Unbiased Summary and Interpretation of Central Bank's Mid-term Monetary Policy Review

Fri, Feb 18, 2022 12:01 PM on Economy, Stock Market, National, Latest,

Nepal Rastra Bank has unveiled the mid-term review of the monetary policy for the fiscal year 2078/79.

While economic activities had begun to resume after apparent recovery from the initial wave of Covid-19 infection, the review states that the new Omnicron variant has again raised the need to proceed with caution.

The mid-term review states that keeping inflation to healthy levels remains a challenge amidst rising petroleum and consumer prices in the international market. The central bank planned to keep inflation contained below 6.5% for the fiscal year. In the six months of the fiscal year, the average inflation has been 5.03%.

The banking economy has seen a constriction in deposit collection and a simultaneous rise in credit demand. As such, the central bank has highlighted the importance of using the limited financial vehicles towards employment creation, productivity, and entrepreneurship development.

The increase in imports and constriction in remittance inflows has created a hard economic imbalance. Imports rose 95.5% in the six months, causing the trade deficit to grow 46.6%.

The review document has stated that the risk weight will be reviewed for import loans including trust receipts disbursed by BFI's, personal overdraft loans, real estate loans related to land plotting, personal hire purchase loan, and margin nature loans (which includes loan against shares).

The document hasn't been specific about whether the central bank will tighten or loosen the risk weight on these loans. If the central bank tightens the risk weight, some speculate that it will curb investment funds in the market, which is considered a negative sign. However, under the same constraints, some speculate that investors may be dissuaded to invest in real estate, and rather channel their funds into the stock market.

As the liquidity crunch intensifies, the NRB has raised the standing liquidity facility rate (SLF) from 5 percent to 7 percent. The review document states that the central bank is going to control refinancing. The interest rate has also been increased from 5 to 7 percent, and the policy has been taken not to forward it to anyone except the Covid-19 affected sectors.

The interest rate of loans disbursed to the productive sector will be different from the interest rate of loans disbursed to other sectors. This means that interest rates on loans to productive and unproductive sectors will be different.

Furthermore, the remittance limit of remittance companies' agents and subagents. It seems that NRB has been trying to relay remittances through formal channels as much as possible, with the aim of discouraging remittances through informal channels.

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