Central bank should be more powerful

Macroeconomic stability under pressure: IMF team


At a time when the domestic banks and financial institutions are complaining of central bank’s over interference, the International Monetary Fund (IMF) team has prescribed to give the central bank more teeth to quick fix financial problems but at the same time, it also urged for increased supervisory capacity.
Talking to the press here today at the central bank, senior representative of the IMF to India and Nepal Sanjaya Panth said that the risk has been increasing in the financial sector since last one year. "Weak supervision and increasing number of financial institutions coupled with over exposure to real estate and share also increased the risk," he said, adding that excessive exposure of the banks and financial institutions to the real estate sector — where an asset price bubble has now burst — has brought many of the risks to the fore.
In such a situation, the central bank should have the right to direct merge, close or create new financial institutions, said IMF deputy division chief of Asia and Pacific Department John Nelmes, who led the mission to Nepal.
The mission also suggested the central bank to take a comprehensive and multi-faceted programme — to resolve the current situation — that includes better diagnostic assessments, strengthened supervision and enforcement of prudential regulations, and stronger intervention powers for the central bank.
"Relaxation of prudential and accounting regulations or blanket provision of liquidity assistance would only postpone the crisis not address it," Panth added.
The mission has also warned of the deterioration in financial institutions’ balance sheets that could lead to potentially significant untoward consequences for the economy.
The team — that visited Kathmandu from July 31 to August 15 to conduct the 2011 Article IV Consultation discussions — after holding talks with deputy prime minister Bharat Mohan Adhikari, central bank governor Dr Yubraj Khatiwada, senior officials in the government and the central bank, private sector representatives, trade unions, and other stakeholders also concluded that the macroeconomic situation is also challenging.
"Growth in non-agricultural activity slowed significantly in 2010-11 and despite a good monsoon overall GDP growth eased to 3.5 per cent from about 4.5 per cent the previous two years," it said, adding that inflation also remained stubbornly high in the range of 9.5 per cent annually. "Despite moderation in import growth, the Balance of Payments remained under pressure for part of the year from higher international oil prices and slower remittance growth, though it ended with a modest surplus."
The growth is expected to remain below four per cent in the near term but in the absence of other shocks, inflation should decline somewhat due to decline in the prices of commodities in the international market and India, from where Nepal is said to import inflation too.
"The authorities’ plans to limit domestic financing of the fiscal deficit to two per cent of GDP is appropriately consistent with macroeconomic and debt sustainability but achieving the deficit target will not be easy," Nelmes said, suspecting that the revenue mobilisation for the current fiscal year could also shortfall like last fiscal year.
"The government must have a contingency plan to ensure the domestic financing target is met," the mission said, suggesting to focus on collection of VAT arrears, further improvements in tax administration, and reductions in unproductive subsidies, while safeguarding spending on priority poverty reduction and infrastructure.

Keep rates at par with India
KATHMANDU: The peg should remain the key policy priority Regards monetary and exchange rate policy, the IMF mission suggested, adding that monetary policy should be conducted in a manner that ensures interest rates in Nepal do not fall below those in India.

ECF talks ing on
KATHMANDU: The government is holding talks with the IMF for the Extended Credit Facility (ECF). Nepal had received Rapid Credit Facility (RCF) in 2010 and is in talks with the IMF for ECF — a three year programme to stabilise macroeconomic situation — that come at a concessional rates. The IMF team will return to Kathmandu in the next few months to continue negotiations.