Low government spending tightens liquidity

The government’s inability to spend has led to liquidity crunch in the financial sector, according to the bankers.
In a meeting held at Finance Ministry today, the bankers urged government to speed up spending to help ease liquidity crunch.
The Credit to Deposit ratio has gone up and the banks are not in a position to float any more loans, said a banker, who took part in the meeting headed by the deputy prime minister and finance minister Bharat Mohan Adhikari.
Due to government’s inability to spending, the liquidity crunch has become a regular phenomenon, he said, adding that interbank lending rate that was below 10 per cent last week has also started going up again.
However, he hoped that it might come down as the central bank has promised to inject liquidity through repo. “Tomorrow, the banks might get some liquidity due to repo,” he added.
Adhikari, on the occasion, promised to speed up the government spending to help inject liquidity in the banks.
Defending the central bank move on action against some of the financial institutions, Nepal Rastra Bank governor Dr Yubraj Khatiwada said that the move was targeted to save financial institutions from collapse that will erode public confidence on banks and financial institutions.
“The central bank’s action will help establish good corporate governance in the financial sector that would ultimately help economy,” he said, adding that the banks and financial institutions would be encouraged to go to rural areas.
Though, finance secretary promised to solve the liquidity crunch by spending up government spending, the bankers asked the government to ease refinancing, create conducive environment to attract Non-Resident Nepalis, and foreign investment.
According to central bank, in the first nine months of the current fiscal year, only 53 per cent of the budget has been spent. The macroeconomic report stated that the government has spent Rs 157.26 billion by the mid-April. “The government budget has remained at a surplus of Rs 6.47 billion, by the ninth month,” the central bank said.
The low government expenditure has, however, not only affected the development projects but also the liquidity situation of financial system.
Through the expenditure of the money stuck in government treasury could ease tight liquidity situation in the financial system. “If the surplus amount — of Rs 6.47 billion — had been spent on time, it would have created liquidity three times larger as the money multiplier is 3.57 at present,” according to the bankers.