Shift in economic emphasis: Growing reliance on monetary policy amid budget formulation

KATHMANDU: The cornerstone of economic policies lies in budget formulation, as it sets a blueprint for the government’s income and expenditure, ensuring the overall economy remains stable.

Alongside the budget, monetary policy plays a supporting role in achieving the outlined objectives. However, a notable shift in recent years has seen people placing greater emphasis on monetary policy over financial policy (budget).

From government officials to the private sector, there is a growing reliance on monetary policy to create favorable economic conditions. High-ranking government officials acknowledge the NRB’s significant role in resolving economic issues, which has led to the diversion of monetary policy from its primary objective.

A recent example illustrating this trend is the central bank’s solicitation of suggestions for monetary policy. In this meeting, stakeholders offered recommendations ranging from interest rate controls to tax rates and gold quotas, which extended beyond the traditional confines of monetary policy.

This is not an isolated incident; similar suggestions have surfaced in recent years. Experts attribute this phenomenon to stakeholders’ heightened expectations of monetary policy’s efficacy compared to the government’s budgetary measures.

The problem of non-implementation can be traced back to an overambitious annual budget, lack of effective coordination among government agencies, and a propensity to shift blame to others, including the NRB, during challenging economic situations.

Former Finance Minister Yuvraj Khatiwada suggests that the increasing expectations surrounding monetary policy stem from the government’s tendency to evade responsibility by attributing shortcomings to the central bank.

He emphasizes that the NRB operates independently and that the government’s primary responsibility is to create an environment conducive to foreign investment and resource mobilization.

Khatiwada believes that foreign direct investment is influenced more by the government’s policies and investment-friendly atmosphere rather than the banks’ interest rates. Consequently, the government should focus on structural adjustments within its ministries, such as finance and industry.

Khatiwada argues that the government’s ambitious revenue growth targets and loose fiscal policies have contributed to imbalances in the economy, and the blame cannot solely be placed on the central bank. Instead, effective coordination between government agencies is essential to address such issues.

The sentiment is shared by former Finance Secretary Shishir Kumar Dhungana, who acknowledges that people’s expectations regarding monetary policy have risen, especially in light of post-Covid economic challenges. While he recognizes the value of monetary policy as a supplementary tool, he contends that it cannot replace financial policy.

Prakash Kumar Shrestha, head of the Research Department at the central bank, notes that high public expectations have pushed the boundaries of monetary policy beyond its theoretical definition and international practices. He cites the Covid period’s refinancing policy as a significant contributor to the heightened expectations.

Shrestha acknowledges that monetary policy encompasses various aspects beyond interest rates and policy rates, including foreign exchange and consumer protection policies. This complexity has caused confusion among the public and blurred the focus of monetary policy.

Gopal Bhatta, former Executive Director of the NRB, believes that the government’s weak governance, over-ambitious budget, and implementation challenges have led to an increased reliance on the NRB to address economic issues. He criticizes the government for placing the blame on the central bank, which is just one component of the larger government machinery.

Overall, there is a need for a more balanced approach to economic policies, with both fiscal and monetary measures working in harmony to achieve stability and growth.

Relying solely on monetary policy while neglecting the broader context of economic management may not yield sustainable results.

Effective coordination and cooperation between government agencies, along with realistic budgetary objectives, are essential in creating a stable and thriving economy.