Over the past one and a half years, the central bank has adopted a tighter monetary policy to address the high inflation and worsening external sector of the economy reflected in the ballooning balance of payment deficit and depleting foreign exchange reserves. “The much-needed monetary policy tightening helped stabilize the external position and lower inflation,” said the International Monetary Fund, in its assessment of Nepal’s economy after its Article IV observation mission in Nepal in February.
According to NRB, the balance of payments remained at a surplus of Rs 148.11bn as of mid-March this fiscal year while foreign exchange reserves increased 15.2 percent to Rs 1,401.21bn in mid-March 2023 from Rs 1215.80bn in mid-July 2022. But inflation has been high at 7.44 percent in mid-March 2023, according to NRB. To support external stability and control inflation, the central bank raised the interest rate corridor in February 2022 and again in July and increased the cash reserve ratio in August, further raising lending rates. “Looking forward, a cautious and data-driven monetary policy stance supported by macroprudential measures will help avoid large boom-bust credit cycles, which can create financial sector instability and are not supportive of sustainable growth,” the IMF has advised. As the IMF is advising against the loose monetary policy, the central bank is unlikely to make a major shift in monetary policy despite the desire of the finance minister, according to NRB officials. A senior NRB official said that the main task of the central bank is to maintain financial stability in the country and to keep inflation at a manageable level. “The central bank cannot compromise on that as it is the mandated task by the NRB Act,” the official said. "A sudden U-turn on current policy could again destabilize the external sector. There is a limited scope of compromise on tighter monetary policy as long as inflation remains elevated." NRB Governor Maha Prasad Adhikari has also clearly hinted that a major shift in current policy is unlikely. “Those who are expecting much from the monetary policy should understand its limitations,” said Adhikari, speaking at the Business Summit-2023 organized by the Confederation of Nepalese Industries (CNI) this week. “The NRB will take private sector friendly policy within the boundary of monetary policy.” Given the diverse interests of the government and the central bank, there is the risk that the fiscal and monetary policy will take different directions further complicating matters for the already troubled economy of the country. The budget for the current fiscal year and monetary policy has moved in different directions with the government introducing an expansionary budget while the central bank introducing a tighter monetary policy. “We cannot expect fiscal and monetary policy to always go in the same direction, but it is important that a certain adjustment on both is necessary to take forward the economy without major upheavals,” the central bank official said.
