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Monetary Policy And Economic Growth

Issue July 2019

Monetary Policy And Economic Growth

Siddhi B. Ranjitkar


Governor of the central bank of Nepal called Nepal Rastra Bank made public the monetary policy for the current fiscal Year 2019 (2076) on July 24, 2019. The policy has been for supporting the 8.5 percent economic growth the Finance Minister set. However, the monetary policy has been not much different from the previous one except for cutting some interest rates. The commercial interest rate is so high that a few businesspeople would dare to take loans. Even the interest on the loan the central bank is providing the banks with reaches three percent, which the banks in turn could provide loans at seven percent interest rate means the spread is four percent, which is very high. The monetary policy could hardly support the 8.5 percent economic growth, as the growth rate is so high for the current non-performing Oli administration. So, anybody could say firmly that the monetary policy would hardly support the so high and unrealistic target of the economic growth, which would be difficult to achieve in the current fiscal year.


The main concern of the monetary policy has been to make the liquidity available in the market for the smooth running of the economic activities so that the flush of cash would not flood the market as the rainy-season-development activities did during the last two months of the FY 2018 (2075). Surely, it is beyond the purview of the central bank to stop the so high cash flow during the last two months of the fiscal year 2018 (2075). It was the deed of the government of Nepal Prime Minister Oli presided over. Thus, most of the development budget in the cash form was released at the end of the fiscal year because it has been the tradition and the Oli administration has simply followed the tradition, as it suited the interest of the folks in power even though it had been at the cost of the development work and the beneficiaries.


The central bank had successfully controlled the inflation in other words the price rise. It had controlled the cash flow except for some period of the fiscal year as already stated. So, the market price rise had been minimum or under the strict control so far. And the new monetary policy would do the same and the price rise would not be so high in the current fiscal year except for the case of unanticipated things would happen. So, the monetary policy as such has been sound and it would guide the financial market seriously and probably perfectly unless something unforeseeable things would happen to hamper.


The central bank has been motivating to merge the commercial banks. Why such measures have to be taken the central bank has not clearly stated to the public. Such merger in other country had been done to save the country from the financial crisis. Nepal is not in such a condition currently. It has not anticipated such crisis in the near future, too but the central bank has intensified its efforts to merge the commercial bank.


At the same time, the government has set up a new Infrastructure Development Bank with the paid-up capital of NPR 20 billion, the monetary policy stated in its Article 39; and it has been functioning since March 11, 2019. Obviously, it has been for the fast infrastructure development, which has been usually at the end of every fiscal year, which coincides with the rainy season. Nepalis have been used to work in such natural wet condition. Surely, it is again beyond the control of the central bank what the Oli administration does.


Such a State-owned bank is another addition to the means of making money for the ministers, bureaucrats, and politicians and political cadres. Ministers could appoint any number of staffers to such a state-owned bank, provide any contractors or any political cadres with the unlimited amount of loans, and then the ministers could forget who had received or taken the loans. Such things had been happening even without such a bank, as the Public Procurement Act has given the ministers unlimited power to provide the contractors with the mobilization amount immediately after awarding the contracts. Then, the contractors could ask for time extension and the cost variation. Not only that but also they could get the compensation for the rise of prices of construction materials. What a splendid Act is the Public Procurement Act. It has been a boon to all the folks involved in the State construction work.


So, the contractors often waited for the completion of the project until the price rose. That was one of the main reasons why the large development projects never ended meant completed. Ministers and contractors and middle folks also plumped up while the beneficiaries slimmed down, as they had to pay high prices for the services the development projects would have provided them with a reasonable cost.


The glaring example is the Melamchi Drinking Water project, which is supposed to provide the folks in the Kathmandu Valley with water several yeas ago but the project has been lingering on. Some folks have not completed to milk the project, which has been a sacred cow kept for milking indefinitely without almost not feeding it. Even now, when the concerned authorities have been saying that only three percent of the work had to be done, the flow of water from the Melamchi River to Kathmandu had been uncertain.


Surely, the monetary policy has nothing to do with the Melamchi project but this thing has been brought in because the governor of the central bank has said that the monetary policy has been following the fifteenth periodic plan, and the current budget, and for supporting the 8.5 percent economic growth the finance minister has set for the current fiscal year. The 15th periodic plan had set the economic growth targets: 8.5 percent for the FY 2019 (2076), 9.5 percent for the FY 2020 (2077) and 10 percent for the FY 2021 (2078).


The finance minister had set the economic growth target at 8.5 percent not because he thinks that he could achieve it but because the planners had already set the target, and the finance minister had to simply follow it, as the 15th plan document has been the holy book for the Oli administration.


With all the things currently happening have been not in favor of achieving the 8.5 percent economic growth. Some are the natural catastrophe others are human-made particularly the folks in power supposed to expedite the development processes for reaching the target of 8.5 percent economic growth.


The nature has been very cruel and gave much more water than needed that also not at the time of the rice transplantation season causing the farmers not to have sufficient water for the rice transplantation or floods at the time of plantation again causing the loss to the farmers. Probably, the harvest of the rice would not be as targeted and would adversely affect the economic growth.


Another trouble is the State made one. The State had been taking the responsibility for providing the farmers with fertilizers. The State had allocated NPR 6 billion to the fertilizers for the FY 2018 (2075), and NRP 9 billion for the current FY 2019 (2076). However, the fertilizers have been just arriving only a few days ago skipping the time when farmers needed the fertilizers the most with the budget allocated in the FY 2018 (2075). Farmers did not have the fertilizers when they needed. So, the rice harvest would not be as much as targeted and would not contribute to the economic growth of 8.5 percent in the current year.


The budget allocated to the agriculture has been NPR 34 billion for the current fiscal year. However, Nepalis have been importing rice not to mention the vegetables, fruits, and livestock products from India causing tremendous trade imbalance with India. On the one hand the State has been spending such a huge amount of money on the agriculture on the other hand the consumers have to pay high prices for every agricultural product imported from India. It has been the double hit on the consumers and taxpayers.


The monetary policy in its Article 28 stated that the central bank purchased NPR 516.97 billion worth of Indian currency at the cost of foreign exchange in the FY 2018 (2075). This amount of money must have gone for purchasing high quality rice, vegetables, fruits, and meat among other consumable goods from India. Really, Nepalis have been paying foreign currencies for buying Indian goods, as Nepalis could not sufficiently earn Indian currency.


The next man-made disaster has been the complete standstill of the export and import. Transporters have been protesting against the Vehicle & Consignment Tracking System (VCTS) and against the need for getting PAN for VAT. Following the VCTS, the transporters have to enter the brief description of vehicles and the goods they carry on the, which the transporters said was next to impossible with the current digital infrastructures the Oli administration has provided, and the transporters could use. Such blockage of export and import would severely and adversely affect the economic growth and would not contribute to the 8.5 percent growth in the current fiscal year.


So, no matter what monetary policy the central bank has crafted and enforced the economic growth would not be 8.5 percent in the current fiscal year because of the unrealistic approach of the Oli administration to the economic development. Anyway, the monetary policy the central bank has brought to the public has been good enough to the fast economic growth but the Oli administration had to act properly to favorably use the monetary policy instead of actually retarding the economic growth.


The Article 2 of the Monetary Police published in “Artha Bazaar” supplement to “gorkhapatra” on July 25, 2019 stated that the country has been on the path of continuously high economic growth since the FY 2016 (2073). This statement might be true. However, the true fact has been the economic growth in the FY 2016 (2073) was 7.9 percent, then it dropped down to 6.3 percent in the FY 2017 (2074), and then it again rose to 7.1 percent in the FY 2018 (2075).


The Oli administration probably would not be able to achieve the economic growth of 8.5 percent in the current fiscal year with the ministers who had been horribly confused about how to enforce the Appropriation Act meant the budget starting from the VCTS and the PAN that took effect on July 17, 2019: the first day of the current fiscal year. The export and import had come to a dead end because of the enforcement of the VCTS and the PAN.


July 25, 2019

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