Positive Outlook of the Monetary Policy 2076/77

It is obvious for the stakeholders to have an interest in the to-be introduced the monetary policy.   Besides the rumors about "Big Mergers" and "Forced Merger" increased curiosity regarding the policy. Amidst all the rumors and curiosity, the much-awaited Monetary Policy of 2019/20 was released on July 22, 2019.

Recently presented Monetary policy aims to capitalize on the achievement to date and also aims to address the emerging concerns prevalent in the contemporary banking and financial sector of the country. 

In contrast to widely popular belief that monetary policy would proactively propagate the notion of forced merger/acquisition, the central bank has proposed an amicable offer to promote the merger and acquisition of the banks and financial institutions(BFIs).

Generally, the monetary policy aims to achieve three major objectives: control inflation, maintain fiscal stability, and assist the growth target of the government envisioned by the fiscal policy. In this connection, the monetary policy 2019/20 aims to move in the same direction. It has adopted a balanced approach and seems promising. The analysis has been presented under the following four headings.

1.    Interest Rate Stability

The appropriate rate of Interest has always been a topic of discussion and debate. The suppliers of funds expect to get an adequate return on their hard-earned money. Whereas the users of the funds like industrialists and businessmen always claim the interest rate to be exorbitant. Though the determination of interest rate is not within the sole control of the Central bank, it can devise policy measures to ensure the stability of the interest rate. The Central bank seems to be moving towards the attainment of the interest rate stability.  For eg, the data of the last three year shows such direction.

Interest rate(Weighted Average)	2073 Ashad	2074 Ashad	2075 Ashad
Deposit	3.3	6.20	6.50
Loan	8.9	11.30	12.50
Average Base Rate	6.50	9.90	10.47

Ability to stabilize the rate of interest will benefit both the depositors and the borrowers. Similarly decreasing the spread rate to 4.4%(from the existing rate of 4.5%) in accordance with Financial Sector Development Strategy, decreasing the Lender of Last Resort(LOLR) rate to 6% from the existing 6.5%, etc indicate the measures by the central bank to ensure that the interest rate will remain within the acceptable limit. Likewise raising 25% of the bank's paid-up capital as debentures will enhance the capacity of the BFIs to invest for a longer period while ensuring the stability of the interest rate.  The policy has also made a downward revision of the refinance rate and has barred the BFIs to charge more than 2% to the base rate for the SME loans, it has also allowed the BFIs to accept Deposits from foreign corporate and Non-Resident Nepalese for a minimum period of two years. With the above-mentioned measures, the central bank has made ample effort to ensure stability of the interest rate while also expanding the banking instruments.

2.  Financial Consolidation

The policy has encouraged willful mergers and acquisitions of BFIs. For a bank entering into merger/acquisition, various facilities have been offered such as; extended time limit up to 2078 Ashad to meet sectoral lending in agriculture, energy, and tourism sector and to maintain spread rate of 4.4%, such banks do not have to take permission from Nepal Rastra Bank to open branches, and waiver of cooling period provision for the Chief Executive Officer and the Board of Directors. Similarly, it has also announced privilege for the Microfinance financial institutions entering into merger/acquisition. Similarly, the policy also puts light on the need for merger/acquisition of institutions with cross-holdings, regulation, and supervisions of Systematically Important Banks (SIBs), etc. All these measures will strengthen the capacity of BFIs to absorb risk, enhance lending capacity, cut duplicating costs, etc. 

3.   Financial Inclusion and Consumer Protection

The policy is step-forward to escalate the level of financial inclusion in the country. In line with the objective of ensuring broader financial inclusion, the policy has aimed towards establishing banking channels to all 6743 ward of 753 local levels. BFIs now can open Branches less banking agents without the approval of the central bank. This initiative is more likely to bring a huge volume of unbanked/underbanked population within the banking network.

Similarly, BFIs now need to develop an audio notice board to transmit the information about their service offerings to the public without transferring any cost to the customers. They also need to develop their website in Nepalese languages. Most importantly the policy has decided to establish the Financial Consumer Protection Unit to address the grievance of both the depositors and the borrowers.  All these measures will improve the situation of financial inclusion and consumer protection in the country.

4.   Supporting growth initiative of Government

With the enforcement of the Federal Constitution of Nepal 2015, the country has entered into a phase of political stability. The present government has a strong mandate for 5 years of which significant time period is left. In such a situation, the executive can steer the economy in a strong growth trajectory.

To create the climate conducive to growth the policy is directed towards containing the inflation rate to 6 % while taking into account the growth objective of 8.5%. It has aimed to increase the sources of deposits for the BFIs and also aimed to decrease the lending rate. 

The demand for credit has been increasing, and time and again banks have been facing loanable funds scarcity. In such a situation, the goal should be to increase the sources of the fund while also to decrease the rate of interest. The policy has adopted flexibility regarding the sources of the funds from abroad, eg: deposits from Pension funds, hedge funds, etc can also be brought, issues of debenture of at least 25% of the paid-up capital of BFIs, etc.  Measures to decrease interest rates are: decreasing the LOLR to 6% from erstwhile rate of 6.5%, a downward revision of the interest rate of general refinance and special refinance facility, decreasing the spread from 4.5% to 4.4%, etc. Similarly, the policy has continued earlier provisions relating to priority sector lending and deprived sector lending, ensure the effectiveness of the refinance via a refinance policy, etc. All these measures will generate adequate resources to support the growth target of the government.

Conclusion

Nepal has a robust banking and financial industry. The increase in the presence of BFIs at the local level has largely increased financial access and inclusion. However, the concerns of interest rate fluctuations, credit allocation, customer grievances, the effectiveness of refinancing, etc have been a topic of debate. The monetary policy aims to address all these issues and thus enhance the stability of the banking and financial system, while also enhancing the trust of the general public in overall banking. As such monetary policy is forward-looking and optimistic.

  

Ease of Doing business in Nepal: 2015

Singapore has ranked as a leader in the Doing Business Report- 2015. This year Singapore is followed by New Zealand, Hongkong SAR China, Denmark, Republic of Korea, Norway and so on. The United States ranks 7th, while Japan ranks 29th.

Ease of Doing Business report 2015 is 12th annual report of World Bank group that provides investigated report of the business regulations that enhance business activity and those that constrain it. It is based on measurement of 10 different quantitative factors namely: starting a business, dealing with construction permits, getting electricity, registering property, getting credits, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

In 2013-14 Tajikistan was the nation that improved most significantly followed by Benin, Togo, Cote d'Ivoire, Senegal, etc. To be noted also is the Sub Saharan African region with the largest number of economies accounted for regulatory reforms in 2013/14. While South Asia as a whole has a lower reforms and is slightly placed over OECD countries and Middle Ease and North Africa countries based on the reforms measures taken.

Nepal performance in the Ease of Doing Business has improved by a mere position of a unit with ranking of 108. Still to this date Nepal remains an unattractive place to do business. Though this year figure shows improvements in some indicators of the study, still Nepal needs to improve in many sectors. However if we compare Nepal's rank with that of other South Asian countries, it seems to be in a comparatively better position. Sri Lanka improved the most by jumping six place up in the ranking to 99. Sri Lanka is followed by Nepal with ranking of 108. Other countries rank as follows: Maldives (116), Bhutan (125), Pakistan (128), India (142), Bangladesh (173). The regional rank is 134.

The trading across border of Nepal is lowest among its South Asian neighbours. However it has the best ranking in terms of registering property(globally 27th) which requires 3 procedures, 5 days and 4.8% of property value to register. The regional average is 6.4 procedure, 99.5 days, and 7.2% of total property value.

This year following reforms aided for improvement of the ranking:
1) Adaptation of new building regulations ( Earthquake resilience)
2) Improved building inspections process
3) Improved/Introduced electronic platforms or online services (for obtaining building permits)

The ranking is updated till June 1, 2014 and thus doesn't include the latest strings of development that the Nepalese government has unveiled in Nepalese business environment like, trade agreement, regulatory changes in the hydropower sector etc. However Ease of Doing Business indicator is remarkable in the sense it gives country like Nepal an assessment of which regulatory reforms have been working, where and why, either in a country's scenario or of that of any other country and thus learn from them.

Massive power cuts, uncertainty about constitutional drafting, volatile political and business environment, etc might have had negative effect to this ranking. As such the government should put a vigil eyes on reforms measure and thus should incorporate methods to improve the business condition of the country. The indicators like:- getting electricity, getting credit, paying taxes etc should be improved more to ensure that ranking gets improved.

However the recent bilateral agreements, Power Trade Agreement with India, surging foreign in Tourism sector, possible promulgation of constitution etc makes one hopeful of the overall business environment improving and thus the ease of doing business also to improve.



Reference:
http://www.doingbusiness.org/