Mid-Term Monetary Policy Review: NRB revises economic growth, inflation rate

KATHMANDU, FEB 21 -

Nepal Rastra Bank (NRB) has revised targets for economic growth, inflation, deposit growth and internal credit growth rate set by the monetary policy. The revision comes through a mid-term review of the policy.

The central bank made a downward revision of economic growth to 4.1 percent from the 5.5 percent, while it made an upward revision of inflation to 9.5 percent from the projected 7.5 percent, according to the review report made public by the bank on Wednesday.

As agricultural production decreased drastically due to bad weather conditions this year, growth in the agriculture sector is expected to remain at just 0.7 percent, while the non-agriculture sector is expected to grow by 5.4 percent, according to the report.

Justifying the upward revision of inflation, NRB Governor Yubaraj Khatiwada said the low domestic production and high inflation in India forced the central bank to make the upward revision of inflation.

Likewise, sluggish deposit growth in banks and financial institutions (BFI) so far this year also forced the central bank to bring down its growth projection by Rs 16 billion to Rs 1.14 trillion.

According to the review, deposit growth rate has been lowered to 13.1 percent from the previously projected 15.1 percent due to decreased government expenditure and slow growth of foreign resources.

The report says that the internal credit flow will increase by 13.5 percent, while the earlier target was 16 percent, as loans that go to the government agencies would go down.

The review of the monetary policy is positive on the balance of payment (BoP) and the country’s potential to import required goods and services.

“The BoP has remained in surplus despite heavily increased trade deficit, deficit in service income, decrease in foreign grant and slow growth in remittance inflow,” the report says.

“Given the current state of foreign exchange reserve that can sustain imports for 8.7 months, it has been projected that the country would have adequate foreign exchange to sustain imports for 8.5 months.

Khatiwada highlighted major achievements to implement the monetary policy for the first half of the fiscal year. They include introduction of the base interest rate, increment in deprived sector lending, mergers, financial inclusion and permission to Nepali banks to invest abroad in call deposit, certificates of deposit and other less risky instruments for two years.

As per the central bank’s directives, banks have started publishing their base rate, which has made the interest rate more transparent. “The base rate will also be implemented in development banks and finance companies gradually,” the governor said.

According to the NRB, development banks have matched the required level of deprived sector lending, while commercial banks and finance companies are a little short of meeting the target so far.

Banks have lent 3.9 percent of their lending in the deprived sector against the target of 4 percent. Development banks have lent 3.5 percent, the set target. Finance companies have lent 2.7 percent against the target of 3 percent.

The governor said that 22 banks have merged over the first half to become 10, while 218 more are in the process of merger to become 12.

The central bank said that each branch of BFIs has served 8,700 people as of mid-January, while one branch will serve 9,000 populations as of mid-July 2012.

Source: The Kathmandu Post