Quantitative easing for pandemic-hit Nepal

Quantitative Easing (QE) is a style of unconventional monetary policy in which the central bank purchases long-term securities from the open market to extend money supply and encourage lending to local firms and individuals. This involves the government using the newly created money to shop financial assets held by banks, like corporate and government bonds. Buying these securities adds new capital funds to the economy and serves to lower interest rates by bidding up fixed-income securities. It acts as a spur for economic activities and improves domestic pecuniary resources to recover from a slump or depression.

In this pandemic, QE could be a way to keep the economy humming and save people’s lives and livelihoods. People get paid in their jobs and when firms run out of money, the easiest way of lowering costs is to make laborers redundant. As unemployment rises, poor laborers will not be able to sustain their livelihood, leading to malnutrition, and other mental and physical health problems. In a third-world country such as ours, the dependency ratio is highly unfavorable. Men are the backbone of houses, and when they are laid off an enormous burden falls on the family.  

According to the World Bank, 79.85 percent of people in Nepal were living in rural areas as of 2019. Nepal, a country of 28.6 million, has also sent over 10 percent of its people of productive age group to work far away. They send money in the form of remittance back to their country. These migrant workers too may lose their jobs.

The Nepal Association of Foreign Employment Agencies (NAFEA) estimates the proportion of job losses for Nepali workers from Covid-19 as follows: 30 percent in the UAE and Malaysia, 20 percent in Qatar and Saudi Arabia, 15 percent in Kuwait, 12 percent in Bahrain, and 10 percent in Oman. Many families in rural areas are almost fully dependent on remittance migrant laborers send home. If the employment rate abroad keeps falling, these families will suffer a direct economic hit.

A recent World Bank report also projects a 14 percent decline in remittances to Nepal in 2020. The corona-related global slowdown and restrictions have begun impacting movement again. In this situation, the International Labor Organization (ILO) suggests direct cash subsidies are the only way out. Raising funds is an option in Nepal but many people who are willing to donate are also suffering huge losses. If it would have been a month or two, frictional unemployment can be disregarded. In this case, it will be a cyclic unemployment and recovery may take a lot of time.

Quantitative easing is one of the most sustainable ways in which the government can allocate money for poor and needy people. Many countries used this method to boost their economies following the global financial crisis in 2008 and the economic recession that followed.

Quantitative easing usually involves a country’s central bank purchasing longer-term government bonds, as well as other types of assets, such as mortgage-backed securities. Banks are willing to buy bonds issued by the government and private companies because they pay out a lump-sum interest rate when they mature. By buying these financial assets from banks, the government can increase the quantity of money banks have to lend in the form of subsidies to the poor and other transfer payments such as unemployment benefits. It will also help with the ‘temporary infrastructure’ needed to accommodate patients fighting this economically and emotionally draining war against covid.

Increasing the supply of money lowers the cost of money, the same effect as increasing the supply of any other asset in the market. This would lead to lower interest rates in which case banks can lend on easier terms to the poor and the needy. It is about time Nepal’s financial institutions and the federal government sat down to find a way out of this unfolding economic crisis.