Banks and financial institution (BFI) are currently running a cash crunch and hence the rise in interest rate for the people to encourage savings and reduce consumptions so that we can see an increasing deposit mobilization. Credit growth, however, has outstripped deposit growth by a greater rate during the last six months compared to the same period in the previous fiscal year. As of mid-February, the lending grew by NPR 4 billion compared to the same period previous year, pushing for the credit-deposit rate to cross the 90 per cent limit. Even so, with the lending demands rising, BFIs are struggling to meet the demands. In a time when the Nepalese market is expanding like never before with many new Small and Medium Enterprises (SME) and businesses booming, BFIs have been falling short to meet the demand for loanable funds. Most of the banks have failed to meet the minimum credit threshold that is to be lend to multiple sectors like agriculture, energy, and SMEs among others.
The interbank interest rate has also seen a significant rise over the year reaching near 5 per cent mark. The rate was less than 1 per cent around the same time last year although much of its credit goes to the pandemic induced lockdown halting daily cashflow in the economy. Understanding the volatility of interbank rate is particularly important to identify whether the cause is from the supply or demand side or due to exogenous shocks. In case of Nepal, the rise in the interbank rate is largely due to the increasing demand for liquidity in the money market. In such a scenario, with low deposit mobilization or the shortage of loanable fund, implementation of cautious measures, especially through an increase in government expenditure would be a welcome move.
With such quandaries wounding the economy, the overarching question that hovers around is, “if the banks are having a cash crunch, then where is the money going?” Given an enormous rise in imports and decreasing remittance flows along with the heavy rise of share trading and massive real estate prices boom, the wider assumption can be that the money lent by the BFIs are mostly floating around in one of these three sectors.
Imports over the last seven months ending mid-February grew by 42.78 per cent compared to a decline of 9.59 per cent during the same period of the previous year. The trade deficit increased massively by 38.35 per cent in contrast to a sharp decline of 10.91per cent last year. The private sector credit growth in the FY2020/21 was 27.3 per cent. The same was 12 per cent in FY2019/20. And, around the same period, the remittance showed an irregular pattern with an increasing trend during the pandemic and a declining trend largely after the second wave. It is quite unlikely for a remittance dependent economy to see an increasing remittance inflow when the whole world was struggling with supply-chain disruption and job losses propelled by the pandemic. And, when the world economy started to take its shape and bounce back in a gradual manner, contrary to the general expectation, Nepalese economy saw a declining remittance flow. In the last seven months ending February 2022, remittance inflows decreased by 4.9 percent to NPR 540.12 billion in contrast to an increase of 10.9 percent in the same period of the previous year. In such case, when remittance have been partly stagnant, much of the imports are largely funded by the credit growth. The current credit growth could be rotated domestically which would keep the money supply intact in the economy. However, when it is largely invested in imports, the economy incurs a liquidity leak. Such phenomenon is one of the many reasons why the banking system is running out of loanable funds.
Amidst such predicaments, the government has taken few measures to control excessive import. However, the confusion and consistent battering of each other between the NRB and the Finance Ministry, two of the most important government bodies, is not something of a demand at the moment. NRB is the monetary body, and the Finance Ministry is the fiscal body of the nation. If the nation is to take a decent leap or solve current issues, they should go hand in hand rather than blaming each other about their policy decisions.
Also, the sectoral credit data based on seven months ending mid-February floated by Nepal Rastra Bank highlights that out of the total credit disbursement of BFIs, 66.8 per cent credit is taken against a collateral of land and building. Here, What I wish to argue next is an assumption, but I believe it is a decent assumption. The overarching hypothesis that we can possibly align here is with reference to the trend in Nepal lately, whereby an individual keeps their current assets (land property) as a collateral in order to get a loan to buy a new property which is mostly land again. Simultaneously, given the massive boom in share trading in Nepal boosted largely during the lockdown period, it’s fair to say that trading has also taken a significant portion of daily flowing money off the market.
From an individual standpoint, it’s very refreshing for the fact that an individual would be gaining money through trading and investing the winnings again on further trading for an expected increasing profitable share. However, this cycle might be troublesome at times if we view it from a macro standpoint in the short run. Not always, but fundamentally with reference to the present volatile economic scenario. In the short run, such phenomenon accumulates money largely in terms of intangible means or more like a savings on shares or land or any other property as such. However, what the economy needs right now is not savings through such intangible means, rather, a regular investment that rotates the money in the market or through banking deposits.
With election hovering around the corner, we can expect for the money to be floating in the market again. Winning election is also a lot about how much money you can generate for the operating & capital expenditure focused primarily on promoting election campaign and not just about party politics. Hence, during the time of election, as history also suggest, it can be expected for a decent amount of money to revamp the market to an extent.
However, governing the very case with election spending, we need to be cautious about the ongoing rampant inflation. The daily living cost has massively gone up over the last few months and the recently released inflation expectation survey by the NRB also shows a higher inflation expectation of almost every good. And, the inflation, in many ways, also depend on what we expect it to be. Nepal’s already inflated market can have even more inflation solely due to the expectation of the rise in the prices for daily consuming goods as the doctrine of Rational Expectation theory highlights it along the lines of expectation driven inflationary pressure.
Given the irregular and unexpected turn of economic events incurred by the Nepalese economy, it’s evident that the economy is undergoing a worrisome state. With such a volatile economic picture, in a time when the whole world is undergoing an unpredictable scenario with oil prices swamping up and the Ukraine-Russia war tensions heavily hitting the world economy via the trade in goods and services, the market tends to become even more volatile, just because it is a little volatile at the moment. The GARCH model describes this very fact whereby a financial economy in which volatility can fluctuate, becomes even more volatile during the period of financial crisis or exogenous shocks like the current Ukraine-Russia war and less volatile during the periods of relatively steady economic progress.
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