•      Fri Jun 21 2024

Flexible monetary policy expected for revival of sluggish economy

Kathmandu, July 21 : The private sector which has been contributing 81 percent to the country’s economy and providing nearly 90 percent of employment in the country is currently reeling under extreme downturn.

The industries are having to reduce their production due to the unimaginable decline in demand, which has directly affected the income of hundreds of thousands of people involved in the production, distribution and sale of these products.

A study conducted by Nepal Rastra Bank (NRB) shows that the industries have to cut down on their production by up to 60 percent. This has also has a negative impact on the revenue collected by the government.

As per the estimates of GDP for the current fiscal year issued by the Central Statistics Office, the growth rate of the three major sectors of the economy – production, construction and trade – is expected to be in the negative by more than two percent. These are not encouraging signs considering the country’s economic health.

The minimal growth rate of the overall economy also indicates that the private sector is not in a comfortable position. On the other hand, the interest rate of loans has increased as most of the depositors have changed their deposits into fixed deposits due to the constantly rising interest rates. For this reason, the private sector is not in a position to make investment and make the economy dynamic by drawing loans in the current exorbitant interest rate.

The past statistics show that the flow of loan to the private sector has increased when the interest rate is lower. Such loan flow had gone up by 26 percent when the interest rate was around 8 percent in the fiscal year 2077/78 BS and the loan mobilization has expanded by only three percent in this year 2079/80 BS when the interest rate has reached 13 percent.

This shows that the economic growth rate is in the positive when the loans are spread to the private sector. There can be no two opinions that the interest rate on loans determines the degree of growth in investments, expansion of trade and business and leaving a positive impact on the economic growth rate.

Industries and business are in crisis due to the economic slowdown and lack of the entire demand. There is a need to rescue some of the businesses immediately. So in this situation, the private sector is looking to the Nepal Rastra Bank with hopes. There is no other option. It is not otherwise to have a hope of a special kind in a special situation. The organisations representing the private sector have jointly submitted a list of suggestions to the central bank with special hopes. The suggestions focus on the responsibilities of the state to resolve the present difficulties.

Nepal’s economy went through many challenges and ups and downs in the past one decade. The economy that was advancing with high economic growth expectations braving the devastating 2015 earthquake, the border blockade and COVID-19 was again hit by the global recession, the obstructions in the supply and the Russia-Ukraine war.

In such crisis, the central bank has played a role in the growth and expansion of the private sector through bank rates, policy rates, interest rates and various monetary instruments.

The private sector has lauded the role of the central bank in uplifting the sectors like tourism marred by COVID-19.

So in this situation of uncertainty, the Rastra Bank should bring such policies through the monetary policy that would increase confidences in the market. It is appropriate to manage the provision that interest rates may differ as per the timeframe of the fixed deposits as a large amount of money from the saving accounts has been converted into the fixed accounts. There is a need to make the provision that the interest rates should be five percent between saving and fixed deposits.

There is a need to maintain flexibility in the debt equity ratio for at least one year as there is a shrinkage in the loan flow due to high interest rates as a result of low confidence in the market and high drop in the demand. The monetary policy should be flexible to make the whole market dynamic.
One of the policy changes that greatly affected the general public is the provision not allowing sending remittance from abroad to home through remittance companies.

The ceiling for sending money through remittance companies internally was reduced from Rs 300,000 to Rs 25,000. The provision put in present bars sending money through remittances companies which has affected millions of workers, students and those working in informal sector.

There are still places in rural areas where there is no easy availability of internet and a big section of demography is still out of the reach of banking facility. At such scenario, barring sending money from remittance companies is adding to the woes and inconvenience of the rural population and destitute demography.

Thousands of remittance outlets have been shut down since the closure of this service. Hence, there should be policy that allows sending up to Rs 100,000 through such companies based on the identity card.

Moreover, the provision to maintain zero arrears for at least seven consecutive days in the loan account according to the nature of the business at any given point of fiscal year is not practical.

The private sector demands that such provision be revoked. Similarly, the provision requiring two separate accounts for obtaining current capital loan is also impractical.

For this type of loan, it would not be possible to accurately estimate the working capital loan if the turnover of a fiscal year is taken as the basis.
Therefore, the current capital should be calculated on the basis of the fiscal year which records the highest turnover among the last four fiscal years.

At the time when the manufacturing industries are struggling to complete two production circles in a year, the 25 per cent ceiling of working capital loan should be raised.

There should separate criteria for loan for the manufacturing industries and trade and this provision should be applied in the current capital loan.
Also, provision for working capital loan of a permanent nature should be put in place.

Furthermore, if the industries need to be shut down, those industries expressing their commitments to pay installments of principle amount and interest should be allowed to shut down and arrangements should be made for easy loan clearance.

A provision should be made to provide project loan to small and middle-scale industries as per the suggestions provided by the FNCCI to the Nepal Rastra Bank. Our suggestion is not to make any delay in implementation of this provision which could play significant role in growth of startup and small and middle-scale industries.

The loan limit given to such enterprises should be increased at least to Rs 50 million. Our demand since the earlier is that a policy should be adopted to encourage production-oriented industries through special discount in interest rate. We are saying that the premium charged on interest rate of loan should be low.

Likewise, the private sector has been demanding arrangement of refinancing in different sector including production-oriented, small and middle scale and export-oriented industries, tourism infrastructures and business run by women entrepreneurs.

Everyone knows that this current situation we are talking is not a normal situation. So this is the wish of the private sector that Nepal Rastra Bank could pave ways to address the current situation rather than just following the tradition in such special situation. Our estimation is that such timely policy could solve the complicated situation created by the time.

We expected that liberal monetary policy would pave ways of growth and expansion for private sector and could save the country’s economy which is in crisis.

I think the entire private sector is waiting that the monetary policy which is being drafted by the NRB would come in a timely manner and would be able to address and resolve the identified problems. RSS