Monetary policy : Is there a choice ?

By Dr Raghab D Pant

Following the election of new leader of NC parliamentary party on Saturday, I found a number of bankers and the professional economists extremely curious to correctly identify the person who will lead the Ministry of Finance in the next government. Their argument was that the choice of the next Finance Minister will also affect (i) the future leadership of the Nepal Rastra Bank and (ii) the ways monetary policy in the country are formulated and implemented. I refused to comment on the first, as it was more a personal and moral issue, but with respect to the second, I did not agree with them because the next Minister of Finance, in my view, will have little independence in formulating monetary policy. The decision has already been made, and, in the short run, it is irreversible.

Current situation: These are the current fiscal and monetary situations of the country:

1. The financial position of His Majesty’s Government is not in a good shape. The growth in revenue has not been able to keep pace with the growth in expenditure, due largely to rising regular expenditure. As a result, the budget deficit in the first six months of the current fiscal year increased by 81 percent to Rs 3.60 billion compared to corresponding period of the last fiscal year. The government has taken some measures but the prospect is not very encouraging.

The activities of the Maoists initiated from the district of Rolpa and Rukum from February 13, 1996 have now spread to over fifty-five districts. It has been viewed by many simply as a problem in internal security. Its implications on budget deficit have seldom been raised or discussed, though it might turn out to be a serious problem in the not too distant future. The government, according to press reports, has recently provided Rs 1 billion plus to the police, in addition to those allocated in the budget for the current fiscal year. In addition, a high level committee is examining the need to create an "armed police" which will have its own financial implications. The Maoist activities, now, cannot be ignored from the problems of financial management.

2. The banks and even the financial institutions, on the other hand, have excess of resources at their disposal and it is estimated to increase further in the coming months due partly to the expected rise in the budget deficit. This has not led the commercial banks, notorious for their incompetitive behaviour, to reduce the loan or the spread between deposit and loan rate. Instead, some of the commercial banks are using their resources for investment abroad. The total foreign exchange holding of the commercial banks in January, 2000 totalled Rs 25 billion. This has led many to charge, perhaps correctly, that a few of the commercial banks have emerged as effective institutions for the outflow of domestic capital. This is an agenda for future research but such disturbing phenomenon has been noticed even by the international organizations. In February 18, 2000, the Executive Board of the International Monetary Fund concluded that "a fairly loose monetary policy led to excess liquidity in commercial banks, much of which has been placed in foreign currency assets."

Structural factors: The Minister of Finance will have to work within the following structural environment:

1. Nepal is committed to maintain free convertibility of Nepalese currency into Indian currency and vice versa. Neither are there quantitative restrictions on the movement of goods and services between the two countries. Nepal also maintains fixed exchange rate with India at NRs 160= IRs 100; the exchange rate with other currencies is fixed taking into account the exchange rate of that currency with Indian currency. We are following what the economists call "Indian Currency Standard", almost similar to the system of Gold Standard followed by the European countries in the nineteenth century.

2. These arrangements will have their own economic implications. In particular, given fixed exchange rate and free convertibility of currencies, inflation and interest rate in Nepal is closely linked with corresponding rates in India. If Nepal has to maintain an interest and inflation rate different from India it has to lift its discretionary control on exchange rate system to let the market determine the exchange rate of Nepalese currency vis-a-vis Indian currency.

3. The interest rate between India and Nepal cannot be different if the movement of capital between the two countries is sensitive to interest rate differentials. For example, if the interest rate in Nepal is higher than in India, the capital from India might flow to Nepal. This will bring Nepalese interest rate close to Indian interest rate. Similarly, if the interest rate in India is higher than Nepal, the capital might flow from Nepal to India.

4. Nepal, in fact, has been lucky until now in that it has not noticed massive capital flight due to interest rate differentials between India and Nepal. But it cannot be expected as a regular feature, specially by the Nepalese authorities. The Indian banks, until now, were popular for their bureaucratic hassles. But the Indian Finance Ministry has recently proposed several measures which will further liberalize the financial system of India. This will also make the Indian banks and even the stock market more attractive to the foreigners, including Nepalese.

Monetary policy: The arguments made by the bankers and the professional economists cited above give us the impression that they are not aware of what is popularly known as ‘impossible trinity’. We cannot have all, namely, free capital movement just like between India and Nepal, a fixed exchange rate and an effective monetary policy. A country must pick up two out of three. Nepal has three options:

(a) It can fix exchange rate and maintain freedom to formulate monetary policy only if it imposes restrictions on the movement of capital between Nepal and India. (It cannot be done according to our agreement with India dated June 10, 1990)

(b) It can maintain present system and retain autonomy to formulate monetary policy only by following flexible exchange rate system.

(c) It can fix exchange rate but then abandon the use of monetary policy to change inflation, interest rate and even to help the implementation of poverty alleviation programme.

We are now following option (c). This means inflation and interest rate in Nepal is closely linked with the corresponding rate in India. Economic Overview, a newsletter by Institute for Development Studies, says: "Nepal cannot fix its exchange rate without giving up all control over its monetary policy". The staff of the International Monetary Fund that visited Nepal recently was more straight in its report submitted to the Executive Board. It said "The fixed exchange rate requires that domestic monetary conditions be consistent with the peg and monetary policy be broadly harmonized with that of India." Nepal has no choice.

We therefore need a finance minister who will understand this issue.

An essay on dogs

By Rajoo

Dogs are domestic animals. They love to dwell among human beings. A dog has one crooked tail, two far-sighted eyes, two sensitive ears, a set of sharp teeth and, one salivating tongue and above all, an insatiable belly.

From time immemorial, people have strong belief that dogs are very sincere animals. They must have flattered Bramha quite a bit to make him plant this idea in the human psyche. Having been driven by this theory, thousands of people have worn the garland of martyrdom but are not yet tired of this dog-loving fancy and being the underdog. The theory of dogs’ sincerity is as true as Aristotle’s ideas about the number of women’s teeth. Howsoever, it is simply useless to think otherwise. Those, who even try to smell the dogs, are sure to have tattered skin - you will be called uncivilized. So better be civilized instead of using your senses. Praying to the dogs has been our tradition. We have one special day dedicated to these lovely-looking animals - the kukur Tihar. On that day, we elect one dog from the pack in the street, smear its scrawny head with vermilion powder and feed it selroti. Some rich people can possess dogs, which are particularly sincere to their masters (that’s because those masters can feed them with all new varieties of imported dog food). Anyway, we want those dogs to pay the price of the vermilion powder and selroti throughout the year. We don’t know how much they pay us but we never show even the slightest hesitation to respect, shelter and protect these carnivorous animals.

Whether we believe or not, we tend to stick to our tradition and feel proud of it. We never mind how much we are liable to become victims of our own dogma. We are happy to be misused for the dogs’ heinous purposes. The tradition has that we pamper them, tolerate their naughty behaviour and become restless when they sneeze.

Don’t be upset. They are enjoying the freedom you have granted. It has become their basic right to eat your meal, use your toilet and sleep on your bed. Don’t ever try to butt in on their imperial regime. You will surely find yourself torn into pieces. For they have sharp teeth, which had been sharpened for thirty years with a dream that came true only a decade ago. Let sleeping dogs lie. There are different species of dogs - Alsatian, bulldog, bloodhound, dachshund, Pekinese etc. They have different backgrounds, so obviously, they have different likes and dislikes. Some love grand international projects and some oppose such ambitious steps. Some love to possess cars and others may prefer to buy and then sell for their party’s sake. After all, dogs are dogs - they love only one thing in the world - bone, bone and only bone.

For a small piece of bone, they can go to any length. For them, the bone dearer than their parents, friends and even sweethearts. They have no time to think that they may one day die a dog’s death. They can launch a fatal duel with their best friends if only there is a small piece of bone thrown in between. Sincerity, servitude, responsibility, patriotism, and self-esteem become meaningless when the powerful bone sparkles on the stage. Some even behave like dogs in the manger. They can’t even tolerate an old dog in his last few breaths chewing a bone. By hook or by crook, that dog proves that he is a dog with a capital D at last.

The bottom line
Bhattarai’s ouster : A catastasis ?

By M R Josse

Understandably, Prime Minister Krishna Prasad Bhattarai’s lachrymatory valediction to parliament on Thursday afternoon grabbed the attention of — indeed, even touched — members of Kathmandu’s hard-boiled political class.

Surrender: Marking a watershed of sorts, it came about abruptly. For, until Thursday morning, not only were Bhattarai’s advisors loudly proclaiming that the prime minister would not resign; he had himself pointedly declared only a short week ago that he intended to remain in office "until I die" (TKP, March 10, 2000).

Then, the very next day, Bhattarai, advertising his determination to soldier on, reassigned new duties to ministers following the resignations several days earlier of 11 members of his cabinet.

Furthermore, in an obvious bid to extend the prime minister’s political longevity, his aides leaked to all and sundry that he was about to pack his bags for an official visit to France — no matter that such a diplomatic mission had yet to be finalized!

The question therefore arises: what made Bhattarai suddenly execute his dramatic, and far from defiant, U-turn on Thursday?

That conundrum aside, there is the lingering mystery of the "understanding" forged between Bhattarai and NC president Girija Prasad Koirala last month which led to the withdrawal of a no-confidence move registered against Bhattarai at the party secretariat by 58 NC parliamentarians close to Koirala.

What were its actual terms? Did its violation, in fact, trigger Koirala’s wrath which led, as far as all can see, to a more lethal no-confidence move being directed at Bhattarai from among his party flock in parliament — this time by 69 of them?

Be that as it may, what is noteworthy is that Bhattarai’s "voluntary" resignation came a day before the NC’s parliamentary party was to meet to take action on that very no-confidence move.

Ordinary mortals outside the pale of the Nepali Congress may truly wonder how secret understandings on power transfer between the party’s senior-most leaders can go hand-in-hand with persistent claims by that party to democratic orthodoxy.

Such a niggling caveat apart, there was no bold or direct reference to the no-confidence assault against him by 69 of his own MPs, leave alone on who the inspiration behind that move was.

What crisis? No less notable was the absence in his rambling disquisition of accusations against any "foreign hand". Despite some alarming stories in the vernacular media clearly suggesting otherwise, Bhattarai underlined that the cause of the "unexpected political crisis" was "within ourselves — not external".

Going beyond Bhattarai’s resignation, one notes, first and foremost, that, once more, a majority NC government has been brought crashing down by
NC president Girija Prasad Koirala, subsequently, and amazingly, rewarded by the additional mantle of parliamentary party leader by ostensibly grateful MPs!

Since the consequences of Koirala’s similar move in 1994 resulted in knocking the NC from its pre-eminent perch in parliament and opening the floodgates of political instability and mayhem, one shudders to think what dire prospects now lie ahead for us all.

Granted that Bhattarai in his farewell address observed that "personal behaviour not the system" is to blame. That is cold comfort for the millions whose dreams of a better future ten years ago, based on a new democratic polity, have come to naught.

Besides, such a convenient exegesis fails to explain why the polity has not — even after three general elections — been able to attract a nobler breed of people’s representatives than hitherto seen and why it has been largely incapable of rejecting politicians not cast in the mould of selfless public service.

If a majority government, despite earlier painful lessons, is wilfully and cynically brought down by its own party, are only personal — and not systemic faults and flaws — responsible?

For instance, if the hydra-headed beast of corruption is slain a million times in public speeches, cannot that societal cancer be traced, in large part, because elections have become astronomically expensive with business houses "donating" funds to political parties in the expectation that their investment will be returned later — naturally, at a hefty premium?

Are such shortcomings merely warts on individual faces or a blemish on the visage of multi-party democracy, a la Nepal?

Similarly, are the collective public actions of 58, or 69 MPs, acting at the behest of a party chief who chooses to remain behind-the-scenes, merely reflective of the personal traits, or ambitions, of politicians? Do they not also reflect inherent anomalies, even to a wee degree, in the political system itself?

Bhattarai’s exit under duress is, of course, an admittedly melancholy affair, not least considering his yeoman contributions to the democratic cause in the distant past.

However, the bitter fact remains that he was neither an effective manager or inspiring captain during his second prime ministerial innings, despite eloquent claims to the contrary in his address.

Catastasis: In any case, now that the uncompromising anti-Communist Koirala has replaced a happy-go-lucky Bhattarai, is there any guarantee at all that the former will be able to steer the battered ship of state through the perilous shoals and eddies that lie ahead on the turbulent Maoist insurgency sea?

If, as UML’s Madhav Nepal laments publicly, no state institution is functioning today, how can such a grim situation be remedied merely by replacing one aging NC helmsman by another — and that, too, by one whose record as prime minister during three previous periods has been none too encouraging?

One is thus truly apprehensive that Bhattarai’s tearful exit, climaxing nine months of a fierce intra-party power struggle and ineffectual government, may be the catastasis for a looming catastrophe. Besides, back-stabbing is neither an occasion for untrammelled joy nor can rewarding it be politically auspicious.