Liquidity crisis

The government’s decision to constitute a high-level committee to probe into deepening liquidity crisis and furnish a long-term solution is a welcome step. It’s been almost two months that Nepal’s banking system is facing a cash shortage (fund available with the banks for immediate investment). Despite repeated attempts of the central bank, it is worrisome that the shortage is worsening, fueling the interbank lending rate to a record 13 percent. As a result, banks have started raising both lending as well as borrowing rates.



It is good that deposit rates are rising as some of the banks have already started offering over 10 percent in a yearlong time deposit whereas the highest rate a year ago used to be just over 6 percent. The four percentage point rise in deposit rate is a good step not just because it will help in attracting additional deposits into the banking system but also provide some relief to the depositors reeling under negative interest rates - inflation rate being more than average interest rate on deposit.



However, rising lending rate has raised concerns as it slows investments and consumption, thereby weakening demand. The interest rate on real-estate lending has crossed 16 percent whereas it was 12 percent a year back. Though some experts have stressed upon the need to curb boiling consumption in order to stabilize economic fundamentals like trade balance, there are many others who disagree. Those who differ argue that drastic curb in consumption will weaken demand thereby slowing imports and revenue collection. Instead, they suggest that widening deficit in foreign trade should be dealt with by promoting exports rather than curtailing consumption.



We at Republica believe in the middle path. To be precise, we hold the view that there should be monetary rather than fiscal treatment of the liquidity problem. Having said that, there is no denial that growth in consumption in Nepal has been unnatural. For instance, there was 22 percent rise in consumption expenditure last year against 16 percent rise in GNI per capita. The trend seems to have continued, as imports have increased by 30 percent, resulting in trade deficit swelling by an alarming 48 percent during the first quarter of the current fiscal year.



There can be measures to control unnatural surge in imports of certain goods like gold. But beware, any step taken to curb blanket consumption will further weaken the already frail growth and promote cross-border smuggling. We think the best short-term monetary treatment will be for the central bank to inject more liquidity against the government bills worth billions being held by the banks. It is good to hear that the central bank is thinking on that line.

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