National 5 (Spotlight Weekly)

Fiscal Measures

The central bank announces a number of measures to ensure more liquidity in the market. But will it help revive the economy?

By BHAGIRATH YOGI

For the third time in little more than one year, Nepal Rastra Bank (NRB) announced new fiscal measures to prop up the country's economy. According to the Bank, the cash reserve ratio (CRR, the amount commercial banks keep as deposits with the central bank) has been cut by one percentage point with effect from Wednesday, i. e. with the beginning of FY 2002-03.

Governor of NRB, Dr. Tilak Rawal, said the central bank had designed new measures for a positive impact on the national economy in a way that it should not affect the economic stability. The cut in CRR is expected to pump in nearly 1750 million rupees in the banking system, which the commercial banks then could finance on industries, tourism and exports. "The central bank is working towards maintaining financial and economic stability in order to achieve the moderate growth rate of 4 percent," he said.

Governor Rawal (left) : Decisive

In July 2001, the NRB had reduced the bank rate (the rate of interest the central bank charges from the commercial banks) by one percentage point to 6.5 percent and lowered refinance rates for the commercial banks. Five months later (in December 2001), the central bank cut the CRR by one percentage point thereby releasing almost two billion rupees in the market besides revising the bank rates and refinance rates.

But because of overall gloomy situation in the country's economy, the private sector in the country could not make use of the available opportunity, experts said. The non-agriculture sector is expected to grow marginally by 0.2 percent in the year 2001-02 thereby pulling down the growth rate to less than one percent.

Officials admit that despite slackness in demand in the market, there is sort of liquidity crunch with the banking system. According to NRB, the Nepalese banking system had a cash deposit of Rs 54.5 billion by mid-July 2001, which declined substantially to Rs 49.5 billion by mid-April 2002. While there hasn't been any official explanation towards such a situation, many believe that the situation might have arisen out of capital flight due to government's measures like land reforms, Voluntary Disclosure of Income Scheme (VDIS) and political instability.

Dr. Rawal, however, said the situation of liquidity in the organized sector was not too bad. "We can't monitor the unorganized sector. But we are confidence that there will be increase in demand for the capital as soon as the law and order situation improves."

Hence, the new monetary measures. The central bank said that sick industries had already used concessional loan facilities amounting to Rs 1110 million under the refinance scheme introduced by the NRB. "The NRB will continue to adopt flexible monetary policy and will reduce the CRR twice in the next fiscal year," said Dr. Rawal. The bank officials said that due to cut in CRR, the cost of fund of the commercial banks will reduce resulting into decrease in the interest for lending without affecting the interest rates on deposits. In April 1998, the central bank had slashed the CRR from 12 percent to 10 percent on an average.

Though NRB's decision was being anticipated for quite long, industrialists feel that these measures alone would not be sufficient to revive the economy. "What we have seen in the past is that users have not been able to make use of the benefits out of the NRB's announcements," said Rajendra Kumar Khetan, second vice president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). "At a time when the banking sector itself is under trouble, we are worried that such a facility could be absorbed by themselves."

According to Mr. Khetan, there is a need to monitor the market (about the impact of cut down in CRR) by all three stakeholders including the regulatory body, the commercial banks and the user (i. e. the private sector).

In December last year, the central bank had reduced refinancing rate (for commercial banks) on industrial rehabilitation loans at three percent, down from 4.5 percent. Similarly, the bank rate on the loans for rural development banks and Nepalese currency export had been brought down to 4.5 percent from 5.5 percent.

Responding to a question, Governor Dr. Rawal said the release of cash in market would not activate inflation. The central bank has estimated that inflation will remain at around 4 percent in the next fiscal year. The rate of inflation has been estimated to hover around 3 percent in the fiscal year 2001-02, down from 3.5 percent in the year 1999-2000.