Challenges and Opportunities before the NRB New Governor
BY Shanker Man Singh [i]
The process of selecting a new central bank governor formally began with the formation of a three-member committee under Finance Minister. The main responsibility of the committee was to identify candidates who have the potential to lead NRB for the next five years. These names were forwarded to the Cabinet. Nepal’s cabinet has appointed Mr. Maha Prasad Adhikari, former Deputy Governor at NRB and the incumbent CEO of Nepal Investment Board as the 17th Governor of the Nepal Rastra Bank. The new governor shall remain in office for five years. The governor’s term can be extended by another five years.
Challenges and Opportunities before the NRB New Governor
Challenges
The guv has assumed office at a time when people were worried about various economic realities like the economic slowdown due to Corona virus pandemic. The economic costs will be considerable. The problem combines demand and supply shocks. The problem has spread to the financial sector. We are all in it together. Policy responses matter but differ markedly. Besides, Nepal is facing increasing inflation, thinning foreign exchange reserve, widening expenses for import and speculation over devaluation of Nepali currency, liquidity management issues, decreasing deposit in the banking sector, irregularities among cooperatives, declining NEPSE Index, increased trade deficit, disappointed investors, and marginal decline in remittance. These burning problems will encircle the upcoming Governor from the hour he will check in his office as NRB boss. Moreover, harmonious relations with the Nepal Bankers Association has to be maintained in terms of addressing the issue of COVID, labor issues, liquidity management, moratorium on the loans, will further aggravate the problem.
The new guv and the Government has to come up with the revival package to combat the impact of COVID 19 like the guarantee on the loan for the rent and the steady supplies needed for the business and industry; concession and or relaxation on the payment of loan and the interest thereof; lowering tax rate and contribution to the business; salary hand out to those who cannot work; income support for the person who are laid off; holiday on mortgage payment, cash handouts for the family who are in dire need. These type of facilities are provided in other countries and our neighboring countries are also working on it. Help in current capital, moratorium on the payment of loan, New definition of NPA based on not the payment days, change in policy rate, tax holiday on payroll, low percentage of VAT, special package for tourism, hospitality, retail , entertainment sector, lowering the price of POL Products, stimulus for consumption, cash support for laborers, tax payment periods to be extended, urban utilities to be made free, direct transfer to the people working in informal sector, fiscal support rather than waiver to hospitality and service sector, if the COVID cycle runs for 3-6 months and if it is not properly addressed the reluctant effect will remain for about 3-6 years in the countries like Nepal. Nepal should not look into fiscal deficit in this time of economic problem and a 2-3 billion rupees stimulus package is needed for agriculture and the manufacturing industries. WINSTON Churchill has said, “Never waste a good crisis”. So we have to reset our targets and our approach in achieving those targets in the recent days. Governor should perform a regulator’s role also needs to be fully implemented with due prudential norms.
Nepal’s Central bank governor’s job is perhaps the most technocratic of all policymakers in the least developed country like Nepal in particular. The recent appointment of the cadre based person shows ample hope that the issue will be addressed in an amicable way. NRB’s function is to maintain stability in the macro economy and the financial system. In the advanced capitalist world, macroeconomic stability has come to mean price stability. For a developing economy, it could also mean defending the exchange rate or maintaining solvency of the government. Financial system stability means maintaining a functioning banking system, keeping the credit flowing, and acting as the lender of the last resort. The new Governor will how far be successful to do so in some financial institutions cases. Since Nepal’s capital market is basically based on the finance and banking institutions rather than the real sector. The Governor’s role has a significant say in the capital market.
Heading the central bank requires a solid understanding of macroeconomic theory and empirics, and practical experience in banking and finance. NRB needs to have years of experience that allows one to develop a thorough understanding of the data, or network in the industry that allows one to make a few phone calls and get a feel for things in a rapidly evolving world. NRB, as the central banker needs to complement rigorous analysis that is founded on a solid understanding of macroeconomic theory and practice with subjective judgment that comes only with experience. For this on-site and off site inspection along with the financial intelligence and financial engineering is a must. The section of Mr. Adhikary in this context seems logical and timely.
At a time when the financial sector needs support, co-operation and coordination, the IMF resident office is no more in Nepal and the country director of the World Bank has already shifted. These risks in the financial sector have been building up and need to be addressed urgently with the advice and or the support of the IMF and the World Bank. Over the past years, accommodative monetary policy, weak supervision, and proliferation of financial institutions have led to rapidly rising asset prices and overextension of banks needing the merger. Going forward, the financial system needs to adapt to an environment of slower growth and is likely to see deteriorating asset quality.
What about the specific challenges that the new governor might face? A recent report of IMF at the Conclusion of the 2014 Article IV states that In concluding the 2020 Article IV Consultation with Nepal, Executive Directors endorsed staff’s appraisal as follows:
“Growth is expected to moderate, helping to contain macroeconomic stability risks. Nepal’s recent strong growth performance has been supported by a stable political environment, a more reliable electricity supply, and post-earthquake reconstruction spending. Efforts to prevent excessive credit growth and contain financial-sector risks should continue. The NRB has appropriately implemented macro prudential measures to limit the buildup of systemic risk in the financial sector. It has also taken actions to further strengthen bank supervision and regulation, including the introduction of a supervisory information system and implementation of selected elements of the Basel III capital framework. The recent regulatory requirement for banks to cross-check corporate borrowers’ financial information against the ITS is expected to facilitate more prudent risk assessment by banks. Activation of the countercyclical capital buffer that will require banks to increase their level of capital by July 2020 is appropriate. The NRB should continue to closely monitor asset quality of banks and improve monitoring of concentration risk.
Fiscal policy should be geared towards containing external pressures and protecting fiscal sustainability. In this regard, a fiscal deficit of 4.5 percent of GDP, similar to the outcome in FY2018/19, would be prudent. Recent upgrades to tax administration are commendable. Staff underscores that a top-down budget process and MTFF based on conservative revenue and expenditure assumptions would instill greater prioritization and would avoid creating unrealistic revenue expectations among SNGs. While important steps have been taken to improve public financial management, further efforts are needed to ensure that spending is of high quality and executed in a timely manner.
The transition to fiscal federalism is a monumental challenge and needs to be carefully managed. To protect fiscal sustainability, the overall expenditure envelope of SNGs needs to be aligned with available funding, with tight limits on any subnational borrowing. A robust reporting and monitoring system for SNGs is urgently needed. There also needs to be a clear delineation of roles and responsibilities across levels of government to ensure adequate delivery of services and investments.
Strengthening the implementation of monetary policy requires a well-functioning interest rate framework that reduces volatility in short-term interest rates. Less short-term interest rate volatility would support financial market development and improve policy signaling and transmission. Staff emphasizes the need to introduce a standing deposit facility as a first step towards establishing a reliable implementation track record for the interest rate corridor.
Achieving the central bank’s mandated price and financial stability objectives calls for modernizing the NRB governance framework to improve its autonomy and accountability, Reforms are needed to strengthen independent oversight, safeguard institutional and personal autonomy, and enhance internal controls and quality of external audit, all underpinned by supportive human resource management.
To boost growth prospects, structural reforms that encourage high-quality investment projects, in particular FDI, are critical. As post-earthquake reconstruction spending draws to a close in coming years, maintaining the recent growth momentum will require an enabling implementation environment for infrastructure projects and FDI. To ensure that high-quality projects move forward in a clear and timely manner, staff encourages authorities to focus on adequate staffing, better skills matching, and aligning incentives across and within government ministries responsible for project approvals, implementation, and subsequent monitoring.
Monetary policy should aim at controlling the volatility and level of excess reserves in the financial system, implying a modest tightening of monetary conditions. The exchange rate peg to the Indian rupee provides a useful nominal anchor for the economy, and the real exchange rate is broadly in line with fundamentals. Capital spending needs to be boosted to provide key infrastructure, and reforms implemented to support private investment, which will help generate sustained economic growth and employment opportunities. In the financial sector, further reforms to bolster regulation and supervision, and improve financial infrastructure are needed to reduce risk and increase access to finance.
Tackling structural problems remains essential to achieve high growth over the medium term. While Nepal’s potential is high, progress is required in addressing the poor business climate, power shortages, infrastructure needs, weak governance, and difficult labor relations. Political stability and improved security are necessary conditions for progress in several of these areas.”
Given the huge expansion of banks and financial institutions, NRB’s supervision should be further strengthened. These issues need to be addressed immediately and with due seriousness. We have to ensure that the banks and financial institutions operate in a healthy environment. The NRB is an institution. But, we need to have coordination among the Ministry of Finance, NRB and NPC to address economic challenges facing the country.
The new governor who has taken over during the moderate storm to batter the economy in living memory. He will need all his wits, and then some, to guide us through. To navigate this treacherous terrain, one hopes he builds a strong team noting some of the challenges mentioned here. Let’s also wish him good luck in his task ahead, for he will need it, badly.
[i] Shanker Man Singh
MBA, PGDIM (Delhi School of Eco.), TIS (Bangkok),SEC( USA)
Former Executive Director- SEZ Development Committee, GoN/
Former General Manager/ CEO-Nepal Stock Exchange Limited (NEPSE)
Associated with: Trade Promotion Centre, Nepal Chamber of Commerce,
FNCCI, CNI, UNDP, World Bank, ILO, GTZ, ECONOMIC Services Centre,
CDSC, CIT, Rashtriya Banijya Bank as Board Member.
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