Ending the confusion created by the change of government and the federal budget issued through an ordinance, Nepal Rastra Bank (NRB) unveiled the Monetary Policy for the current fiscal year on August 13, a little later than last year. Given that there is not much room for formulating a specific monetary policy in Nepal, NRB generally focuses on regulating the banking system. However, this time it seems that the central bank has taken more of a transformative approach.
The current fiscal year’s Monetary Policy has arrangements to accelerate the economy crippled by the Covid-19 pandemic and to protect the affected businesses. Overall, the arrangements in the Monetary Policy are conducive to the private sector. If the policy provisions are implemented effectively, the target groups will get some support to face the challenges erected by the global health emergency.
Some announcements made in the Monetary Policy can also be important for bringing meaningful changes to the Nepali economy. For instance, NRB has announced it will conduct a feasibility study of digital currency and full-fledged digital banking. It should be understood that digital currency is not limited to cryptocurrency like Bitcoin; it is also about dematerialising physical currency. It is known that about seven dozen countries around the world are currently studying the prospects of digital currency because of drastically cutting down the cost of supplying such money. The adoption of digital currency has been expected to open new doors of possibilities. It can bring about big changes in payment and banking services. Therefore, NRB's announcement in this regard is certainly welcome. Nevertheless, the sluggishness seen in introducing domestic payment gateways makes it hard to believe that any work related to bringing digital currency and digital banking will move ahead faster.
In the policy announcement, NRB has also prioritised the promotion of electronic payments, introduction e-KYC to remove the hassles of the current KYC practices and bring uniformity in KYC criteria. This indicates that NRB is moving towards a conceptual change. However, it is the implementation of policies that matters the most.
The central bank has hinted at some flexibility in its decade old insistence of bank mergers. NRB, which is particularly interested in reducing the number of commercial banks at the moment, has avoided bringing in arrangements for ‘forced mergers’ between banks. The appropriate number of banks and financial institutions (BFIs) in the country has remained a long-debated issue. However, it should be understood that the high number of BFIs is not the only problem in Nepal's banking system. Other issues such as the efficiency of BFIs, low-level of financial and digital literacy, and issues related to access to finance among the country’s rural population needs to be resolved. At the same time, there are also concerns about the creation of ‘too big to fail’ banks in the wake of mergers that have taken place in recent times.
Overall, the central bank has tried to please everyone, and the Monetary Policy has been welcomed by umbrella organisations of the private sector. Nonetheless, it will not be an easy task to balance conflicting policies such as employment growth and taming inflation. The policy arrangements can provide the much-needed support to the pandemic-ravaged economy if implemented properly.
Madan Lamsal
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