Central Bank suggested to leave exchange rate to market

Kathmandu, July 5

For the Monetary Policy for the upcoming Fiscal Year 2022/23, the Nepal Rastra Bank (NRB) has received some unconventional suggestions like letting the exchange rate free, equity financing for the hydroelectricity projects, policy for blended finance, and bringing large cooperatives under the ambit of central bank's supervision,

Dr. Roop Jyoti, former Minister of State for Finance, suggested the NRB to leave the interest rate and exchange rate free to the market. "The rate should go up with the increasing demand, it will balance the short-supply of resources," he said.

Speaking at the discussion of the Monetary Policy of the next year, he said that Nepal should match the import duty of gold at par with the Indian rate.

Expand scrutiny to coop sector

The experts also suggested to bring the cooperatives with more than two billion rupees deposits under the scrutiny of the NRB. According to them, there is a need to increase the confidence of the money market and regulate non-compliance. Likewise, there should be a provision for opening a bank account in Indian currency which is more important than the dollar account.

Prakash Chandra Dulal, Member of Independent Power Producers' Association of Nepal, requested for increasing the ceiling for loan mobilisation to the hydroelectricity sector. About 1500 MW projects are waiting for power purchase agreement, so the Banks and Financial Institutions (BFIs) should mobilise resources to this sector, he said.

Dulal also suggested for the promotion of equity financing for the completed projects.

Similarly, Birendra Raj Pandey, Vice-President of the Confederation of Nepalese Industries, recommended to formulate policy for blended finance, try at the niche markets for the Foreign Direct Investment (FDI) and venture capital.

Develop bonds as long-term instrument

Anil Kumar Upadhyay, President of Nepal Bankers' Association, stated that bonds and debentures should be developed as the tools for long-term resources.

Suggesting to think about hybrid financial instrument, he maintained that there is no situation to meet the annual targeted credit growth due to the shortage of required resources.

"We need to review our policy and strengthen the system, the shortfall in the resources could be bridged," he said.

Chandra Prasad Dhakal, Senior Vice-President of the Federation of Nepalese Chambers of Commerce and Industry, sad that the central bank should be vigilant about the misuse of the grants and subsidised loans.

"The monetary policy for the next fiscal is being announced at a time when the economy is facing liquidity crisis, external pressure and foreign exchange depletion. It should give priority to SMEs, tourism and agriculture," he said.

Allow INR 500, 2000 notes

Speaking on the occasion, Kamlesh Kumar Agrawal, Senior Vice-President of Nepal Chamber of Commerce, said that import substitution is a long-term strategy, it does not happen overnight. So, the government and NRB should be cautious on imposing moratorium on import of goods.

He suggested that Nepal should reconsider its policy not to allow Indian currency notes of Rs. 500 and Rs. 2000 denominations.

Agrawal also said that the base rate should be 2 per cent. "A quasi-judicial body is needed to settle the disputes between a bank and its customers," he said.

According to him, policy flexibility adopted during the COVID-19 pandemic should be safely lifted in order to increase the confidence of the market and producers.

Priority to agriculture

Many experts suggested to facilitate financing to agriculture. Stating that agriculture needs an advocacy for value chain development and financial support for the same, Bharat Raj Dhakal, Chief Executive Officer of Muktinath Agriculture Company, said that central bank's mandatory provision to expand loan mobilisation to the sector increased financing exponentially but the investment has not yielded the expected results.

Banks and financial institutions considered agriculture a sector with high risk until about a decade ago.  

Saroj Kaji Tuladhar, President of Nepal Financial Institutions' Association, said that there should be a centralised KYC (Know Your Customer) system to facilitate a hassle-free service to customers. Likewise, a central database is needed to get the updated information of loan defaulters and the like.

Indirectly, there are demands that the NRB should be supporting to facilitate the growth of the stock market. If anyone guarantees the growth of share market by scrapping the provision of 400million/1.2 billion on margin lending, the central bank can opt for that, said Tuladhar.

Similarly, Sreejana Rana, President of Hotel Association of Nepal, said that since tourism is still in the recovery phase, the NRB should continue the refinancing policy. Furthermore, restructuring and rescheduling should be provided for the next two years as well.

Focus to increasing domestic production

Responding to the demands, Governor of the Nepal Rastra Bank (NRB), Maha Prasad Adhikari, said that the focus of the monetary policy would be enhancing the domestic production.

"If we don't mobilise the available resources to increase production, we will continue having pressure on the foreign exchange reserves and balance of payment," he said.

The central bank has responded to the business community's demand to provide a breathing relief to them with the redress of payment deferral to support them in the revival process during the COVID-19 pandemic.

But supply chain disruption caused by the Russian invasion over Ukraine has created pressure on the prices of goods and services globally, said Governor Adhikari.

He information that relaxation provided during the pandemic would be lifted gradually. "We already have begun the process," he said.

  Published in The Rising Nepal daily on 6 July 2022.