Monetary Policy Review: No Policy Changes Due to Election Code of Conduct

The Nepal Rastra Bank (NRB) has indicated that it will not introduce any policy changes to the current fiscal year's monetary policy through the mid-term review, even as businesses seek further ease in credit flow.

The central bank is preparing to release the mid-term review of the Monetary Policy for Fiscal Year 2025/26 within a few days. However, a high-level source at the NRB confirmed that the review will focus solely on an assessment of policy implementation, with no new programs or policy changes. This is attributed to the imposition of the election code of conduct ahead of the House of Representatives elections scheduled for March 5.

“Due to legal provisions, we must issue the mid-term review of the monetary policy within this week,” an executive director at the central bank told New Business Age. “However, because of the election code of conduct, there is no plan for any policy changes.”

According to the Monetary Policy Formulation Procedure, 2073 (First Amendment, 2079), the annual monetary policy must be introduced within 15 days of the start of the new fiscal year. Quarterly and half-yearly reviews are mandated to be released within 45 days of the end of the respective period. Consequently, the NRB is required to complete the half-yearly review by February 27.

This review comes at a time when economic activities remain sluggish and credit expansion of banks and financial institutions is slow, creating pressure on the central bank to boost credit flow. The NRB had previously held discussions on introducing flexibility in working capital loans and auto loans.

Just days ago, the Nepal Automobile Importers and Manufacturers Association (NAIMA) formally requested the NRB and the Ministry of Finance to increase the loan-to-value ratio for hire-purchase loans on all types of vehicles from the current 60 percent to a maximum of 80 percent.

NAIMA has stated that the existing 60 percent limit is a major reason for the slowdown in the automobile market. "The need for high down payments has made many consumers unable to purchase vehicles, which has not only reduced sales but has also directly impacted overall economic activity and revenue collection," the association noted.

Despite these pressures, the election code of conduct prohibits government agencies and public corporations from launching any programs, policies, or plans not already approved in the annual budget and program. This has forced the central bank to shelve any planned policy shifts for now.

While the code does allow for programs to be conducted with the Election Commission's approval in cases of epidemics, natural disasters, or extraordinary circumstances, the NRB official stated that no such emergency measures are included in the upcoming review.

The central bank had adopted a "cautiously flexible" policy for the current fiscal year to spur economic activity. This approach was continued and further loosened in the first quarterly review held in November, which included a cut in the policy rate, an increase in the limit for personal overdraft loans from Rs 5 million to Rs 10 million, and a hike in the microfinance collateral loan limit from Rs 700,000 to Rs 1.5 million.

The monetary policy had projected private sector credit growth of 12 percent for the current fiscal year. However, by mid-January, year-on-year credit growth stood at only 6.7 percent. Despite the banking system being flush with excess liquidity, which the NRB has been mopping up through various instruments, it continues to struggle to maintain the lower bound of the interest rate corridor.