Saturday, 25 March, 2023

All Eyes On Monetary Policy

Uttam Maharjan


The economy of Nepal has been badly battered by the COVID-19 pandemic. Businesses, whether big or small, have taken a knock on an unprecedented scale. Many labourers dependent on such businesses for their livelihood have found it difficult to survive. The government arranged for relief for such labourers for some time during the complete lockdown. Now, the lockdown has been partially lifted to keep the economy, which remained stagnant during the complete lockdown, moving.
The monetary policy for the fiscal year 2020-21 is around the corner. It will be unveiled in the first week of Shrawan. There has been some delay in proclaiming the monetary policy this time around as intensive discussions are being held to incorporate in it provisions relating to relief for the banking sector and the business community. Indubitably, the need of the hour is to set to rights the economy plagued by the COVID-19 pandemic. For this, it is imperative to bring the businesses back to normal through a relief package.

Additional funds
Businesses are in an uptight position now. Their income was well-nigh zero during the complete lockdown. Most of them have not been able to pay salaries and wages to their staff. On the other hand, they have to pay taxes to the government and pay installments on loans taken from banks. So businessmen are demanding that they be provided with relief in loan payment. Such relief may be given in the form of extension of the period of loan payment, restructuring of loans or capitalisation of interest. Such relief should be provided for businesses based on their nature and size. For example, interest capitalisation may not be appropriate for small businesses. But for big businesses which require more time to be restored, interest capitalisation may be a good option. Further, some businesses may require additional funds to run smoothly. For this, additional funds of ten per cent of the existing working capital may be provided for such businesses, which should be covered in the upcoming monetary policy.
On the other hand, the two per cent interest waiver scheme announced by Nepal Rastra Bank has been availed of by some businesses, especially big businesses. There are, however, complaints that small businesses have not been able to enjoy the facility. The facility should be made available to all businesses.
It is reported that banks have been pressurising businessmen to pay installments of loans as the year-end is approaching. As businesses are in financial straits, it is not reasonable for banks to force them to pay installments of loans. However, those who have a good financial standing and who can afford to pay installments can do so. Nepal Rastra Bank is mulling over extending the tenure of loan payment by at least three months by making a provision in the upcoming monetary policy, which will be a great relief for businesses.
The refinancing fund is to the tune of Rs. 50 billion at present. The importance of such a fund is more amplified at abnormal times like now. Nepal Rastra Bank is considering increasing the limit of the fund to Rs. 100 billion. Even small and medium enterprises (SMEs) should have access to the fund. It may be noted that the rate of interest on loans charged to SMEs is higher than that charged to big businesses as banks have varying rates of interest on loans for various categories of loan clients.
It is gratifying to note that the banking sector of Nepal is sound in South Asia. The banking sector has proved that it is strong even amid the present coronavirus crisis. The effects of the COVID-19 pandemic on the banking sector are low vis-à-vis other sectors. The tourism sector, for example, has been devastated. There is no sign that the tourism sector will be restored within this year (2020). The labourers associated with the tourism sector have been left high and dry.
The story of banks is, however, different. Even during the complete lockdown, banks were able to mobilise billions of deposits. With the gradual lifting of the lockdown, businesses returning to rhythm and general people resuming their normal life, it may be hoped that credit will grow soon. Although banks have now high liquidity, it may not be sufficient for catering to more loan requirements that may arise in the near future. That is why banks are now demanding that the credit to core capital-cum-deposit (CCD) ratio and the cash reserve ratio (CRR) be relaxed. The CCD ratio stands at 80 per cent now, whereas the CRR stands at 4 per cent.
It does not, however, mean that banks are fully secure from the effects of the COVID-19 pandemic. Their financial standing has also been affected to some extent. To make amends for such effects, they are doing homework to retrench unnecessary expenses such as dismissing outsourced and contract staff. Further, a study is being made on overall cost-cutting measures. The banking sector is still robust and resilient. The position of the foreign reserves is good. The position of the balance of payments is satisfactory. Remittances have also increased. Such remittances could be from those stuck in foreign countries due to the COVID-19 pandemic. So it is a safe bet that the economy can be restored quickly.

Relief packages
The upcoming monetary policy should be different this time as it is being proclaimed amid the coronavirus crisis. The basic thrust of the policy should be to stimulate both the business community and the financial sector through stimulus and relief packages. It is good news that Nepal has recently been promoted to a lower-middle-income country from a low-income country on the basis of the per capita income, which reached US$ 1,090 in 2019. There are now two major challenges before the country: to attain the status of developing country by 2022 and that of middle-income country by 2030. For this, strengthening the economy is a sine qua non. It may, therefore, be hoped that the upcoming monetary policy will include provisions designed to stimulate the economy so that the desired economic growth can be notched up.

(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000.