Editorial: All eyes on monetary policy

Nepal Rastra Bank (NRB) is preparing its Monetary Policy for the fiscal year 2024-25. Since various sectors of the economy are experiencing stagnation for a long time, stakeholders are making calls for a policy that can reinvigorate the economy. The fiscal policy introduced by the government through the budget is traditional in nature. Since this budget cannot find a way out of the crisis, the monetary policy needs to be able to reenergize the economy.

While expectations are high for a more flexible approach, particularly in areas like construction, share market and real estate, Governor Maha Prasad Adhikari’s recent statements suggest that the central bank will take a cautious stance. Speaking at interactions on upcoming policy a few days ago, Governor Adhikari said borrowers are still looking for a solution to their debt obligations through the monetary policy.

The economy’s sluggishness is evident in the banking sector’s excess liquidity. More than Rs 600bn of investable funds is sitting idle in banks due to a lack of demand for credit. The central bank needs to bring policies to create demand for loans so that this investable fund is used to increase productions and create jobs. The central bank is faced with a dual challenge. While it is facing pressure to relax policies in sectors like real estate and the stock market to spur economic activity, there are valid concerns about excessive lending to unproductive sectors. The central bank must find a middle ground that encourages growth without compromising financial stability.

However, we must not forget that problems in the banking sector indicate issues in the overall economy. Therefore, problems in the banking sector should be taken seriously. Banks are currently struggling to recover principal and interest on loans. They may be making billions in profits, but their return on equity is declining over the past few years. Financial statements of commercial banks for the third quarter show more than 10 commercial banks have negative distributable profits. It remains to be seen how the central bank will address all these issues in the upcoming monetary policy.