Increase interest rate on deposits to solve liquidity shortage: Economists

 

Drying of liquidity is synchronized with the increasing balance of payment (BoP) deficit in the current fiscal year (FY).

A recent report of the Nepal Rastra Bank (NRB) showed a steep fall of the excess liquidity from Rs. 122.9 billion in mid-July last FY to Rs. 17 billion on January 25 in the current FY.

Likewise, the surplus BoP of Rs. 1.23 billion of FY2020/21 turned down to a huge deficit of Rs. 195.01 billion during the first five months of the current FY.

The external sector witnessed the deficit in BoP coinciding with the continuous climb of the imports. The import is getting financed from the bank and financial institutions (BFIs). The NRB report revealed that the amount of the outstanding credit of BFIs leaped by a huge amount in the current FY in comparison to the previous FY. In the current FY, the outstanding credit for import finance rose to Rs. 12.2 billion is far too large in comparison to just over Rs. 405 million recorded in the same period of the previous FY.

In effect, the import has been draining the liquidity out of the banking channel.

The outcome of the import finance has been nudging the BoP in a deficit position in the context of weakening support of remittance, foreign aid, and a low foreign direct investment base. Besides, the foreign exchange reserve has been depleted by 12.5 per cent in the first five months of the current FY.

Sharing his view, the former governor of NRB, Deependra Bahadur Kshetry, said that a rise in imports is one of the causes of the current shortage of liquidity. He said that deposits are not being mobilized at par with the rise in the credit flow. In response to sluggish deposit mobilization, Kshetry thinks that a sharp rise in inflation has discouraged the depositors because of a very low-interest rate in the savings. The saving rate is far lower to compensate for the 11 per cent rate of inflation.

Former governor Chiranjivi Nepal said that the budget vacuum at the beginning of the current FY is one of the reasons for the current stress in liquidity. He said, in addition to the situation of a replacement budget, aggressive lending in recent months emanates the problems as the deposit has not been mobilized to match the lending. In response to the slow deposit mobilization, he said that fixing of fluctuation rate of interest on deposits could be a major fault in the NRB policy, which has demoralized depositors to invest in banks and financial institutions.

Former Minister of Finance Dr. Ram Sharan Mahat said that the way the incumbent government has taken internal debt has disrupted the liquidity mobilization in the private sector. He also noted that the preceding government had also taken a high amount of internal debt. In his view, the government’s internal debt should not exceed 2 per cent of gross domestic product (GDP), instead, he said it has been exceeding 5 to 6 per cent. He also added that the COVID-19 pandemic also played a key role in exacerbating of the current situation of the economy by disrupting economic activities.    

source: trn online

Liquidity Shortage Lasts Longer Due To Domestic, External Sector Pressure

 

The liquidity management issue has lasted longer in the bank and financial institutions (BFIs) alongside the daunting macroeconomic indicators.

The Nepal Rastra Bank (NRB) data shows that the trend of the excess liquidity indicator fluctuated around Rs. 122.9 billion to Rs 120 billion at the beginning of the current FY. However, it began depleting from there hitting the rock bottom to Rs. 17 billion on January 25.

The current situation in managing liquidity in the BFIs could be pointed out to the rising external sector pressure together with the upsurge in the domestic economy.

The foreign trade statistics (FTS) of the Customs Department recorded a high rise of imports in the first half of the current fiscal year (FY). The imports sprung up by 51.13 per cent in the first six months in comparison to the same period of the previous FY. Import is one of the main causes for leakage of local currency from the economy.

Besides swelling imports, the diminishing remittance has led the BFIs liquidity position to a vulnerable situation. The Current Macroeconomic and Financial situation data of the NRB revealed that the Nepali migrant workers' remittance contracted by 6.9 per cent in the first five months in comparison to the same period of the previous FY.

Alongside external pressure, the domestic economy is also flexing out after being badly hit during the second wave of the COVID 19 pandemic. Subsequently, the demand for loanable funds took off in recent months. The Current Macroeconomic and Financial situation data reveals that the private sector credit boosted by 11.1 per cent in the first five months in comparison to the same period of the previous FY.

Further, the government’s capital expenditure also could not be stimulated as per the target. The government has set the target to spend at a rate of 10 per cent per month over this FY. But in contrast, 13.71 per cent of the target is spent in the first half of the current FY.

These all factors contributed to the disruption of the flow of liquidity in the bank and financial system.

The Research Department’s executive director of NRB, Prakash Kumar Shrestha, agreed that swelling imports besides leap in the credit flow in the private sector has exerted pressure on liquidity management.  He stated that excess liquidity is pulled down to Rs. 17 billion as of January 25.

Source: trn online