Nepal Rastra Bank (NRB) has planned to issue NRB bonds worth Rs50 billion as the banking system has been awash in excess liquidity for the last three years straight. Central bank officials said that a proposal had been sent to the governor and the bonds would be issued after the board gives the go-ahead.

While the government’s debt instruments such as treasury bills, development bonds, citizen savings bonds and foreign employment bonds are basically used to generate resources for government spending, the central bank’s long-term bonds are designed to mop up excess liquidity. “Currently, the maximum maturity period of monetary instruments used for liquidity management is three months, and this has not adequately addressed the prolonged problem of excess liquidity in the banking sector,” said Min Bahadur Shr-estha, chief of the public debt management department.

“We have already submitted a proposal to issue NRB bonds which will mature in six months to one year.” The central bank will decide whether to issue bonds or not depending on the liquidity situation of the banking sector.

Currently, NRB has been using instruments like repo, reserve repo and deposit collection which mature in one week to three months. According to NRB, banks have around Rs20 billion in extra cash. “The figure seems to be relatively low as the central bank has absorbed around Rs115 billion so far.”

Short-term interest rates have come down to as low as 1 percent due to the excess liquidity with banks. When depositors don’t get a good interest rate for their savings, the chance of capital flight is heightened as they can get a better deal abroad.

NRB has issued such bonds in the past, but it stopped doing so long ago. According to NRB Deputy Governor Chintamani Siwakoti, the central bank used to issue bonds from 1989 to 1997.

A senior central bank official said NRB decided to issue NRB bonds after the government rejected the idea of issuing sterilization bonds to manage the excess liquidity. “NRB will own the bonds and pay the interest by itself.”

In the case of government bonds, the central bank issues them on behalf of the government which pays the interest.

The idea behind issuing NRB bonds, according to central bank officials, is that the money collected thus does not return to the economy until they mature so there is no extra money in circulation.

“However, in the case of government bonds, the money returns to the economy in the form of government spending, so the structural problem of excess liquidity is not addressed,” said Shrestha.

Meanwhile, the central bank has also issued development bonds worth Rs12 billion, citizen savings bonds worth Rs3 billion and foreign employment bonds worth Rs250 million. The government aims to raise all of the planned Rs88 billion in internal loans.