Tuesday, July 29, 2008

Can Monetary Policy crack whip?

Nepal Rastra Bank (NRB) is soon going to announce the Monetary Policy for fiscal year 2008-09. But the million dollar question is, can it crack whip on inflation that is at 11 per cent in mid-june 2008, according to the macro-economic report by NRB based on 11 months.
The inflationary pressure as been regularly rising from the food and energy price hike in recent months.
"It will take all possible measures to contain inflation and stabilise economy. It will change cash reserve ratio (CRR), that is at five per cent of deposit and has not been changed for last four years," said a high official at the central bank. The CRR is the portion of deposits banks have to keep with the central bank that is at five per cent at present.
The policy that is brought after the budget annually is being announced this year before the budget. Due to delay in the government formation this year, the government could not bring its annual budget, instead it brought an Accounts Bill to temporarily manage the expenditures and revenue collection.
"But, the central bank has prepared the monetary policy for the fiscal year 2008-09," the official said, adding that attempt would be at keeping the inflation at manageable level that is around six per cent and to achieve six per cent economic growth rate. Last year the policy had set the target of 5-5.5 GDP growth.
"However, the real GDP could be calculated after the government brings the budget. According to the budget and with an estimation of surplus in Balance of Payment (BoP), size of budget and income sources the policy projects the gross domestic product (GDP), every year," the source said. "The central bank might have to bring another policy, if needed, after the full estimation of BoP, budget deficit, foreign aid flow and size of the budget."
The policy will be discussed in next week's NRB board meeting and finalised.
Last fiscal year's policy had also increased the single borrower limit for the bank loans for infrastructure development such as hydropower — as it requires big loan for a longer term — to facilitate the banks to increase investment in infrastructure for a longer term.
"To strengthen supervisory capacity of the central bank, it has also implemented a system of prompt corrective measures that will enable the central bank to supervise financial institutions on a regular basis for their capital adequacy ratio (CAR)," the official said.

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