Nepal Rastra Bank (“NRB”) issued the monetary policy for the financial year 2079/80 B.S. (“Policy”) on Shrawan 9, 2079 B.S., and conducted its first term review of the Policy on Mangsir 11, 2079 B.S. 

The central bank has now unveiled its mid-term review of the Policy today indicating that the primary macroeconomic indicators have exhibited a steady improvement as a result of the comparatively contractionary policy measures undertaken by the central bank earlier this year.

Here are the major highlights from the mid-term review of Policy by NRB: 

Foreign Exchange Reserve Position 

The FOREX Reserve has increased drastically & is now sufficient to cover the import of goods & services for 9.1 months. NRB's  objective is to maintain foreign exchange reserves at a capacity of  at least 7 months during the current fiscal year 2079/80.

Considering this improvement in the foreign exchange reserve, the provision to maintain a mandatory cash margin of 50% to 100% when opening a letter of credit for import was abolished. 

Consumer Price Inflation 

The average consumer price inflation for the first six months of the current fiscal year is at 8.02%. The NRB objective was to keep consumer price inflation within the threshold of 7% in the current financial year. 

The high inflation rate is mainly caused by the rise in petroleum product prices and the devaluation of the Nepalese currency in the international market, leading to a significant increase in the cost of imported goods. The central bank expects that it may take some more time to tame inflation considering the global market scenarios. 

The inflation as per International Monetary fund (IMF)  for the year 2022 A.D. stood at 7.3% & 9.9% for developed & developing countries respectively. It is projected that this rate will fall to 4.6% & 8.1% respectively in 2023 A.D. 

Liquidity position in the country 

Banks & Financial Institutions (“BFIs”) have seen a slight uptick in the liquidity. The BFIs have utilized Rs. 401 billion through open market transactions (RePo, Reverse RePo) & Rs.2,693 billion through Standing Liquidity Facility (“SLF”) from the central bank in the first six months of this FY. 

In the same time previous year, these figures were Rs.352 billion & Rs. 3,016 billion respectively. 

This decrease in overall utilization of funds by BFIs from the central bank indicates that the BFIs have sufficient funds available internally & do not need to rely on NRB for day-to-day cash needs.

Additionally, the amount of money being deposited in the banks is growing faster than the amount of loans being given out after Ashoj 2078, which shows that the banks are in a comfortable liquidity position. 

Interest Rates overview 

Spread rate requirements for BFIs 

Nation’s Economic & Financial Position 

In the first six months of the current fiscal year, imports have decreased by 20.7%, exports have decreased by 32% thereby reducing the Trade deficit by 19.2% .

The decrease in imports and trade deficit can be attributed majorly to the ban on the import of luxury goods, the requirement for cash margins when opening a letter of credit (“LC”), the appreciation of the US dollar rate, and the restricted credit flow from financial institutions.

The inflow of remittance has increased by 24.3% compared to first six months of last FY

This is expected to continue growing, with more individuals seeking employment abroad, and an increase in the US dollar rate and remittance account interest rates.

The tourism sector has also seen a boost, with the revenue increasing by 116.9%.

This is a result of the declining number of COVID-19 infections and a corresponding rise in tourist arrivals.

The Current Account deficit has decreased & BOP has remained positive. 

The Current Account is at Rs.29.47 billion deficit compared to the Rs.352.16 billion deficit in the same time of previous fiscal year. 

However, the balance of payment remained positive at Rs.97.9 billion compared to the massive deficit of Rs. 241.23 billion in the same time of previous fiscal year. The improvement in the Current A/c and BOP position is due to the increase in the flow of remittances and the decline in imports.

Changes in Regulatory Provisions 

No significant changes in the regulatory provisions have been made by NRB in the Mid Term Monetary Policy Review. However, here are some of the major changes made by Monetary policy review:-

• NRB has decided to provide the Overnight Liquidity Facility to the Banking and Financial Institutions (BFIs) at a reduced interest rate of 7%. Previously, NRB had been offering a Daily Liquidity facility  at an interest rate of 8.5%. This reduction in interest rate is expected to further decrease the interest rates on deposits in the month of Falgun.
• By the end of Jestha 2080, penal interest will not be charged if the loan is paid within one month of exceeding the principal / interest liability of the borrower.
• The  loans of up to Rs. 2 Crores in the Performing Loan category (i.e Pass loan & Watchlist loans ) at the end of Poush 2079 will  be restructured and rescheduled by the end of Ashad 2080 after analyzing the cash flow and income of the industries and businesses. This will help small and medium-sized industries and businesses operate more easily.

Conclusion 

The mid-term review conducted by the Central Bank has revealed a positive outlook for the country's economy with the liquidity position slowly easing up. NRB has maintained its contractionary monetary policy to prevent any potential economic disruptions in the future. There have been no modifications made to the regulations overseeing the stock market and real estate sectors. This may be a major disappointment as the investors were hoping for some positive changes in this mid-term review. But the central bank has clearly ignored any short term changes and this could be attributed to the fear that any changes in provisions related to these sectors could lead to an increase in asset prices, thereby boosting demand for goods and services. This would result in higher imports depleting the FOREX Reserves.

So what do you think of this mid-term review? Do share our analysis if you found it insightful.