Government favors flexible monetary policy; NRB urges caution in response to the economic crisis

KATHMANDU: While the government has emphasized the importance of monetary policy in addressing the nation’s current economic issues, Nepal Rastra Bank (NRB) warns that placing too much trust in the central bank could have unintended consequences.

The current fiscal year’s performance of the Nepali economy was dismal, according to a recent report from the National Statistics Office (NSO). In the first quarter (between mid-July and mid-October), the nation’s economy expanded by just 0 point 8 percent.

The growth rate also decreased in the second quarter (between mid-October and mid-January) to a negative 1 percent. In addition, the NSO forecasted that the nation’s economic growth rate would be just 2.16% in the current fiscal year, which is nearly four times less than the government’s target.

Prakash Sharan Mahat, the minister of finance, stated on Sunday that the monetary policy review, rather than the fiscal policy, could be used to address the current economic issues.

In order to find a suitable solution, monetary policy should be used, according to Mahat, who was speaking at the Nepal Business Summit-2023, which was put on by the Confederation of Commercial Banks and Financial Institutions Nepal (CBFIN).

Instead, it is the government’s duty to steer the economy in the right direction; Finance Minister Mahat appears to abdicate this responsibility to the central bank alone. The government’s capital spending is pitiful on the one hand, and it is unable to collect enough taxes on the other.

The government has also struggled to control the outrageous price increase, which analysts predicted would reach double digit percentage points.

The NRB has been under pressure from Mahat to implement the expansionary monetary policy. NRB Governor Maha Prasad Adhikari, however, asserted that the central bank cannot take on too much responsibility outside of its purview. The entire financial system of the nation will collapse, according to Adhikari, if the central bank tries to violate its code of conduct.

Finance Minister Mahat attributes a decline in business activity to high interest rates. “The production businesses have also been crippled by the high interest rates. ”.

Recently, banks have begun to lower their interest rates in tandem with an improvement in their liquidity position. Governor Adhikari stated that the NRB has been working to protect the interest rates of both depositors and borrowers through the use of policy tools.

If their vested interests are not addressed, “some people just put forth their baseless allegation on the central bank for being apathetic towards the economic problems,” he said.

Swarnim Wagle, an economist and recently elected lawmaker, stated that in order to address the nation’s current economic issues, significant policy reforms are required. In the event that political leaders’ behavior does not change and there is continued inaction to stop institutional corruption, he continued, the economic problems will worsen.

A distinct policy discourse is now required, according to Wagle, because the current economic policies cannot provide adequate solutions to the current issues.