Investors, experts stress drastic measures to salvage economy

Biratnagar, Dec. 25

While the government and central bank are adopting traditional measures to improve economic indicators amidst depleting liquidity in the system and low capital budget expenditure, there is growing gloom among the entrepreneurs across the country.

Businessesmen and economists are wondering where the money has evaporated. Recent move of the Nepal Rastra Bank (NRB) to tighten the imports of luxury goods including silver and expensive vehicles has directly hit the confidence of business community. The measure to manage cash margin while opening a Letter of Credit (LC) to import luxury goods was announced to ease the liquidity situation in the country, according to the NRB.

Amending its Unified Directives, the central bank had asked to maintain 100 per cent cash margins in the imports of luxury items including beverages, spirits, tobacco, sugar, perfumes, footwear, shampoo, artificial flowers, stone, cement, silver, cars and motorcycles.

"The NRB had to find some ways to curtail the growing imports of unnecessary goods. The tightening on some selected goods has come to lessen the pressure on the foreign exchange reserves," Governor of the central bank, Maha Prasad Adhikari had said in an interaction with journalists a few days ago.

He maintained that the central bank would make interventions in the financial system if there were any challenges. Stating that the new provision would discourage the imports of luxury and unnecessary goods, he said that it was a short-term measure and was not expected to bar importers from brining in luxury goods and raise the price of such goods.

 

Indicators are not healthy

According to the central bank's Macroeconomic and Financial Situation report of the first four months (up to mid-November) of the current Fiscal Year 2021/22, the country has US$10.47 billion foreign exchange reserve which could manage the imports for just seven months. Remittances decreased by 7.5 per cent while tourism-based income has tumbled since the advent of COVID-19 pandemic.

Likewise, imports have increased by over 60 per cent creating a serious pressure on the foreign exchange reserves. Meanwhile, the federal government spending remained lower than revenue collection while capital spending remained pathetic.

According to the daily budgetary reports of the Financial and Comptroller General Office, the government collected 56.56 per cent of the annual revenue target of Rs. 1180 billion by Friday while total expenditure remained scanty at 25.47 per cent of Rs. 1632.8 billion.

Capital expenditure in more than five months of this year is just Rs. 33 billion – 7.54 per cent. Although the NRB and Ministry of Finance (MoF) attribute the current liquidity crisis to the growing imports, economists say that the problem is also the result of low government expenditure, decreasing remittance inflow, increased economic activities and peoples' tendency to keep money at home during the time of crisis.

 

Revival needs funding

The post-COVID economic revival has created a massive demand for business and trade financing. While consumer demand is ever growing, many people who lost their jobs in the pandemic started their own micro, cottage or small business, and medium and large industries are expanding their capacity banking on the growing demand and more reliable  energy supply.

The banks and financial institutions (BFIs) have already mobilised 50 per cent of the annual loan growth target – 19 per cent – for the private sector announced by the Monetary Policy for FY 2021/22 in five months. According to the NRB report, on year-on-year basis, deposits increased by 17.2 per cent and claims on the private sector 31.2 per cent in the first four months of this year.

 

National crisis

After the recent NRB directives, entrepreneurs have said that it’s an imminent crisis. "Where has the money gone? Who is accountable to it?" President of Morang Trade Association, Prakash Mundara questioned. "This is a sort of financial lockdown. Entrepreneurs are not getting money needed for their business. Unhealthy competition in the banking sector should be kept in check," he added.

While money is not being invested in productive sectors, some large industries have imported raw materials for a year in three months, according to Mundara.  He said inefficient banks' unhealthy competition was the major cause behind the current problem.

Entrepreneurs in Morang-Sunsari Industrial Corridor said that the tightening of imports has painted a negative image of the country. "Government is only concerned with revenue collection while the plight of entrepreneurs is largely unattended," said Pawan Sharda, entrepreneur and former lawmaker.

Likewise, Suyesh Pyakurel, President of Morang Industries Association, said that only large businesses would be benefitted by import tightening. "Such measures will affect the inflow of Foreign Direct Investment (FDI) as they discourage domestic investment in the first place. Growth of productive lending should not be affected," he said.

 

High severity this time

Economist Dr. Dilli Raj Khanal said that this time the problem seems more severe as   there are complications in budget mobilisation and monetary policy implementation.

"The nature of the crisis is inter-related – expansion of lending should have created more jobs and supported economic growth, but money is channelized to trade sector and imports," he said.

The government has failed to mobilise capital budget even up to the level of COVID-19 period. Money is accumulated in the state coffers while private sector investors are not getting resources for investment.

"Therefore, a comprehensive strategy is required.  Shrinking remittance and liquidity crisis indicate growing presence of parallel economy," said Dr. Khanal.

According to him, the government must increase budget spending. There should be a special unit at the Ministry of Finance to mobilise, track, monitor and evaluate budget expenditure. "Nobody is held responsible if there is failure in budget mobilisation. Someone should be made accountable," he said.  

Meanwhile, entrepreneurs said NRB sits idle until the problem is imminent. It must create a policy environment to channelize investment in productive sectors and maintainenough liquidity in the system.

Likewise, tightening the imports of goods that contribute to revenue collection can give rise to another challenge on the part of the government.

"They are the major sources of revenue. Pros and cons of this tradeoff must be analysed before checking the imports," said Dr. Khanal.

 

Finance Minister in action

Finance Minister Janardan Sharma, after presenting the replacement bill at the parliament a couple of months ago, had pledged to mobilse about 10 per cent of the total capital budget each month. But at the end of five months of the current fiscal year, it is still way below 10 per cent.

 In an apparent attempt to alter the situation, he directed the development ministries to mobilse about 30 per cent of their respective capital budget by mid-January 2022.

He also vowed to provide all necessary support to the executing agencies in terms of capital expenditure. If his directives are implemented, the liquidity pressure in the system would probably relax.

 

Published in The Rising Nepal daily on 23 December 2021.