Wednesday, July 6, 2016

‘Maintaining price stability is central bank's responsibility’

Nepal Rastra Bank (NRB) – as a central bank – should work for maintaining price stability, whereas the government should shoulder the responsibility of propelling growth, according to experts.
As rising inflation means decline in value of money, the central bank has to crack the whip on inflation to maintain the value of money and keep it stronger, according to head of the Central Department of Economics under Tribhuvan University Ram Prasad Gyawali.
In the budget for Fiscal Year 2016-17, the government has targeted to contain inflation under 7.5 per cent, whereas the economic growth has been targeted at 6.5 per cent.
However, the economic growth and inflation targets have been eluding the government for the past couple of years due to various reasons. The government has failed to meet economic growth and inflation targets in the current fiscal year as well. Though the government had targeted 6 per cent economic growth in the current fiscal year, the Central Bureau of Statistics (CBS) has estimated that the economy will grow by a mere 0.77 per cent.
Likewise, inflation is hovering above 10 per cent almost round the year even though the government had set a target of containing inflation below 8.5 per cent in the current fiscal year 2015-16. Due to rising inflation the value of deposit money in banks have also been eroding. Generally, banks are offering 1 per cent to 3 per cent interest on savings account. But the inflation above 10 per cent means a depositor will lose Rs 7 and the value of his Rs 100 in the bank account will be only Rs 93 at the end of the year, even after adding interest income. "Thus, its central bank's responsibility to maintain the value of the currency and tame the inflation, he added.
Nepal Bankers Association (NBA) president and chief executive officer of NMB Bank Upendra Poudel echoed Gyawali. "The central bank has to focus more on taming inflation,” he added.
The government and the central bank do not accept double-digit inflation as the failure of Monetary Policy. "Though they blame supply side constraints and non-economic reasons for exorbitant market price hike, it is the failure of the Monetary Policy,” Gyawali said, suggesting that the central bank should bring a tight Monetary Policy to contain inflation below the target for the next fiscal year.
"The government has targeted to contain inflation at 7.5 per cent in the coming fiscal year," he said, adding that there is every possibility of contain inflation at single-digit, if the central bank brings tight Monetary Policy by adopting open market operation policy. "The central bank, through its Monetary Policy, should manage financial chaos created by the government through its distributing and expansionary fiscal policy."
Due to rising inflation, depositors have been reluctant to keep their money in banks and are turning to share market which has been offering better returns compared to banks.
If the Monetary Policy marginally increases bank rates, the excess liquidity, which is fueling the inflation, can be controlled and the interest rates will go up, which would eventually attract more deposit in the banks, and also curtail capital flight. “People will be encouraged to deposit as they get comparatively more return,” added Gyawali.
The lending rates have been below the inflation, which is ridiculous, according to Sanima Bank’s chief executive Bhuwan Dahal. “Neither the lender nor the borrower is benefitting from the lower rates and also higher inflation,” he added.

1 comment:

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