New monetary policy
There are 744 local level units in Nepal right now, and there could be more if the constitution amendment bill in parliament is passed. According to Nepal Rastra Bank’s new monetary policy unveiled on Sunday, there will be one commercial bank in each of these local level units. These banks will play a vital role in the functioning of the new local units as all their commercial transactions will be routed through these banks. Yet, as things stand, commercial banks have shown no interest in setting up branches in 161 local units, saying that these locations are commercially unviable. Interestingly, the new monetary policy makes it mandatory for commercial banks to open branches in government-designated areas. The question is: In a free-market economy, can the state force banks to open branches even in commercially-unviable areas? We believe it can—and should. As the banks are busy earning profit for their shareholders, they cannot forget that their first duty is to the society they serve. If the government has to bail out these banks when they are in trouble, surely, it can also offer them guidance in public interest.
There are other interesting targets of the new monetary policy. One of its main goals is to cap inflation at 7 percent. At the same time, it projects an economic growth of 7.2 percent. To achieve high growth, the monetary policy targets credit growth of 20 percent to the private sector and overall 28.8 percent credit growth. But with more money entering the market, it will be difficult to keep inflation down to a single digit. There thus seems to be a mismatch between ambition and reality. This is also seen in the new requirement that at least 25 percent of loans of commercial banks should go to the ‘productive sector’, the definition of which has now been widened to include, among other sectors, pharmaceuticals, cement and garment. But this is also an ambitious target, given that even the previous requirement of 20 percent was not being met. Perhaps this is precisely why the productive sector is now more liberally defined. That said, the central bank’s intent is right. The funneling of bank loans into non-productive real estate has artificially inflated land prices. The steadily growing bubble could burst any day, taking the big banks down with it.
There is also a big question mark over implementation. The new government of Sher Bahadur Deuba is expected to hold all three levels of elections mandated in the new constitution, all by the January 21, 2018 deadline. If this happens, there will be a new government after only six-odd months, whose economic priorities are likely to be different to those of this government. This is why our important monetary and fiscal measures need the buy-in of at least the major political actors. This is clearly not the case with this monetary policy. Moreover, the private sector seems displeased with it as it seemingly fails to address the credit crunch in the market. The bankers for their part are unhappy with high interest rates. We hope that the central bank can hit all its economic targets.
But our hope is also tempered by a heavy dose of realism that this kind of expansionary-monetary-policy-by-proxy warrants.