First Quarter Review of Monetary Policy 2022_23 Nepal

The Nepal Rastra Bank published its First Quarter Monetary Policy Review on 26 November 28, 2021. Here is an highlight from the policy document.

Monetary Policy Stance

Credit flow and imports have surged with the speeding of the economic recovery. Accordingly, the stance of monetary policy has been continued while being cautious for managing the surging credit demand, increasing the base of resource mobilization and ensuring resource availability for productive activities. In addition, monetary management will be made more effective taking into consideration the recent pressure on balance of payment and the likely pressure on inflation.

Monetary and Financial Measures

The existing cash reserve ratio, bank rate and statutory liquidity ratio have been kept unchanged.

Provision will be made for the banks and financial institutions to submit an action plan for maintaining the credit to deposit ratio within the specified limit by July 2023 after approving such plan from the board of directors.  

Considering the position of foreign reserve, cash margin will be made mandatory while opening letter of credit for importing specified goods.

The existing limit of Document Against Payment and Documents against Acceptance will be revised.

The maximum limit for importing silver will be tied up with the foreign exchange facility given for imports through draft and TT.

The existing provision for the interest rate and fees on borrowing in foreign currency will be revised.

The provision for mobilizing deposits in foreign currency from the non-resident Nepalese and the institutions involving the non-resident Nepalese will be further simplified.

The existing limit on foreign currency non-deliverable forward will be revised.

The policy documents can be accessed here.

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Increasing Gap between Remittances and Imports in Nepal

Remittances are the life line of Nepali economy as they provide a cushion to foreign reserves and help finance imports. At household level, remittances have helped consumption and build-up of human capital. 

However, during the recent months, the gap between remittances and imports is widening creating pressure in foreign reserves. Foreign reserves of the country declined from Rs. 1470 billion in mid-October 2020 to  Rs. 1319 billion in mid-October 2021. Declining reserves and increasing imports has pushed the foreign reserve adequacy of the country from the imports of goods and services of 7.8 months from 14.1 months a year ago. (NRB, 2021).

Chart below shows the monthly imports and remittance inflows of Nepali economy during the last several months. Before the COVID-19, the gap between remittances and imports around minus 40 billion which narrowed down during the peak of the COVID crisis. However, as the restrictions were lifted and economic activities gain momentum, such gap has continuously increased and has crossed Rs. 60 billion during the last few months.

  Source : NRB (2021)

Declining reserves has  called the attention of the government, policy makers as well as economists in the recent months. There is a risk of a structural tending of falling reserves if imports continue to pick up in the medium term. As shown in the chart below, foreign adequacy reached as high as 15.6 months of imports of goods and services and is continuously declining thereafter. Likewise, foreign reserves reached the highest point of Rs. 1506 billion in mid-November 2021 and has followed a downward trend.

Source : NRB (2021)

It seems that the policymakers need to come forward with concrete measures  to manage imports and promote exports and tourism industry as a sustainable source of forex reserves in case remittances cannot support the imports. If the current trend persists and policymakers ignore the pressures created in currency account balance, balance of payments and foreign reserves, Nepal may face a structural problem in the external sector as faced in the 1980's.

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