Monetary Policy review faces many a challenges

Increasing shadow economy, inflation and balance of payment (BoP) deficit together with plunging capital market and real estate sector confidence have failed the Monetary Policy.
Though, the central bank is reviewing its policy as a routine mid-term evaluation. It is, however, not that easy to resurrect financial and economic activities to keep the economy afloat through policy instruments.
Dr Posh Raj Pandey, former member of the National Planning Commission (NPC), opined that the Monetary Policy has failed. However, according to him, the policy also failed due to failure of its supporting policies. "The instruments of monetary policy could not function due to the failure of fiscal policy, which was delayed by four months,” he said.
The central bank had, making it an exception, brought Monetary Policy for this fiscal year before the budget that was delayed by four months due to political tug-of-war.
Delayed budget translated into a delayed implementation, making it even impossible for the Monetary Policy to achieve its objectives.
"Due to government’s inability to spend, many side-effects have started popping up,” a banker said, attributing the current liquidity crunch to the aftershock of the delayed budget. “Lack of government spending and central bank’s mandatory Credit to Deposit (CD) Ratio also squeezed the liquidity from the commercial banks creating a credit crunch,” he added.
According to the central bank regulation, the commercial banks have to maintain 85 per cent CD ratio at present and reduce it to 80 per cent by the end of 2011, which is going to be a tough job for the commercial banks.
“The central bank neither can loosen the Monetary Policy nor can it make tighter,” he said, hoping the central bank to take sensible revision of the Policy.
"The revision in Policy should help ease current liquidity crunch,” another banker vice-president of Nepal Bankers’ Association (NBA) and CEO of Citizens’ Bank International Rajan Singh Bhandari, said, adding that the review should boost confidence of capital market and real estate sector that could help lessen the pressure on financial sector. “The Policy revision has to provide incentives for the exporters to increase exports and forex reserve,” he added.
The unattractive incentives and interest rates made it more difficult for the export industries to grow hurting the Balance of Payment.
Apart from correcting BoP that is Rs 4.34 billion in deficit and cracking whip on rising inflation, two major objectives, the policy revision needs to address a plethora of issues like bringing the shadow economy to light that could help sustain economic growth.
Job creation is yet one of the major objectives of the monetary policy, though our policy has not clearly spelled it out. The closing of many industries – due to high interest rates and insecurity – has naturally increased the unemployment.
The unrest in the Gulf, if reverse the trend of Nepali migrant workers, it could pose yet another threat to the whole economy as it could not absorb these unemployed youths due to shrinking job opportunities.
The 'cautious' Monetary Policy for the fiscal year 2010-11 that has based broadly on Three Year Interim Plan (2010-2013) has projected the inflation rate at seven per cent, GDP growth rate at 5.5 per cent, broad money supply at 15 per cent, BoP at Rs 9 billion surplus and forex reserve that could be enough for six months goods and services import.
Though the Monetary Policy is no magic wand, the financial and business fraternity is still waiting for some magic that it could give a quick fix to the economic distortions.

Target
Inflation rate -- seven per cent
GDP growth rate -- 4.5 per cent
Balance of Payment -- Rs 9 billion surplus

The reality (by six months)
Inflation rate – 11.3 per cent
GDP growth rate – 3.8 per cent, (ADB projection)
Balance of Payment -- Rs 4.43 billion deficit