Nepal Monetary Policy 2080/2081 (2023-2024)

News 24 Jul 2023 8790

Nepal Rastra Bank Rolls Out Flexible Nepal Monetary Policy 2080-2081 (2023/2024) to Bolster Economic Activity

In an attempt to keep the national economy buoyant and back the government's budget, the Nepal Rastra Bank has carefully introduced a new, more flexible monetary policy. This policy aims to keep price increase in check within 6.5%, while also targeting an economic growth of 6%.

Policy Rate Cut and its Implications

The key development in the monetary policy was the reduction of the policy rate from 7% to 6.5%. As a result, the cost of short-term loans procured by the bank via Rashtra Bank is expected to decrease. This move will likely pressurize banks to bring down the overall interest rates.

Management of Liquidity and Bank Rate

To effectively manage liquidity, the bank rate of 7.5% remains untouched. This decision suggests that the interest rates of government bonds and securities will remain stable. The bank rate plays a critical role, particularly when banks and financial institutions experience liquidity crises, as it dictates the rate at which the central bank provides liquidity.

Deposit Collection Rate and Credit Expansion

The new monetary policy has also slashed the deposit collection rate from 5.5% to 4.5%. This strategy of maintaining the bank rate stable will help fend off any downward pressure on interest rates due to the repo rate.

Moreover, the policy displays signs of tightening credit expansion. However, it also brings relief to Nepalese planning foreign tours by allowing them to exchange up to 2500 dollars, facilitating payment through the airport.

Increased Money Supply and Risk Review

Contrary to the credit expansion policy, the Nepal Rastra Bank has raised the wide money supply. The limit on expanded money supply, which was previously set at 12%, has been increased to 12.5% this year. This move suggests a more active market with an influx of more money in circulation.

Additionally, the bank has committed to reviewing the risk weight in non-productive sectors, such as real estate, share mortgages, and vehicles. This review could lead to an increase in credit flow in these sectors, which, in turn, could raise the government's revenue.

Enhancements in Home Loan Limits and Regulatory Bodies

The policy also announced an increase in the residential home loan limit from Rs 1.5 crore to Rs 2 crore. Furthermore, it declared the formation of a separate regulatory body for savings and credit cooperatives.

Key Goals and Projections for Fiscal Year 2080-81

The Nepal Rastra Bank aims to maintain sufficient foreign exchange reserves to cover seven months of goods and services imports. It also prioritizes keeping inflation within 6.5% and channeling financial resources to the productive sector to help achieve the budget statement's economic growth target of 6%.

The monetary policy projects an increase of 12.5% in comprehensive money supply and 11.5% in private sector loans from banks and financial institutions in 2080-81. This projection is a significant jump from the previous year, when such loans only increased by 4%.

Borrower Support Measures and Supervision Enhancement

The policy announces the review of the mandatory permanent account number system for borrowers using loans/facilities beyond certain limits. It also introduces a framework to assist banks and financial institutions in managing and reviving borrowers who face difficulties due to natural disasters or special circumstances.

To enhance supervision of large borrowers, the policy will issue separate guidelines, aiming to decrease the over-centralization of credit by modifying single customer credit facilities.

Positive Economic Outlook and Future Directions

Governor Mahaprasad Adhikari expressed positivity regarding the monetary policy, noting improvements in Nepal's economic index and a positive external economic scenario. He also announced plans to encourage mergers and acquisitions of microfinance financial institutions.

Additionally, the monetary policy promises foreign exchange facilities to industries/businesses aimed at exporting services, including IT. It also plans to remove the system of paying foreign currency loans in Nepali Rupees as the impact of Covid-19 lessens. Furthermore, it seeks to provide instruments such as swaps for managing foreign exchange risks in external loans provided by banks and financial institutions.

Highlights of Monetary Policy 2080/81:

Inflation Rate Reduction: The inflation rate was lowered from 7% to 6.5%, aiming to reduce the cost of short-term loans and put pressure on banks to lower overall interest rates.
Stable Bank Rate: The bank rate remained stable at 7.5% to maintain the stability of interest rates on government bonds and securities, and ensure efficient liquidity management.
Decreased Deposit Collection Rate: The policy trimmed the deposit collection rate from 5.5% to 4.5%.
Increased Money Supply: An expanded money supply limit of 12.5% was introduced, up from 12% in the previous year, indicating an anticipation of a more active market.
Credit Expansion Tightening: The policy shows indications of tightening credit expansion while facilitating payment for Nepalese going on foreign tours.
Risk Weight Review in Non-productive Sectors: A review of the risk weight in non-productive sectors like real estate, share mortgages, and vehicles was announced, potentially increasing credit flow in these sectors.
Higher Residential Home Loan Limit: The home loan limit was increased from Rs 1.5 crore to Rs 2 crore.
Formation of Regulatory Body: A new regulatory body will be established for savings and credit cooperatives.
Economic Growth and Inflation Targets: The policy prioritizes maintaining inflation within 6.5% and managing financial resources towards productive sectors to achieve the targeted 6% economic growth.
Projections for Private Sector Loans: The policy forecasts an increase of 11.5% in private sector loans from banks and financial institutions, compared to a 4% increase in the previous year.
Support Measures for Borrowers: A system for reviewing the mandatory permanent account number for certain borrowers was introduced, along with a framework to aid borrowers facing difficulties due to natural disasters or other circumstances.
Enhanced Supervision of Large Borrowers: Separate guidance will be issued to improve the supervision of large borrowers, with the aim of reducing the over-centralization of credit.
Promotion of Mergers and Acquisitions: The policy encourages mergers and acquisitions of microfinance financial institutions.
Provision for Foreign Exchange Facilities: The policy allows industries/businesses aimed at exporting services, including IT, to avail of foreign exchange facilities.
Removal of Foreign Currency Loan Payment in Nepali Rupees: In response to the diminishing impact of Covid-19, the system of paying foreign currency loans in Nepali Rupees has been revoked.
Instruments for Managing Foreign Exchange Risk: Arrangements will be made for banks and financial institutions to access instruments like swaps for managing foreign exchange risk in external loans.