India slump could affect Nepal growth: IMF
KATHMANDU, OCT 06 -
The International Monetary Fund ( IMF ) said on Friday that despite better prospects of relatively higher growth, Nepal’s economic performance is expected to be influenced by developments in the Indian economy.
“Growth is expected to recover somewhat in the near term, boosted by a favourable monsoon, timely approval of the budget for fiscal 2013-14 and measures to expedite capital spending,” said the global monetary advisor in a press release. “Key risks to the outlook stem from developments in India as Nepal’s key trading partner. A protracted slowdown in India is likely to have adverse effects on growth.”
A visiting IMF team led by Alexander Pitt reached this conclusion after assessing Nepal’s condition from Sept 26-Oct 3. The team also met with Finance Minister Shankar Koirala, Nepal Rastra Bank Governor Yubaraj Khatiwada, National Planning Commission Vice-Chairman Rabindra Kumar Shakya, Finance Secretary Shanta Raj Subedi and other senior officials. The mission also met with private sector representatives and development partners.
“Although developments in the Indian economy will affect Nepal’s growth, the measures to address the impact will be different because the Indian economy is suffering from a deficit in the current account but Nepal’s main problem is low production,” said Min Bahadur Shrestha, chief of the research department at Nepal Rastra Bank.
He added that the central bank had been implementing policies that facilitate growth such as requiring banks to invest at least 12 percent of their total lending in the farm and hydropower sectors and providing refinance facility at reduced interest rates for productive sector lending.
According to the IMF , the India factor will not only be responsible for Nepal’s overall economic growth but also the banking sector’s vulnerability. It said that tighter monetary policy in India and excess liquidity in Nepal had widened the gap between banking interest rates in the two countries, which could increase financial sector vulnerabilities.
It has been observed that whenever interest rates on deposits fall in Nepal, capital flight to India takes place. A tighter monetary policy in India has kept interest rates there at a high level while excess liquidity in Nepal has forced banks here to bring down interest rates. In this context, the IMF has recommended tightening the monetary condition to reduce the gap between the interest rates in the two countries.
Regarding the differences in the interest rates between Nepal and India, Shrestha said the central bank’s policy of not allowing banks and financial institutions to keep their spread rate higher than 5 percent was guided by the aim to keep interest rates on deposits on the higher side.
“When they reduce interest rates on deposits due to the high liquidity, they should reduce interest rates on credit too,” he added.
Shrestha also said that the recent reverse repos were designed to mop up excess liquidity and prevent BFIs from reducing interest rates on deposits.
Meanwhile, the IMF said that inflation pressures were rising due to a depreciation of the Nepali rupee against the US dollar and continued strong credit growth.
As of the first month of the current fiscal year, inflation has remained at 7.9 percent. In the last fiscal year, inflation was recorded at an average of 9.9 percent, according to Nepal Rastra Bank.
The Nepali rupee plunged against the greenback due to its being pegged with the Indian rupee which went into a freefall and dragged it down with it. However, the IMF has urged maintaining the exchange rate peg with the Indian rupee since it serves Nepal due to its close economic relations with India.
“Moreover, the recent depreciation creates an opportunity to benefit from enhanced international competitiveness, which would be boosted by structural measures to lower the cost of doing business,” the IMF said.
Since a weaker Nepali rupee has swelled the already high losses of Nepal Oil Corporation (NOC), the IMF has suggested increasing fuel prices under the automatic price adjustment mechanism to avoid recurrent losses at the state-owned oil monopoly.
The IMF has also urged continuing the reforms in the financial sector. “While the financial sector’s health has improved, the mission considers that risks are still significant. Asset quality remains a concern, while connected lending and conflicts of interest are widespread, and the fragmentation of the banking system makes supervision difficult,” it said.
In the last fiscal year, Nepal’s economic growth remained at a mere 3.6 percent due to weak agriculture activity and delayed approval of the budget which impeded capital expenditure.
Source: The Kathmandu Post
