Monetary Policy review revises inflation upward, growth downward

Despite failure of Monetary Policy in containing inflation, propel growth and bring negative Balance of Payment (BoP) situation to the surplus, the central bank has no major policy departure from its earlier stance in the mid-term evaluation.
However, it has revised the inflation target upward to nine per cent from earlier seven per cent and growth target downward to 4.7 per cent from earlier 5.5 per cent. It has not changed the Balance of Payment target, though it is still Rs 4.43 billion deficit by the six months of the current fiscal year. The target was Rs 9 billion surplus.
"There is no major policy shift in the mid-term evaluation," said the central bank governor Dr Yubraj Khatiwada here in the Valley today.
Nepal Bankers Association (NBA) vice president Rajan Singh Bhandari, however, said that the Policy should have been deviated from its earlier stance as it has failed to meet its target.
Another senior banker, chairman and chief executive of Nepal Investment Bank Prithvi Bahadur Pandey said that the Policy should have introduced some quick fix for the current economic situation.
"Though there are structural problems, the Monetary Policy needs no major departure from its stance," Khatiwada reasoned, accepting that service sector is still in loss.
The deposits in the banks and financial institutions have not increased creating tight liquidity situation fuelling the cost of fund high. "Government's failure in spending coupled with reimbursment dues of the donors created tight liquidity situation," he said, adding that the liquidity crunch has propelled the interest rates up.
"The high cost of fund has send the lending rates also high, making it unnecessary for the revision in the refinancing rate," the governor said.
The central bank has offered refinancing facility to the banks to lend in the productive sector at the 10 per cent rate, which the mid-term evaluation has not revised.
"The refinancing rate should have gone down to boost the manufacturing sector," said vice president of Confederation of Nepalese Industries (CNI) Hari Bhakta Sharma. "The review of the Policy has nothing new to offer to the manufacturing sector that has been hit hard by the rising rates and cost of fund," he said. "The nearing fuel price hike will even increase the cost of production higher as the Policy could not give any respite to the sector that has seen contraction in recent times."
Immediate past president of NBA Sashin Joshi agreed to Sharma. "There is nothing new in the review that could boost the morale of the financial sector except some easing in the home loan and respite in the margin lending," he said, adding that the housing sector's contribution to the economy has been recognised by the Policy, which is a breather to the economy.
The evaluation has promised to bring directives to relax the home and apartment loan, and margin lending, as expected and repeatedly promised by the governor since some time back.
However, the review has also showed serious concern over the growing shadow economy. "The central bank will discourage informalisation of the economy," the governor said, without elaborating further.

Monetary Policy Target
Inflation rate -- seven per cent
GDP growth rate -- 5.5 per cent

Revised target
Inflation rate – nine per cent
GDP growth rate – 4.7 per cent

The promises
* Housing and Margin lending to be relaxed
* Repo to continue to inject liquidity