The Meaningfulness of the Monetary Policy

 0   761 times read   3 min 25 sec to read
The Meaningfulness of the Monetary Policy

At a time when the government has failed to add any meaningful momentum to the country’s economy hard hit by the Covid-19 pandemic through the Federal Budget, the central bank has reignited the hopes of the private sector by announcing a slew of relief and rescue measures to help the crisis-stricken businesses through the Monetary Policy.  The policy document is seen as a bold and necessary step taken by the new Nepal Rastra Bank (NRB) Governor Maha Prasad Adhikari who had assured that he would do everything at his disposal to help the private sector face the current challenges. 

The Monetary Policy has attempted to rejuvenate the investment environment in the country by increasing the flow of credit and bringing interest rate stability. The central bank has focused on the issuance of a five-year debenture and short-term intervention into the market by arranging an interest rate corridor. Additionally, the Monetary Policy for FY2020/21 has relaxed provisions for banks to bring in foreign investments. Its other focus is on mergers between banks which have been sought for long in the financial sector. 

The Monetary Policy has mandated banks to lend 15 percent in the agriculture sector. It has also proposed to introduce an agriculture bond which can positively impact financing in Nepal’s agriculture sector. The central bank has made policy arrangements to increase the size of a Rs 50 billion relief fund to SMEs and tourism businesses up to five times. In the meantime, payment of interest and principal amount of loans has been deferred to at least by mid-January 2021 which can be extended to a year. 

Particularly, small and medium enterprises (SMEs) and tourism businesses that have been the biggest victims of the current crisis have been assured their revival through liberal measures including new loans, refinancing and rescheduling of loans. NRB has provisioned a 3 percent interest rate for special types of refinancing and 6 percent for general refinancing. The Monetary Policy has facilitated banks to increase their private sector lending up to 21 percent.  

With these measures, NRB has tried to please the entire economic sector. The Monetary Policy has also garnered support from the main opposition party, Nepali Congress as well. However, widespread support on its own cannot ensure the success of the policy.    

While it is praiseworthy for the central bank to come up with measures in a bid to revitalise the depressed business activities, there are some concerns nonetheless. It has aimed to keep the inflation rate under 6 percent which seems unattainable at the moment. It is because an expansionary monetary policy always tends to increase the inflation rate. Given that the Covid-19 pandemic has hit hard Nepal’s international trade and foreign currency sources including remittance, tourism and exports, the stability of the country’s external sector will be under big pressure with the depleting foreign exchange reserve and growing balance of payment (BOP) deficit. As opposed to earlier norm of maintaining forex reserves to sustain imports of goods and services for eight months, NRB has adopted the policy of maintaining forex reserves sufficiently to sustain imports for seven months. This move of the central bank has indicated brewing problems in the country’s external sector. 

Monetary policies of past years also used to garner welcome from different quarters of the economy. Nevertheless, many provisions couldn’t enter into implementation and many others couldn’t produce the expected results despite being implemented. The fate of the measures announced in the Monetary Policy for FY2020/21 could be similar. The meaningfulness of the policy rests on its implementation. Taking the country’s economy out of the deep slump is indeed a herculean task which will require bold yet considerate efforts. In this regard, the central bank needs to pay special attention to ensure that all pandemic-affected businesses benefit from the relief measures mentioned in the Monetary Policy. 

Madan Lamsal
[email protected]

 

No comments yet. Be the first one to comment.
"