Nepal Monetary Policy Expectations for Fiscal Year 2021/22

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Monetary policy is one of the primary tools used by central banks to ensure a country’s economic and financial stability. Central banks modify the supply of money and market interest rates by establishing monetary policy in order to control inflation and manage economic swings.

Delay in Monetary Policy Announcement

Every year, the Nepal Rastra Bank (NRB) releases the monetary policy for the new fiscal year by the first week of Shrawan (mid-July). However, with the KP Oli government having fallen and the new government under Sher Bahadur Deuba looking to make changes to the FY 2021/22 (FY 2078/79) federal budget unveiled by the previous government through an ordinance, the monetary policy to be issued for the new fiscal year has been delayed until the budget changes are announced. Given the country’s current economic demands as a result of the COVID-19 outbreak, numerous stakeholders think that the central bank did not need to wait for a budget amendment to issue monetary policy. Monetary policy supplements the budget, but it can also be an independent policy, and the notion that monetary policy is only a supplement to the budget is no longer relevant.[1] Economic sectors now have greater expectations from monetary policy than in the past, which is why it must be addressed as soon as possible.

Highlights of the Previous Monetary Policy

The previous fiscal year’s (2020/21) monetary policy was largely focused on economic recovery, assisting entrepreneurs and enterprises to operationalize, and assisting borrowers who were hard hit by the COVID-19 triggered lockdowns. It focused growing agricultural investment, improving the energy sector, and revitalising SMEs hit by the pandemic. Similarly, the NRB and the Ministry of Finance (MoF) announced refinancing and concessional loans for firms impacted by the pandemic. Banks and Financial Institutions (BFIs) were prohibited from collecting additional fees and penalties to borrowers, and they were instructed not to post any type of auction or debt collection notice during the lockdown and for up to a month after the restrictions were lifted. Furthermore, the third quarter review of monetary policy announced special refinancing loans for hospitals and industries importing/producing medical oxygen and medical equipment/supplies.[2] This has raised stakeholders’ expectations of monetary policy, and the NRB must meet those expectations this year.

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Expectations

Offsetting the impact of the second wave:

After falling by over 2% in FY 2020/21, Nepal’s steadily improving economy suffered a setback once more as the pandemic’s second wave hit the country. Furthermore, with the third wave on the way, the country may once again go into lockdown, further squeezing the economy. As a result, the forthcoming monetary policy would most maintain programmes aimed at easing monetary supply and recovery through refinancing while maintaining financial stability. The NRB’s most recent inflation poll predicted an increase in inflation. Similarly, an increase in imports of more than 25% due to increased consumption compared to a mere 0.2 percent increase in exports in the first 11 months of FY 2021/22 resulted in a Balance of Payment deficit.[3] The new policy would need to address concerns about price stability as well as external stability. Although demand and consumption began to rise when the lockdown was lifted, the third wave of the COVID-19 epidemic would have an impact. The new monetary policy should continue to assist economic growth by making financial instruments more available for growing output, job creation, and economic recovery.

Mergers and Acquisitions:

In terms of BFIs, the NRB has previously attempted to minimise the number of commercial banks by encouraging large mergers by raising the capital requirement. The central banks feel that reducing the number of banks is vital to strengthen them so that they can fund larger projects while bearing more risks and competing with foreign banks. It would also make it easier for the central bank to regulate banks. The previous fiscal year’s monetary policy gave several incentives for banks to merge, such as extending the deadline for banks on priority lending, debenture issuance, and maintaining a 4.4 percent interest rate spread. It eliminated the six-month necessary cooling time for promoters as well as the central bank’s mandatory branch expansion approval requirement. Banks, on the other hand, were ambivalent about such incentives. Instead of merging, commercial banks have largely acquired development banks and financing companies and issued bonus shares/right shares to meet the capital requirement. As a result, the NRB would most contemplate raising the rate of large mergers through future monetary policy while discouraging excessive share dividends. Similarly, in order to avoid a liquidity crisis during the current crisis, the NRB would most likely keep cash reserve requirements for BFIs low.

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Stock Market:

Depending on how good or unfavourable the policy is for investors, the announcement of monetary policy frequently causes volatility in the stock market. The prior monetary policy lifted the margin lending cap to 70%, increasing credit flow into the stock market. It also prohibits BFIs from paying cash dividends if their distributable profit is less than 5% of their paid-up capital. BFIs with distributable profits more than 5% of their paid-up capital were permitted to release up to 30% as a cash dividend. They were, however, forbidden from delivering cash dividends that were greater than their Deposit Weighted Average in June 2020. Over the last year, the stock market has seen an extraordinary increase in transaction volume and market value, with the NEPSE Index reaching 3000 points. Concerned about the bullish market, the central bank advised banks to refrain from short-term stock trading. Furthermore, the on short-term trading was hiked to 7.5 percent in the fiscal year 2021/22. As a result, the next monetary policy is anticipated to be less favourable to the stock market. To encourage investors, the investors’ group has demanded that the capital gains tax be cut to the previous 5% on short-term trading and 2.55 % on long-term investing.

Expectations of the Private Sector:

The Federation of Nepalese Chambers of Commerce and Industries (FNCCI) also made recommendations to the NRB, urging the central bank to continue implementing policies put in place to address the economic impact of the COVID-19 pandemic in the previous fiscal year. Similarly, the FNCCI recommended that NRB Governor Maha Prasad Adhikari prioritise SMEs and startups in the future monetary policy in order to boost entrepreneurship, while also thanking the governor for the good results of the refinancing facilities granted the previous year. It was also recommended that monetary policy should increase the flow of liquidity in the market while maintaining a single-digit interest rate to encourage enterprises to acquire borrowing. The previous strategy provided refinancing opportunities for export-oriented and ailing industries at a maximum interest rate of 3%, while SMEs were to receive credit at a maximum rate of 5%. Similarly, commercial banks were obligated to offer at least 15% of their loan portfolio credit to the agricultural sector, 15% to SMEs, and 10% to the hydropower sector. The private anticipates provisions in the future monetary policy.

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The federal budget for fiscal year 2021/22 projected 6.5 percent economic growth, which far-fetched given the current scenario. Nonetheless, monetary policy must include elements that support the budget’s goals. The measures for economic recovery may not be as effective unless the COVID-19 outbreak is brought under control. This is why credit flow for the import, production, and distribution of COVID-19 vaccines, as well as medical supplies and equipment, must be promoted. Furthermore, achieving ambitious goals such as a 6.5 percent growth rate would be impossible without the contribution of the private sector, so the upcoming monetary policy should facilitate the private sector’s recovery and growth through various stimulus packages, refinancing facilities, and concessional loans that are not only limited in the paper but are also implemented without bureaucracy.

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