Liquidity crunch to hit growth

Delay in the releasing of funds for capital expenditure by the government is going to hurt the growth as the delay has sqeezed liquidity from the banks.
"Government must expedite the release of fund for capital expenditure to ease the short-term liquidity crunch through open market operations," said Nepal Bankers' Association (NBA) president Sashin Joshi.
The four-month delay in the full-fledged budget has not only sqeezed the liquidity from the market, it has also put brake on the development activities.
According to the central bank, the total government spending has increased by only 1.8 per cent to Rs 51.54 billion in mid-November, compared to an increase of 36.5 per cent in the same period last year.Generally by October the government relaeses the fund for the capital expenditure -- as by mid-July the budget is announced -- but this year the fund has not been realesed on time due to delay in the budget.
"If the suituation continues, economic growth will be further constrained due to unavaibility of credit to business and industry," he added.
The budget has set a target of achieving 4.5 per cent growth but it will be difficult to achieve the target, in absence of enough liquidity to lend to the business and industry.
The banks are facing liquidity crunch also due to diversion of deposits to other financial institutions that are offering higher interest rates.
The deposit that stood at around Rs 620 billion in mid-July 2010, has currently dropped to a little above Rs 600 billion. The deposit mobilisation of commercial banks has also declined by Rs 4.5 billion mid-November against a growth of Rs 19 billion in the same period last year, according to the central bank.
Due to the crunch, has not only pushed the Credit to Deposit (CD) ratio of the banks up, but also pushed the short-term interest rates higher relative to those in the same period last year.It has also pushed the inter-bank transaction up to Rs 120 billion by mid-November against Rs 96.1 billion in the same period last year, though the central bank has injected liquidity through the standing liquidity facility (SLF) amounted to Rs 51.8 billion, said the central bank.
However, contrary to the decline in deposit mobilisation, commercial banks' credit to private sector has increased by 19.9 billion in the first four months of the current fiscal year.
Commercial banks' credit to production sector has increased by Rs 9.5 billion compared to Rs 3.6 billion in mid-November. Similarly, banks' credit to wholesale and retail trade, construction and mining sectors increased by Rs 4.9 billion, Rs 758 million and Rs 367 million, respectively.
"But the credit to transportation, communication and public services declined by Rs 1.6 billion," according to the central bank.