Central bank blues

  • Unless we enhance our productive capacity, an expansionary monetary policy will do more harm

Jun 27, 2017-

Nepal Rastra Bank, the central monetary authority, is making final preparations to introduce the monetary policy for the next fiscal year. The monetary policy generally includes provisions to help the government meet its projected economic growth target, 

maintain stability in the financial sector and ensure consumer prices do not fluctuate too much.

The government has projected an economic growth rate of 7.2 percent for the fiscal year 2017-18. To meet this growth target, the central bank must come up with an expansionary monetary policy. But an expansionary monetary policy—which will increase money supply and reduce interest rates—alone cannot help Nepal accelerate economic growth because the country’s average productivity growth has stayed around zero in the last 45 years. This means the rise in investment or number of workers has not yielded desired outputs.

Considering this, an expansionary monetary policy will only increase imports in this 

net-importing country because of cheaper credit. This will stoke inflation. So, unless reform measures are introduced to enhance productive capacity, an expansionary monetary policy will do more harm than good to the country.

Recently, one of the biggest concerns for Nepal has been soaring imports. Imports surged by 35 percent in the first 10 months of the current fiscal year. This, coupled with a mere 9.8 percent growth in exports, has widened the country’s trade deficit by 37.5 percent in the 10-month period to a startling Rs747.7 billion, which is almost 29 percent of the gross domestic product.

This kind of trade deficit simply cannot be tolerated by the economy, especially at a time when the growth rate of remittances is continuously decelerating. This problem may worsen if problems in Qatar, which is currently facing a Saudi Arabia-led diplomatic and economic blockade, deepen. Qatar is one of the largest recipients of Nepali labourers.

Remittances are Nepal’s biggest source of foreign income. Deceleration in the inflow of money into the country and soaring imports are a lethal combination. These external factors will ultimately hit the foreign exchange reserve, rendering the import-dependent country with less money to settle import bills and facilitate foreign investors looking forward to repatriating earnings generated in Nepal.

Such a situation will also reduce the stock of deposits in banks, creating panic in the financial sector. This will ultimately destabilise interest rates, eroding confidence of both depositors and borrowers. The central bank should be mindful of the repercussions of these internal and external factors. It should come up with a pragmatic monetary policy that can help spur growth and maintain fiscal and price stability.

Published: 27-06-2017 08:04

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