NRB unveils monetary policy, draws mixed reactions

Nepal Rastra Bank (NRB) has unveiled its monetary policy for the current fiscal year 2022/23. Unveiling the monetary policy on Friday, the governor of the central bank Maha Prasad Adhikari said that the monetary policy has given a solid course of action to promote macroeconomic stability while maintaining price and external sector stability and to support economic growth by increasing productivity He said that the priority of monetary policy is to flow credit to the productive sector rather than credit growth.

The easy regulatory arrangements taken during the COVID-19 pandemic will be reduced gradually and made in accordance with prudent regulatory standards, he said.

In the fiscal year 2022/23, the growth rate of the broad money supply is projected to be 12 per cent and the growth rate of loans to the private sector is expected to be 12.6 per cent.

Money supply was projected to expand by 18 per cent and credit to the private sector by 19 per cent in the last fiscal year 2021/22.

The policy has set a target to keep inflation at 7 per cent and economic growth at 8 per cent in the current fiscal year.

The policy has a target to maintain foreign exchange reserves that can support the import of goods and services for up to 7 months without putting pressure on prices from the demand side.

Keeping in mind the pressure on prices and foreign exchange reserves, the rates under the interest rate corridor have been increased by 1.5 per cent for macroeconomic stability and the bank rate has been maintained at 8.5 per cent, the policy rate at 7 per cent and the deposit collection rate at 5.5 per cent.

The NRB has increased the Cash Reserve Ratio to be maintained by the BFIs from 3 per cent to 4 per cent to be effective from mid-August this year.

According to the new monetary policy, there will be a difference in the interest rate of loans going to productive and commercial sectors. Meanwhile, the monetary policy has drawn mixed reactions. The Confederation of Banks and Financial Institutions Nepal (CBFIN) has said that the monetary policy has adopted timely policies to bring the economy back on the right track. Presenting the view over the monetary policy, the CBFIN said that monetary policy has adopted strict policies to maintain economic and financial stability and bring back the declining economy to the right track in order to facilitate the current situation where Nepal's economy is becoming uncomfortable as the important indicators of the economy are moving towards the negative direction.

It, however, said that the achievement of the goals set by the monetary policy and the implementation of some of the measures adopted for the improvement of the current economy will be challenging.

In a situation where there is a negative impact on Nepal's economy due to various issues seen in the external sector, it is challenging to increase investment in the productive sector in order to maintain economic stability, keep price inflation within limits, maintain foreign currency reserves and balance of payments and import substitution, it said.

Similarly, the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) expressed its view that the monetary policy will put additional pressure on the liquidity situation seen in the market for about eight months.

It seems that the central bank, which is forecasting to provide less loans by about 7 percentage points than last year, has adopted a policy to absorb liquidity from the market and increase the interest rate of loans by reducing consumption. Rather than increasing the source of foreign exchange earnings, the policy trend is towards reducing expenses by controlling credit, FNCCI said.

The monetary policy could not encourage the private sector because it has no concrete measures to reduce the lack of capital in the market. The policy has not been able to cover the concrete measures of import substitution and export promotion.

As the private sector investment will also shrink due to strict policies, it will be challenging to achieve the economic growth rate of 8 per cent as targeted in the budget, FNCCI said.