Mid Term Review of the Monetary Policy 2081/82

Nepal Rastra Bank has published its semi-annual review of the monetary policy based on the implementation status of the monetary policy until the second quarter, internal and external economic and financial activities, and the macroeconomic outlook for the remaining period of the current fiscal year.

The monetary policy published on 11th of Shrawan 2081 for the fiscal year 2081/82, aimed at achieving price and exchange rate stability as well as financial stability for overall economic stability and sustainable economic growth. Likewise, the monetary policy was reviewed and made public on 14th of Mangsir 2081.

Implementation Status of the Monetary Policy up to the Mid Term Review

The Nepal Rastra Bank has mentioned the following major points in its mid-term review which is mentioned below:

1. The policy of managing monetary conditions to avoid price pressures through monetary expansion, with the aim of keeping inflation around 5%, has resulted in an average consumer inflation rate of 4.97% for the first six months of the current fiscal year.
2. Additionally, the monetary policy aimed to maintain foreign exchange reserves sufficient to cover at least 7 months of goods and services imports. As of the end of Poush 2081, the foreign exchange reserves were sufficient to cover approximately 14.4 months of goods and services imports.
3. For the fiscal year 2081/82, the broad money supply was projected to increase by 12.0%, and loans flowing to the private sector from banks and financial institutions were expected to grow by 12.5%. As of the end of Poush 2081, the broad money supply increased by 10.2% on an annual basis, and loans flowing to the private sector from banks and financial institutions grew by 7.0%.
4. To manage interest rate fluctuations, an interest rate corridor was implemented and has been made more effective. The upper limit of the interest rate corridor is 6.5%, and the lower limit is 3.0%. In Magh 2081, the weighted average interbank rate of banks and financial institutions was 3.00%.
5. Most of the regulatory measures related to the financial sector and foreign exchange included in the monetary policy for fiscal year 2081/82 have been implemented.

Key Takeaways from the Mid Term Review of the Monetary Policy 2081/82

The important points of the mid term review of the monetary policy are as follows:

1. The average consumer inflation for the first six months of the current fiscal year is 4.97%.
2. The annual point-to-point consumer inflation in Poush 2081 is 5.41%.
3. The annual point-to-point wholesale inflation in Poush 2081 is 4.01%.
4. During the review period, the wage and salary index increased by 2.85%.
5. The total goods exports increased by 46.5%, reaching NPR 127.2 billion, while goods imports rose by 10.1%, amounting to NPR 988.59 billion in the first seven months of the fiscal year 2081/82.
6. The growth rate of remittance inflows has remained in single digits in recent months. During the review period, remittance inflows increased by 1.1% in USD, reaching USD 5.58 billion (NPR 763.08 billion).
7. Compared to the previous fiscal year, there has been an improvement in government expenditure and revenue management. According to data from the Ministry of Finance (Office of the Controller General of Accounts) of the Government of Nepal, as of the first seven months of the fiscal year 2081/82, the total expenditure of the federal government increased by 9.9% compared to the same period of the previous fiscal year. During this period, out of the total expenditure of NPR 754.85 billion by the Government of Nepal, current expenditure was NPR 522.63 billion, capital expenditure was NPR 68.42 billion, and financial arrangement expenditure was NPR 163.81 billion.
8. With improved liquidity, short-term interest rates, along with the base rates, deposit rates, and loan interest rates of banks and financial institutions, have decreased. The weighted average interbank rate between banks and financial institutions, which is the operational target is decreased to 3.00% in Magh 2081.
9. As of the first seven months of fiscal year 2081/82, a total of NPR 1486.16 billion (based on transactions) liquidity was injected, with NPR 1.8095 trillion collected through deposits via calls and NPR 130.52 billion through fixed deposit facilities. During this period, NPR 2.70 billion was injected through overnight liquidity facilities, resulting in a net liquidity injection of NPR 1485.88 billion (based on transactions).
10. The average base rate of commercial banks, is decreased to 6.65% in Poush 2081. Similarly, the weighted average interest rate on deposits in commercial banks is decreased to 4.75% in Poush 2081. The weighted average interest rate on loans from commercial banks stands at 8.69% in Poush 2081.
11. The non-performing loan (NPL) ratio of banks and financial institutions has risen to 4.92% in Poush 2081. In Poush 2081, the NPL ratio for commercial banks was 4.73%, for development banks it was 5.11%, and for finance companies, it was 12.85%.
12. According to the National Statistical Office, the economic growth estimate for the first quarter of the current fiscal year is 3.4%.
13. In analyzing the credit flow for the first six months of fiscal year 2081/82, economic activity is expected to expand. During the first six months of the current fiscal year, banks and financial institutions extended credit in the following sectors: industrial production by 8.4% (NPR 6.84 billion), consumption by 5.8% (NPR 5.84 billion), wholesale and retail trade by 4.8% (NPR 4.83 billion), and construction by 7.7% (NPR 1.59 billion).
14. Despite negative growth in the production-based industries and construction sectors for the past two years, these sectors have not yet gained sufficient momentum. However, the continued growth in hydroelectric power production, the expansion of foreign trade, and improvements in the tourism sector are expected to support the expansion of economic activities. Additionally, the recent legal reforms made by the Government of Nepal to promote private sector investment are expected to improve the investment climate.

Policy Arrangements Taken from the Mid Term Review of the Monetary Policy

The Nepal Rastra Bank has taken the following policy arrangements from the mid-term review:

1. The recent trend of price inflation has highlighted the need to increase policy rates, however, since expanding economic activities must also remain a high priority, the flexible approach that was adopted when announcing the monetary policy for the fiscal year 2081/82 has been maintained.
2. The current policy rate of the monetary policy has been kept at 5.0%, with the deposit collection rate remaining at 3.0% as the lower limit under the interest rate corridor, and the bank rate remaining at 6.5% as the upper limit of the interest rate corridor.
3. The mandatory cash reserve ratio and the statutory liquidity ratio have been kept unchanged.
4. From Jestha 2082, the interest rate on loans from microfinance financial institutions will be linked to the base rate.
5. The loan-to-value ratio for personal vehicles and all types of electric vehicles will be capped at 60%.
6. The existing 1.10% loan loss provision ratio will be reduced to 1.0%.
7. For non-deliverable forwards, the existing limit of 15% of the primary capital will be increased to 20%.