Saurav Aryal

MBA-IT 1st semester, Roll: 18

Managerial Economics

Monetary policy 2020-21 review

Nepal’s central bank on July 17 unveiled its annual monetary policy to mitigate economic effects
of Covid-19, promising to support business to get back on their feet.

The main focus was given to reduce, refinance and restructure the loans. Extension of the loan
replayement deadline, refinance facility, grace period extension for infrastructure projects and
targeted leading in productive sectors at cheaper rate are the key measures the NRB announced
in its monetary policy for the fiscal year 2020-21 for relief and revival of various sectors affected
by Covid-19.

Apart from loan payment deadline extension, the monetary policy also has provisions mandatory
lending sectors such agriculture, hydropower and SME’s. As per the policy, commercial banks
need to lend at least 15% to the agriculture sector by mid-July 202, 15% to SME’s and 10% to
the hydropower sector of total loans by mid-July 2024.

Policy has extended the deadline of paying loans, depending on the degree of impact on the
particular sector and has permitted financial institutions to extend further loan’s to industries
affected badly by the pandemic. Loan is to be extended by 20% of the working capital
maintained at mid-April. Private sector said it is pleased by the monetary policy as most of their
demands have been addressed, their demand was focused on loan repayment reschedule to be
extended by 6 months. However, NRB announced that worst affected sectors could pay their
dues by mid-July 2021.

There is a provision of fund worth Rs. 50 billion through which badly affected sectors like
tourism get loans at a 5% interest rate. The central bank also addressed the demand that the
capital plus credit to deposit ration be increased to 85% from 80% so that more liquidity could be
available to the banking sector.
Highlights

Some of the major provisions made by the central bank’s monetary policy 2020 are listed as
below:

Policy direction

Main focus of this policy is to help the government of Nepal to achieve its economic goals while
maintaining macroeconomic stability.

Financial mobilization will be encouraged to expand economic activities.

Emphasis on the integration and strengthening of banks and financial institutions for the
development and sustainability of the financial sector.

Encouraging electronic payment transactions by making the payment system secure and
efficient.

Economic and Monetary Targets

Target to keep the inflation within 7%.

Keeping economic recovery at priority, policy aims to maintain liquidity to help to achieve the
goal of economic growth.

Growth of private sector credit and the broad money supply is aimed to limit at 20% and 18%
respectively.

Operating Targets and Instruments

Permanent liquidity facility rate is set as it at 5% and the deposit collection rate is decreased
from 2% to 1%.

Repo or policy rate reduced from 3.5% to 3%.

Statutory liquidity ratio (SLR) is set 10,8 and 7% for commercial banks, development banks, and
financial companies respectively.

Lender of last resort (LOLR) is kept at 5%.

Economic Recovery Programs

(Refinancing facility)

Provision for refinancing up to 5 times of the available funds for refinancing.

Provisions are made for special refinancing at a 1% interest rate in specified areas such as
export-oriented industries, refinancing at a 2% interest rate in the cottage, small and medium-size
enterprises, and general refinancing at 3% interest rate in specified areas. In such refinancing
borrower pays only 3,5 and 5% interest respectively.

Payment system

All types of financial transactions within Nepal will be encouraged to be done electronically and
a national payment switch will be set up to facilitate this.

Guidelines will be issued to manage payments made through quick response (QR) code in
electronic system.

Provisions have been made to revoke the permissions of PSP service providers if they will not
reach at least 300,000 customers and if the average monthly revenue turnover does not reach at
least 600,000 by 2078.

Conclusion

Many sectors have said that the monetary policy have addressed most of their demands. The
private sector and the primary opposition Nepali congress welcomed some of the measures in the
monetary policy to control money supply to achieve sustainable economic growth. The
implementation of monetary policy is believed to revive the economy affected by the pandemic
while maintaining overall economic and financial stability.

Although the covid-19 poses a challenge to economy, it is felt that the door is open for
opportunities to manage exports and promote payment systems by boosting domestic
productions. NRB has a practice of reviewing the monetary policy on a quarterly basis there is
scope for revision.