Money matters

  • Central bank should ensure that banks are channelling credit to priority sectors

Jul 11, 2017-

The Nepal Rastra Bank has launched the Monetary Policy for the next fiscal year without much change to key targets. The central monetary authority has set a target to increase money supply by 18 percent in the next fiscal year, slightly above this fiscal year’s 17 percent. It has also fixed a target for mobilising banks and financial institutions to expand credit to the private sector by 20 percent in the next fiscal year, which is the same as in the current fiscal year.

With these targets in place, the central bank is hoping to help the government attain an economic growth rate of 7.2 percent in the next fiscal year. This may be ambitious, because the scenario in the next fiscal year is going to be very different from the one in this fiscal year.

In the current fiscal year, the country’s economy is projected to expand by a 23-year high of 6.9 percent. This economic growth is coming on the back of monetary targets that are similar to those of the next fiscal year. This, however, does not mean the targets for the next fiscal year will automatically help the government to meet the projected growth rate of 7.2 percent, because the economic base of the last fiscal year was extremely low. In the fiscal year 2015-16, economic growth had shrunk to 0.01 percent. So, growing by 6.9 percent from a near-zero base was much easier. But climbing another 7.2 percent from the existing base of 6.9 percent will not be that easy unless there is considerable increase in productivity.

This, however, does not mean the central bank should have inflated its key monetary targets, because an expansionary monetary policy only increases imports in this net-importing country due to cheaper credit and stokes inflation.

Yet the silver lining in the new Monetary Policy is a provision that makes it mandatory for commercial banks to extend 25 percent of the total credit to priority sectors within mid-July 2018. As per this plan, 10 percent of the total credit should go to the agricultural sector, 5 percent to the hydroelectric sector, another 5 percent to tourism and the remaining 5 percent to other priority sectors. This is a welcome move, as all these are productive sectors and can help create new goods, services and jobs.

But the big question is whether the central bank can enforce this decision. Earlier, the 

central bank had directed commercial banks to extend 20 percent of the total credit to the productive sector within mid-July 2016. Until the deadline, only around 16.8 percent of the total credit was channelled to the productive sector. Yet the 

regulator did not take any action against the banks.

If the central bank shows similar lethargy, attaining higher economic growth in the next fiscal year will only be a pipedream.

Published: 11-07-2017 08:07

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