Revitalizing Economy

WITH a view to enhancing economic activity in the country, the Nepal Rastra Bank (NRB) the other day announced reductions in Capital Reserve Ratio (CRR) by one percentage point in average and refinancing rate from between one to two percentage point. This was necessitated by the fact the economy was not moving properly due to various reasons mainly because of dearth of optimum level of liquidity. The prime aim of NRB in announcing these cuts was to increase the liquidity in commercial banks thereby providing the necessary boost to the economy of the country. Moreover, according to NRB Governor Dr. Tilak Rawal, the move is aimed to increase the funds for loans that can help in boosting industry, tourism and export. These are the basic activities which supplement the national economy and the performance of these sectors were below expectations in the first four months of the current fiscal year. In fact the NRB action was the result of the liquidity going down to 50 per cent of what it was about 8 or 9 months back. With the cash flow from commercial banks as loans had to be supplemented so that the industrialist and businessmen could avail them at a lower interest rate.

With the commercial banks able to keep a capital reserve of 7 per cent of the total amount deposited (for current and savings accounts) and 4.5 per cent for fixed deposits, it would be possible to disburse more funds in the form of loans than what they could do till the new rate of CRR was announced.

While the new rates would definitely increase the liquidity in commercial banks, caution has to be taken so that the funds are not utilized in the unproductive sectors. For this a strong mechanism is necessary to do the needful monitoring works so that the loans given out by the commercial banks are invested in sectors which can boost the real economy. If these aspects are also looked into then there is no doubt that the CRR reductions would be able to contribute to revitalizing the economy which is not at present going through easy times.