Deposit, investment confidence waning

By Prem Khanal

KATHMANDU, May 28 - Anchored by the historic low inflation rate coupled with healthy economic growth rate, the overall economic performance during the third quarter of the current fiscal year, remained satisfactory.

However, poor government budgetary operations, reflected mainly in soaring regular expenditure along with skyrocketing fiscal deficit, and dwindling investors’ confidence are some of the darker side of the economy.

In this economic scenario, some interesting changes have been witnessed in the monetary sector. During the period, board money (M2), which reflects total liquidity condition in the economy, registered a deceleration growth of 8.4 per cent and touched Rs 201.8 billion against 16.6 per cent.

Unlike last year, during which the actual money supply had exceeded the budgetary target by 6 per cent, increase in the money supply during third quarter of the current fiscal year is still below the budgetary estimation of 12 per cent.

This indicates that excess liquidity in the banking system - one of the serious problems of the monetary sector - is slowly declining. This has been reflected on the liquid funds of the banking system, which has declined to Rs 45.14 billion from Rs 45.16 billion recorded by July 2000.

This is good development for the commercial banks, which are bearing huge deposit burden, and for the depositors, who are getting a record low interest rate.

However, if the declining liquidity position starts hitting lending rates, then it can hit the development of the industrial sector, which is stationary.

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 and NDA swelled by 6.2 and 10.1 per cent respectively.

Squeezing export growth rate plagued mainly by the slip in the major exportable commodities as carpets and ready-made garment are the prime factor for such low growth of NFA. "Besides dwindling exports, increased repatriation of Foreign Direct Investment (FDI) also dragged down NFA," says Nara Bahadur Thapa, Deputy Director of Nepal Rastra Bank.

The two components of narrow money supply (M1), currency held by the public and the demand deposits, registered a growth of 9.3 and 15.5 per cent respectively. The double-digit swell in the demand deposit indicates sliding business opportunities.

The domestic credit and non-monetary liabilities, two components of the NDA also registered growths of 10.5 and 11.2 per cent respectively. The slumping flow of domestic credit also reveals declining investment opportunities in recent months.

Of the total domestic credit flow during the period, government borrowing from the banking system posted a growth of 7.9 per cent and touched Rs 41.25 billion.

The soaring fiscal deficit, which registered a robust growth of 35.3 per cent to touch Rs 8.4 billion, is the prime cause for such growth. The government, during the review period, has absorbed internal loan worth Rs 5.05 billion and foreign cash loans worth Rs 3.37 billion to bridge the deficit.

Similarly, government’s claim on public enterprises continued to record a slump of 4.9 per cent to touch Rs 9.8 billion. However, credit flow to the private sector, during the review period recorded a decelerating growth rate of 12.8 per cent, whereas such increase during same period was 14.2 per cent last year.

Declining absorption of loans, though marginally, by the private sector reveals deteriorating confidence of the business community to invest in new business projects.

Similarly, during the period, the growth in time deposits, the most important part of the public savings, posted a marginal growth of 7.1 per cent as compared to 17.3 per cent last year.

The downward revision of the nominal interest rate of the banking system and a rapid growth in foreign currency deposits, which is reflected by swelling foreign liabilities, largely contributed to decline time deposit. "In addition, the growing attraction of holding foreign exchange accounts in the expectation of exchange valuation gain due to depreciation of domestic currency against dollar also caused to squeeze time deposit," Thapa says.

The persistence of the existing excess liquidity position in the banking system, though declining slowly, matched with a declining credit demand of the private sector, might eventually force the banks to downgrade the existing deposit interest rates.

If this occurs, huge capital flight, particularly from the bordering cities to Indian financial institutions, which offer a relatively attractive interest rate and other financial schemes can take place.