Will the Monetary Policy be effective?

The central bank is preparing to bring the Monetary Policy -- for the first time before the fiscal policy popularly known as budget -- to plug in the loop holes of the economy.

However, the experts doubt the effectiveness of the Monetary Policy as it could not support the full-fledged budget that might come in two months. "Given the size of the 'Special Budget' that is Rs 110.21 billion, the actual budget size could be expansionay to be at around Rs 335 billion," said Prof Dr Bishworbher Pyakurel.

"It calls for expansionary Monetary Policy to support growth and credit flow," he said adding that 'Otherwise, it could not absorbe the macro-economic shock.

But the bankers think that the expansionary policy could create more trouble. "We need tight Monetray Policy that could support banks and financial instuitution," said Radhesh Pant, former president of Nepal Bankers' Association (NBA).

Though, expansionary Monetary Policy could pull the interest down and increase money supply, it would be ineffective currently in an absence of good investment-climate that could only be ensured by the budget and its policies.

This is the first time the central bank is bringing the Monetary Policy before budget despite its bad experience of last Policy's failure.

The ex ante stance of monetary policy of 2008-09 was made tight in the face of arising trend of prices. "It was made tight considering rising pressures on prices of goods and services, liquidity overhang of a year ago, rising asset prices and likely adverse impacts of volatility in asset prices-the prices of real estate and shares in economic activities and banking sector stability in the long run," the central bank had said then.

But it could neither contain the price hike nor eased pressure on liquidity rather the banks and financail institutions have faced liquidity crunch. "The liquidity of the commercial banks has gone down by 5.1 per cent in the first 11 months," a central bank authority said.

As last fiscal year's Monetary Policy failed to create microeconomic stability and crack whip on price hike that has posted a double digit growth despite the Policy's target to contain within seven per cent, the central bank has to analyse the tools it has used.

One of the major objectives of Nepal Rastra Bank (NRB) is to maintain stability by adopting suitable monetary policy. However, it failed in not only raising public confidence on banking and financial system, but also to provide excellent services by promoting monetary and financial system stability and ensuring a financial sector for achieving sustainable economic growth.

Another key objective of the Monetary Policy is also to facilitate economic growth through price and external sector stability. The Balance of Payment -- that registered a deficit in last 25 years -- is another challenge for the Policy.