Challenge to contain inflation to single digit

The Nepal Rastra Bank (NRB), in its mid-term review of Monetary Policy 2015/16, said that the average annual consumer inflation would be 9.5 per cent in the current fiscal year against the 8.5 per cent estimated by the Monetary Policy.

"It is challenging to contain the price inflation rate to single digit as the disruption in trade routes and shortage of fuel obstructed production and supply of essential goods," said Dr. Chiranjivi Nepal, governor of the NRB.

He was addressing a programme organized by the central bank to publish the mid-term review of Monetary Policy.  

The year-on-year consumer price inflation (CPI) edged up to 12.1 percent in mid-January 2016 from 6.8 percent in the corresponding period of the previous year.

The central bank said in its six months' macroeconomic and financial situation report that the prolonged strikes in the Terai region and disruption on trade routes in the southern parts of the country were the underlying factors driving prices.

"However, the recent return of normalcy in the southern trade routes is likely to moderate the rate of inflation in the remaining period of the current fiscal year," read the report.

The review of Monetary Policy said that strengthening of US dollar, likely increment in reconstruction work might create pressure on the price in the days to come.

In its review, the NRB said that the economic growth rate would shrink this year because of low industrial production, public expenditure and reduced private sector lending.

As the Indian blockade at Nepal-India border immediately after the promulgation of new constitution created fuel crisis forcing almost all the development projects, carried on by both the government and private sector, to come to a halt, the government could spend about 7 per cent of its development budged in the first half of this fiscal.

As a result, the economic growth rate would hover around 1 to 1.5 percent, according to the estimates of the Ministry of Finance.

Dr. Nepal informed that the preparations were underway to increase the paid up capital of the microfinance banks, and to create a second-tier institution to regulate the cooperative sector.

"A bill on creating a regulatory framework of cooperatives has been prepared and sent to the parliament," he informed.

The governor defended NRB's policy to force the commercial banks to increase their paid-up capital to Rs. 8 billion saying that Malaysia, Philippines and other countries did this in a year's period.

"This will create able and efficient banking in the country. About 83 banks and financial institutions were merged to create more powerful 31 institutions so far. This will have positive impact on the economy," Dr. Nepal stated.

According to the mid-term review report, the gross foreign exchange reserves stood at Rs. 988.40 billion as at mid-January 2016, an increase by 19.9 percent from Rs. 824.06 billion in mid-July 2015.

"The foreign exchange reserves are sufficient to cover prospective merchandise imports of 13 month," read the report.

He said that talks were in progress with the Reserve Bank of India about opening formal channel of remittance between Nepal and India.

Nepal Bankers' Association president Upendra Poudyal said that it was challenging to manage the liquidity for the banks for the past months.

He said that the banks were sensitive on the concessional loan to be mobilized for the quake-victims. "Delay in establishing the National Reconstruction Authority and bringing out the earthquake-resistant house construction standards, and the blockade affected the timely disbursement of concessional housing loans."