National 5 (Spotlight Weekly)

Call For Balance

NRB mulls introducing auction system to fix the interest rate in primary market

By SANJAYA DHAKAL

Every year, the central bank releases monetary policy immediately after the announcement of the budget. The Nepal Rastra Bank (NRB) releases its annual monetary policy as per the provision of the NRB Act 2058 B.S. “We are going to release this year’s monetary policy in a few weeks’ time,” said Ram Babu Panta, deputy governor at the NRB.

Speaking at a program organized last week by the Nepal Economic Association (NEA), Panta hinted of some new provisions in the upcoming policy. “We are planning to make drastic changes in the way we have been managing the interest rate in the primary market.”

Till now, the government (NRB) has been fixing the rate of interest for the primary market. “But now we want to leave that responsibility to the market forces. Initially, we are mulling introducing auction system to determine the interest rate,” he said.

Likewise, the upcoming policy will also be introducing the process of selling government papers (scrips, bonds) through Stock Exchange. “At first, this will be done in an experimental basis to test the waters on how much of it can our Stock Exchange absorb. The idea is to let the market forces determine the economic course,” said Panta. He added that one advantage of this system would be that the market itself would begin to restrict the government’s unnecessary deficit-management process.

At present, the NRB’s foreign exchange reserve is encouragingly handsome. “We have the reserve that can finance our imports for 10-11 months. But this year, we are looking at ways in which we can productively utilize this Balance of Payment surplus,” said Panta.

Experts and economists have said that the NRB needs to prudently shape its upcoming monetary policy for the fiscal year 2004/05 to maintain the fiscal stability.

“At first glance, the monetary policy adopted by the NRB appears practical. However, one must remember that the country is in an extra-ordinary situation. Such conflict situation would also demand extra-ordinary policies,” said Professor Dr. Madan K. Dahal, the Head of the Department at the Central Department of Economics, Tribhuwan University.

The challenge of the monetary policy will be to keep the inflation within limit, experts argue. “In the situation of conflict, the NRB should bring down interest rates to trigger economic activities,” said Dr. Dahal.

Experts added that the differences in interest rates between Nepal and India, could also trigger capital flight. “Here we have interest rates (on deposits) around 4 percent whereas in India the rate is over 6 percent. Naturally, capital will fly if the situation persists,” said Narendra Bhattarai, president of Bankers’ Association of Nepal.

Former governor of NRB Satyendra Pyara Shrestha said that the major challenge of the monetary policy would be to address the problem of low domestic credit growth rate as well as private sector credit growth rate. “Despite macro-economic stability, these problems will eat up the economy if not addressed properly,” said Shrestha.

Another sticky point of Nepal’s monetary policy has always been its exchange regime. Nepal has embraced the fixed exchange rate regime with the Indian currency. “In a changing time, it would be prudent for the NRB to study its alternatives,” said Professor Dr. Bishwambher Pyakuryal, president of the NEA. Dr. Pyakuryal believes that since even the NRB officials have been saying that the Nepalese currency is marginally over-valued vis-à-vis Indian currency at present, it would be better to seriously consider the alternatives and be prepared. “Otherwise, if suddenly India decides not to let Nepal maintain fixed exchange regime, what will happen?” he asked. “By not floating our currency in the market and by not studying alternatives, we are playing a risky game.”