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Kathmandu Wednesday March 07, 2001 Falgun 24, 2057.
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Investors’ confidence low despite squeezing
liquidity
By Prem Khanal
KATHMANDU, March 6 - Anchored by the historic low inflation rate and
continued double-digit growth of exports, the overall performance of the economy, during
the first half of the current fiscal year, was remarkable. However, poor government
budgetary operations, reflected by the decelerating growth of development expenditure and
skyrocketing fiscal deficit, and dwindling investors’ confidence are some of the
worrisome facts.
Along with this economic scenario, some interesting changes have taken place
in the area of money supply during the first half of the current fiscal year. During the
first half of the fiscal year, board money (M2), which determines the total liquidity in
the economy, registered a slim sprout of 4.6 per cent against 10.8 per cent during the
same period last year. Unlike last year, during which the actual money supply was 6 per
cent more than desired or budgetary target, increase in the money supply during first half
is far below than the budgetary estimation of 12 per cent.
This indicates that excess liquidity in the banking system - which is one of
the serious problems of the monetary sector since the last couple of years - is slowly
declining. This might be good news for the commercial banks, which are bearing huge
deposits burden, and for the depositors, who are getting record low interest rate.
However, in the long run, if declining liquidity position hits the
banks’ lending rates, then it can have a severe negative impact on the development of
the industrial sector, which already is more or less in the stationary state.
Among the two components of M2, both Net Foreign Assets (NFA) and Net
Domestic Assets (NDA), registered a decelerating growth compared to last year, hence
playing a vital role in squeezing M2. During the period, NFA swelled by 4 percent whereas
NDA surged by 5.1 per cent.
Despite a healthy growth in exports, which during the review period increased
by over 22 per cent, rapid increase in foreign liabilities by 23.3 per cent has
contributed to a decelerating growth of NFA.
The two components of narrow money supply (M1) - currency held by the public,
and the demand deposits - registered a growth of 4 per cent and 11.3 per cent, as against
9.9 per cent and 14.8 per cent in the same period last year. After adjusting inflation
rate of 2 per cent, the nominal growth in the currency held by the public reveals that
public spending has not improved enough to stimulate domestic demand.
The ratio of currency held by public to M1 has also declined marginally to
touch 0.67 from last year’s 0.68 indicating that people are holding less cash-in-hand
mainly due to deteriorating investment opportunities. Similarly, double-digit growth of
demand deposit indicates squeezing business activities.
The domestic credit and non-monetary liabilities, two components of the NDA
also registered growths of 6.4 per cent and 9 per cent against the last year’s 9 per
cent and 2.5 per cent respectively. Out of the total domestic credit, government borrowing
from the banking system posted a decelerating growth of 2.1 per cent as compared to 4.2
per cent in the first half of the last fiscal year.
The soaring fiscal deficit, which has surged by almost 22 per cent as
compared to the same period last year, is the prime cause for such growth. The government,
during the review period, has mobilized internal loan worth Rs 1.93 billion and foreign
cash loans worth Rs 2.45 billion to bridge the deficit.
Similarly, government’s claim on public enterprises recorded a marginal
slump of 0.2 per cent to touch Rs 10.29 billion against Rs 10.31 billion last year.
However, credit flow to the private sector, during the review period, recorded a
decelerating growth rate of 8.6 per cent, whereas such increase during same period was
11.7 per cent last year.
Declining absorption of loans by the private sector reveals an inconfidence
of the business community to invest in new business projects. The recent attacks on a
number of industries and worsening law and order situation are some of the influential
factors for declining investment. If urgent steps are not taken to restore investment
friendly environment, then it will surely hit not only the domestic investment, but also
the much needed foreign investment, resulting in a shrinkage in national productivity
along with employment opportunities.
Similarly, during the period, the growth in time deposits, the most important
part of the public deposits, posted a marginal growth of 3.8 per cent as compared to 10.5
per cent last year. The downward revision of the deposit interest rate of the banking
system and a rapid growth in foreign currency deposits largely contributed for such
sluggish growth. This has forced the depositors to look for alternative investment
opportunities, which is exemplified by the recent huge subscription of newly issued equity
shares.
The persistence of the existing excess liquidity position in the banking
system, though declining slowly, matched with a low demand of credit from the private
sector, will eventually force the banks to downgrade the existing deposits interest rates.
If this happens, huge capital flight, particularly from the bordering cities to Indian
financial institutions, which offer a relatively attractive interest rates and other
financial schemes, cannot be ruled out.
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