Growth target achievable amid tightening credit flow

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By Ajay Chhetri, Kathmandu, Aug. 2: Nepal Rastra Bank (NRB) has recently unveiled a monetary policy for the fiscal year 2022/23. There have been different comments regarding the policy. Given this background, NRB executive director Prakash Shrestha has shared his views on the policy in a video interview with TRN Online.

Excerpts:

What is the main objective of the monetary policy for 2022/23?

The main motive of this monetary policy is to maintain price and external sector stability, especially considering the declining foreign currency reserve and higher inflation.

Will not a rise in the policy rates raise the cost of the loanable fund?

At this point in time, we have more pressure on the foreign currency reserve and inflationary pressure. To control the aggregate demand, we needed to raise policy rates. We raised the policy rates by 1.5 percentage point. It may increase the cost of borrowing for the time being. But it will help maintain macroeconomic stability.

Both the broad money supply and private sector credit expansion target are curtailed. Will not this curtail slow down the growth?

Though credit supports economic growth, it is determined by many other factors. If we take a closer look at the past data, we have seen that when private sector credit grew on an average of 19 per cent, the economic growth remained around 4 to 5 per cent. In our case, credit growth does not necessarily support economic growth. So, lowering the credit growth target doesn’t mean it will slow down economic growth. If the credit goes to the productive sector, the lower credit growth can also enhance growth.

Can we achieve 8 per growth target given the narrowed down of broad money supply and private sector credit target?

Achieving or not achieving 8 per cent growth depends on different factors and credit is only one of them. We will have an additional 700 MW of hydropower; the economic activities are going up. It will support the economic growth above average. If the industrial sector is able to operate at its full capacity, we will go above-average economic growth. Even if it is not 8 per cent, it will be strong growth.

If we further increase imports, we will have further pressure on the foreign currency reserves. So, this fiscal year is not the right time to target higher economic growth.

Besides, we must look at the external sector, the balance of payment (BoP), high growth demand high imports which need high foreign currency reserve. Now, we have pressure due to low foreign currency reserves. If we further increase imports, we will have further pressure on the foreign currency reserves. So, this fiscal year is not the right time to target higher economic growth.

What do you think are the main challenges to stabilizing the external sector?

We are having very high imports both in terms of quantity and cost due to the rising price of fuel which covers about 16 to 17 per cent of the total imports. Though remittance has been increasing, it is not sufficient to cover this level of imports.

Will there be more restrictions on imports in the future?

The government has already put some restrictions on imports. Due to the international rules, we cannot put complete restrictions on imports. It will raise prices in the market which will hit the consumer. So, we must focus on internal production. We must reduce consumption. Given the higher price, we hope people will demand less.

The foreign currency reserve is depleting. Does NRB have a new strategy to raise it?

At the moment, we have sufficient reserve to import goods and services for 6 to 7 months. But we are cautious that it should not decrease further. Also, that higher interest rate may curtail the demand which will reduce the imports. The higher interest rate might also attract remittances and savings. Nonetheless, we are closely monitoring how it goes. If the foreign currency reserve further declines, we will need to adopt additional measures to avert its further depletion.

At the moment, we have sufficient reserve to import goods and services for 6 to 7 months. But we are cautious that it should not decrease further.


The Indian currency is falling against the dollar. What will be its implication for our economy?

There will be both positive and negative implications for the fall of the Indian currency (IC). Our currency also depreciating against the dollar. That will make imports in the dollar term costlier. A higher dollar may attract remittance inflow. But the burden on the government to pay in dollars will increase. There will be pressure on inflation.

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