Frozen land price, market distorting decision led to liquidity crunch

Government’s market distorting decisions, low spending coupled with frozen land prices led to the current liquidity crunch, according to economists.
"Land prices must be allowed to collapse so that frozen assets thaws and starts generating liquidity," according to former finance secretary Rameshwor Prasad Khanal.
"Without price collapse market dynamism is not possible," he said, adding that maekrt players should be ready to face losses but central bank must not help banks and financial institutions minimise loss by generous refinancing.
However, in the short term, refinancing alongwith strong reform plan would allow them time to recover cash from their frozen assets," the former bureaucrat added.
Though, he did not rule out the possibility of some development banks and finance companies' collapse but that could be prevented by pushing them to merger, he said.
The financial institutions should go for merger as soon as possible that is good for economy and financial health of the institutions.
Central bank has also termed the refinancing as a short term measure. In the long run, they have to manage their portfolio and assets liability mismatch as the current liquidity crunch is a result of lack of management of assets and liabilities.
But the brighter side of the current crisis is that the total banking assets has not eroded in the recent four months. "There was erosion in the past year, but the banks and financial institutions are slowly recovering," Khanal said, adding that aggregate Credit to Deposit ratio is close to 90 per cent meaning, even if there is aggregate value loss of 20 per cent too, the depositors money will not be in risk and they do n to fear.
But depositors are not yet confident on the financial institutions due recent series of ''bad news''.
"People's confidence has not been restored yet," Prof Dr Bishwhambher Pyakurel said, blaming the government for market distorting decisions lately. “The root cause of recent trouble is politics-led economy," he said, adding that the political leadership is not accountable to the people but to the party. "The government itself is responsible for the current crisis."
Had the fiscal policy supported, there would not have been liquidity crunch, he said, blaming 'partly' to the financial institutions also. "In some institutions there is excess liquidity and others are in trouble,” Pyakurel added.
The bankers, however, blame low government spending for the current liquidity crunch. "Accelerated government spending could help but slow government spending is not the only reason of current liquidity tightening," Khanal said, adding that unspent government money always remains in the government system. "It goes to the market through open market operations and it helps lubricate the market helping generate more liquidity."
"The government -- especially the finance ministry's -- apathy towards economy is the grave concern currently as it has put the economic agenda at the back burner," said entrepreneur and CA member Binod Chaudhary.