Midterm review of monetary Policy

Midterm review of monetary Policy
‘Creeping inflation a challenge for economy’
eKantipur.com

Nepal Rastra Bank (NRB) on Wednesday released the mid-term review of Monetary Policy, which leaves all monetary measures unchanged, giving up on efforts to curb rising inflation.

Reckoning that inflation is spurred by supply factors including rise in prices of food items, the Policy concluded that taming inflation was not possible only through monetary means In the present context, it is not necessary to change monetary instruments for the purpose of containing inflation, states the Policy.

“Private sector's investment has not picked up. The government's expenditure remains contained. As a result, the aggregate demand of money is low. This justifies that money supply does not have any contribution to push up inflation,” states the Policy.

The central bank has projected inflation based on consumer price index to grow to 6.6 percent this fiscal year, up from the earlier projection of six percent. Inflation stood at seven percent in the first six months of the current fiscal year.

The NRB has estimated that the country would see surplus of Rs 10 billion in balance of payment this year against the earlier estimate of Rs 16 billion.

The central bank, in the mid-tern evaluation also stated that the rate of broad money supply (M2) will remain at 16 percent, the same rate as its earlier projection.

To further liberalize foreign currency transactions, the Policy gives a nod for commercial banks to provide exchange transfer facilities for up to US$ 2,500 for miscellaneous purposes. There has been simplification over the opening of letters of credit (LC) as well. The

Policy introduced a provision to allow review of the LC on the basis of 'already shipped documents.'

The economy is expected to grow by 3.8 percent this fiscal year due to slower-than-expected rise in capital expenditure, growing power load shedding and its subsequent impact on industries, states the Policy. Due to steep fall in paddy production caused by adverse weather, the Policy said that the agriculture gross domestic product would creep up by a nominal 0.7 percent.

The Policy also envisages a plan to speed up the process pertaining to opening up the financial sector for foreign financial institutes. “The central bank has already prepared a study report over allowing branches of foreign banks to operate in Nepal allowing them to engage in wholesale banking transactions. Steps would be taken to implement the report,” states the policy.

In order to encourage banks to reopen their rural branches closed due to the conflict, the Policy states that contrary to the previous system, the banks do not need NRB's prior permission. “They can just send information of resumption of the branches' service to the NRB,” it said.

According to the Policy, the central bank purchased IRs 17.72 billion by selling US$ 390 million in the first six months this year to meet growing demand for Indian currency. Due to soaring trade deficit with India, the country has experienced paucity of Indian currency in recent periods.