Roundup: Nepal faces dilemma between price control, economic growth
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E-mail Xinhua, July 22, 2022
KATHMANDU, July 22 (Xinhua) -- Nepal is aiming for an 8-percent economic growth for the new 2022-23 fiscal year amid six-year-high inflation, putting the country's central bank in a tight spot over whether to focus on price control or economic growth.
Nepal's inflation stood at 8.56 percent in June, a 70-month high, according to Nepal Rastra Bank (NRB), the country's central bank. Noticeably, the Nepali government set an 8-percent target for growth in its budget for 2022-23 starting on July 17, as three waves of the COVID-19 pandemic had left the economy in dire conditions.
"High inflation means we have to control credit expansion which creates demands in the market and higher demands lead to high inflation," Prakash Kumar Shrestha, chief of NRB's economic research department, told Xinhua. "But it is difficult to achieve the targeted growth without the expansion of credits."
In his view, it is necessary to control credit expansion, and even to curb rising imports which are depleting the foreign exchange reserves, while a dwindling forex reserve constrains the country's ability to buy essential goods and services.
"The declining foreign exchange reserves, rising inflation and the need to boost economic growth to create more employment opportunities have put us in a tight spot over what type of monetary policy we have to introduce," said Shrestha, who is involved in preparing the new monetary policy.
Normally, the NRB introduces monetary policies to help the government to achieve economic targets unveiled in the annual budgets.
In the past two fiscal years, the central bank introduced monetary policies that enabled banks and other financial institutions to expand credits enormously. The stated aim of the policies was to help the businesses to recover from the devastating impact of the pandemic.
The central bank itself made a refinance facility available in huge amounts to enable borrowers to get loans at low interest rates in the range of 3-5 percent to recover businesses affected by the pandemic.
Easy credits in turn fueled imports, and during the first 11 months of 2021-22, merchandise imports increased 27.5 percent to 1,763 billion Nepali rupees (13.74 billion U.S. dollars), as against 186 billion rupees (1.45 billion dollars) in exports during the period.
As a result, the gross forex reserves decreased by 19.6 percent to 9.45 billion dollars in mid-June 2022, down from 11.75 billion dollars in mid-July 2021 when 2021-22 began.
NRB officials have hinted time and again now that the days of getting cheap credits are over, and there would be no easier access to refinance facilities like before.
During the third quarterly review of last fiscal year's monetary policy in May, the central bank stated clearly that it would continue tightening the monetary policy if pressure persists on inflation and forex reserves.
Experts said that despite the need for high economic growth to create more jobs, controlling inflation and imports should be the first priority of the new monetary policy, considering the risks facing the country mainly due to falling forex reserves.
"There is no doubt that a tighter monetary policy will affect the prospect of economic growth because of reduced credit expansion," Govinda Nepal, a senior economist, told Xinhua. "But it is the time to control the expansion of credits that have fueled imports."
As imports constitute 90 percent of Nepal's foreign trade, global inflation is deeply affecting Nepal's economic situation.
"Avoiding a potential crisis from the imminent threat is more important at the moment," said Nepal, a former member of Nepal's National Planning Commission.
While loose monetary policies adopted in past fiscal years led to massive credit expansion, they did not translate into high economic growth, economists said.
"Credits were largely used for imports instead of increasing domestic production," said Nepal.
As much as 59.18 percent of the overall lending went to less productive sectors like wholesale and retail, finance, insurance, real estate and consumption as of mid-November 2021, according to a study report released in February by the Confederation of Banks and Financial Institutions.
"When we spend most of the credits for imports, it does not help increase domestic production," Nara Bahadur Thapa, NRB's former executive director, told Xinhua.
"Nepal's economy is vulnerable due to decreasing foreign exchange reserves over rising imports and inflation," he said. "So the first priority of the new monetary policy should be to address these threats." Enditem
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