email protected]

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