The liquidity crunch is expected to last for several months.


Officials and financial experts say that the shortage of loanable funds has forced most banks and financial institutions to halt lending, and that the situation is likely to worsen the government plans to collect more money from the banking sector in income taxes by the middle of January next year, according to officials and financial experts.


According to Section 93 of the Act of 2002, taxpayers are required to pay 40 percent of their projected tax by the middle of January the first instalment. By the middle of January, the Inland Revenue Agency expects to have collected more than Rs80 billion in income taxes, on top of other taxes such as value added tax and excise duty that are collected on a monthly basis, according to Shovakanta Poudel, director general of the department.

In addition, banks and financial institutions are required to pay the first instalment of by the middle of July, and other businesses are compelled to draw money from the banking sector in order to pay their taxes to the government, causing liquidity in the banking system to be depleted.

Prakash Shrestha, chief of the central bank’s economic research department explained that the central bank made the decision to refinance Rs92 billion into the banking sector this week in order to avoid an escalation of the liquidity constraint. part of this decision, the government increased the amount of reserve funds that banks can accept as deposits from the previous threshold of 50 percent to up to 50 percent.

It is projected that the local government funds will inject approximately Rs50 billion in liquidity to the banking system. According to the Nepal Rastra Bank, the situation is severe, with the average credit-to-deposit ratio of banks and financial institutions already at 92 percent, while the central bank’s 90 percent threshold is being exceeded.

“While the liquidity crunch may not worsen a result of the measures we have implemented, the situation is likely to remain tight for at least 3 to 4 months,” Shrestha predicted. ” In March, government spending is expected to increase, while import control measures are expected to slow down loans, so we may expect the situation to improve.

She does not rule out the potential of a prolonged period of liquidity constraint in the banking industry, according to Shrestha. Throughout the whole fiscal year 2018-19, the banking sector experienced a lack of loanable capital for the first time in its history.

The current liquidity crunch is the outcome of excessive lending during the first five months of the current fiscal year, which was compounded by the government’s failure to spend its budgetary resources during the same period.

According to central bank figures, banks and financial institutions have collected Rs116 billion in deposits since the beginning of the fiscal year 2021-22 in mid-July, bringing the total amount collected to Rs1 billion. During the same era, credit grew to Rs438 billion, a significant increase.

Apart from the liquidity crunch and surging imports, other indicators such declining remittances, depleting foreign exchange reserves, rising inflation, damage to paddy crops caused by untimely rains in October, and a scarcity of fertilisers for winter crops, among others, indicate that the economy is in a state of crisis.

According to central bank officials who spoke at a roundtable on Wednesday, the vast majority of credit in the last five months went toward import finance.

Even though Finance Minister Janardan Sharma has been asserting, albeit without evidence, that the economy is operating well, the continued liquidity shortage means that even the productive sector may be denied credit, which would have a negative impact on economic growth.

For the time being, according to former federal affairs minister and finance secretary Bidyadhar Mallik, the financial crunch will remain for the foreseeable future, particularly in light of an upcoming tax payment deadline.

Despite this, he stated that “actions taken by the government and central bank will ultimately ease the situation.” “If government spending increases and Finance Minister Sharma, he has stated, reallocates funds from poor projects to performance projects, the situation is likely to improve by February or March. ”

According to the Financial Comptroller General Office, the government agency responsible for keeping accounts of government incomes and expenditures, there is more than Rs250 billion in cash reserves a result of the failures of the three layers of government to spend the funds that have been allocated, according to the Financial Comptroller General Office.

According to the agency, the federal government’s spending accounts for only 25 percent of total expenditures, with capital expenditures accounting for 7 percent.

a result of increased tax collections, the federal, provincial, and local governments will have a surplus of funds in their respective bank accounts.

Mallik stated that if the government is unable to increase spending, it may be able to prolong tax collection without imposing penalties on people.

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