National 5 (Spotlight Weekly)

Money Matters

This year the central bank's monetary policy aims to contain rising inflation

By SANJAYA DHAKAL

Releasing the central bank's monetary policy for the fiscal year 2060/61 (2003/2004), governor of Nepal Rastra Bank (NRB) Dr. Tilak Rawal said that major challenge of the policy was to contain the inflation.

The inflation rate, which hovered around 3 percent in fiscal years 2057/58 and 2058/59, had risen to 4.7 percent in the last fiscal year of 2059/60. "We wish to contain it within 4.3 percent in the fiscal year 2060/61," said Dr. Rawal.

The inflation rate has continued to rise in the last one year. According to a report by the Nepal Rastra Bank (NRB), compared to June last year, the urban consumer price growth rate has shot this year. The inflation in the urban areas this June increased by as much as 6.6 percent — a rapid rise from the 3 percent last year. The sharp increase in inflation is partly due to the rise in the price of petroleum products and the effect of inflation in India. The price of both food and non-food items as well as services has increased sharply.

According to Dr. Rawal, the major objectives of the monetary policy, apart from containing inflation, include preventing the depletion of foreign exchange reserve and ensuring stability of Nepalese currency. "All these measures are, in turn, aimed at economic stability and triggering economic growth," he said.

Dr. Rawal said that after the negative economic growth in 2001/2002, the nation's economy is once again moving ahead and is expected to grow by over 4 percent in the fiscal year 2003/2004. Currently, the Balance of Payments stands at Rs 5 billion surplus — a marked improvement from the negative balance two years ago. "The new monetary policy aims to continue with the trend of favorable balance of payment," he said.

The huge contributions from the remittances by Nepalese workers abroad were a major factor for making the BoP surplus. "The NRB will further its policy of encouraging the domestic banks and financial institutions to build relations with recognized banks and financial institutions of other countries so that remittance amount can be easily transmitted via official channels," he said. The central bank has also allowed the manpower agencies to operate bank accounts in foreign exchange.

The NRB has also decided to stick with the existing policy of pegging the Nepalese rupees at fixed exchange rate with the Indian currency. "Though our currency is slightly over-valued in real terms, we will stick with the fixed pegging arrangements with the Indian currency for the time being to give stability to the monetary sector," the governor said.

At present the central bank has Rs 112.3 billion worth foreign exchange reserve — a record level — enough to fund the imports for 11 months. The forex reserve previous year was Rs 105 billion. This is one reason why the central bank has raised the exchange service offered to Nepalese against their passport. Now each citizen, who goes on private or official visit overseas, can get USD 2000 in one fiscal year.

The new policy has decided to bring down the Cash Reserve Ratio (CRR) for the commercial banks to 6 percent from earlier 7 percent of total deposits. Bank rates continue to be fixed at 5.5 percent. Bankers have termed the new monetary policy as balanced.

The NRB governor expressed satisfaction over the reform initiatives undertaken by the new management at the Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB). "Though the pace of reforms are not adequate, I am satisfied with the steps that are in the right direction," he said.

In the export front, the NRB has raised the amount an entrepreneur can get - to USD 100,000 from earlier USD 50,000 — based on the system of Cash Against Document (CAD). Likewise, in the import front, the NRB has raised the limit — from USD 3000 to USD 30,000 — an importer can send in the form of draft or TT to overseas.