Highlights of Monetary Policy 2009/10 R&D Department
Objective The Nepal Rastra Bank (NRB) has stated price stability and financial sector development for the overall economic growth as the primary objective of the monetary policy.
Economic Statistics Nepal’s GDP grew by 4.7% in 2008/2009 as compared to 5.3% in 2007/08. Agriculture sector grew by 2.2% as compared to the 4.7% in the year 2007/2008. The main reason for this decrease is due to the bad weather and flood in the eastern Nepal. The non- agricultural sector has expanded by 4.8% in 2008/2009 as compared to the 5.6% the previous year. The overall balance of payments (BOP) posted a surplus of Rs. 43.1 billion in the first ten months of 2008/09 compared to a surplus of Rs. 19.9 billion in the previous year.
Workers' remittances increased significantly by 55.5 percent to Rs. 169.2 billion in the first ten months of 2008/09 compared to a growth of 35.5 percent in the previous year. The accumulation of gross foreign exchange reserves reached Rs. 283.4 billion in the first ten months of 2008/09. This level of reserves is sufficient to cover merchandise imports of 12.4 months and merchandise and services imports of 10.1 months.
Inflation
Annual average inflation is estimated to soar up to 13% in 2008/09 – against the target of 11% announced in the mid-term monetary policy review in January 2009. The Nepal Rastra Bank (NRB) has identified that the current inflationary pressure is mostly due to supply-side constraints rather than monetary expansion. However, NRB said that it will continue to monitor monetary expansion to prevent inflation from monetary side. In tune with the current budget, the NRB has projected an inflation rate of 7% for 2009/10 and said that inflation can be brought to single digit with improvements in supply constraints.
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Monetary Policy tools The cash reserve ratio (CRR) has been kept unchanged at 5.5 percent. Likewise, the bank rate is kept unchanged at 6.5 percent. After a gap of 18 years, the NRB has re-introduced SLR. As per the policy, A, B and C class financial institutions have to invest 6, 2 and 1 percent of their liabilities respectively in government securities by mid-January 2010. They will have to raise this ratio to 8, 3 and 2 percent respectively by the end of the current fiscal year. Nepal Rastra Bank (NRB) stated that the move was aimed at ensuring that financial institutions maintained adequate liquidity to enable them to make repayments to their customers as required. Currently, there is no compulsory provision in this regard.
Others The deprived sector credit requirement of 3 percent for commercial banks has been continued. The policy has increased the deprived sector credit requirement for development banks to 2 percent from the existing 1.5 percent.
The policy made public by the central bank on Friday has left the required amount of paid-up capital unchanged, which is Rs. 2 billion for commercial banks, Rs. 640 million for development banks and Rs. 200 million for finance companies by 2070. Now onwards, the base for increasing capital of licensed banks and financial institutions by the NRB will be their capital fund.
In the context of the possibility of the establishment of foreign bank branches and offices in Nepal beginning 2010, the NRB will prepare memorandum of understanding for home-host supervisory relation within this year.
The implementation of Early Warning Signal (EWS) to banks and financial institutions will be further strengthened so as to enhance the efficiency of offsite supervision. In the process, "Stress Testing" of commercial banks will be carried out.
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The existing provision of refinance facility of Rs. 2 billion to sick industries and the refinance rate at 1.5 percent will be continued for 2009/10. The provision of refinance rate to the Rural Development Bank at 3.5 percent has been continued. Export credit refinance facility in foreign currency has been kept unchanged effective with extra surcharge of 25 basis points at the prevailing 6-month LIBOR rate.
In order to avert the excessive concentration of credit in a single sector, single obligor limit has been currently set at 50.0 percent, including 25.0 percent from fund based and remaining from non-fund based. This limit has been slashed to 25.0 percent of core capital including that of non-fund based effective from July 17, 2010.
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