Ongoing Liquidity Crisis and Nepalese Economy. Reason and Measures

 There has been a severe liquidity Crisis witnessed across the country since last couple of months. Many have been claiming that it's due to irresponsible acts of banking sectors, taking almost 30% growth of lending within first 4 months of current fiscal years while growth in deposit is only 19%. In contrast bankers and other some economist saying, this liquidity Crisis is mainly occurred due to delays in governments capital expenditure. There are some voices who are stating current crisis is mainly fueled by NRB's latest monitary  policy restricted Banking sector to finance their majority of capital and reserves, Debentures and new provisions that restrict them further invest in the market. 

What is real status of economy? 

During first 4 months of ongoing fiscal year, government capital expenditure is only 6%  which was around 10% in previous years. Remittance growth is after many years shown downward growth, decreased around 11%  as compared with previous year. Export has increased substantially to Rs.100 billion but import increased as well exponentially and massively during these period to above Rs. 6.5 trillion and above. Country's Balance of payment negative first time in many years (more than Rs.1.5 trillion) and  foreign currency reserve decreased to about Rs.11 trillion, is only sufficient 7 months of payment of import of goods and services for the country. Reduction is almost Rs.3 trillion in frist 4 months of this fiscal years that is about Rs.15 trillion in Ashadh end 2078 and that was sufficient for 11 months of above times requirement.

Country trying just to recover from ongoing covid 19 pandemic and it's long and heavy outbreak. Almost every sectors but specially tourism, transportation, hotels, travel, and other services from where Nepal earns most gross domestic product (GDP) hampered or severely impacted. These sectors are just been tried to revive; however the new variant 'Omicorn", showing black flag again resulting big threat to further devastation on days ahead. 

Due to un-time rainfall across the country after post monsoon , natural calamities, flood etc, agricultural production this year and contribution to GDP is expected to be low. Due to covid 19, millions of job seeker still waiting a call, foreign employment and remittance income also not as per the expectations, hence days ahead is not so graceful for Nepal and Nepalese economy.

Import Based Economy 

Nepal primarily a import based economy. Though it is regarded as agricultural country, majority of its day to day consumable food grains are imported from India. Hector's of lands across the country remains barrons while millions of people's flying middle east to try their fate at 50 degree temperature. Results is that Nepal who used to export paddy and wheat 30-35 years back now is importing ample amount of food to fed it's population. 

In first 4 months of current fiscal year, we imported more than Rs 6.5 trillion equivalent goods and services. During covid pandemic period, we have reserve of foreign currencies equivalent to import good and services upto 11 months or above of our requirements while its reduced to only 7 month  now. Even in restricted import system, situation reported like that, what if NRB or Nepal government release all such quota based restricted import of goods. 

We exported only Rs100 billion worth good and services during last 4 months which is 100% more as compared with previous years same period. It can be considered satisfactory if we presume goods are our own but no, that is not our own goods, we merely have 10-15% value additions in majority of exported items. Branding, packaging, leveling major value addition we do on our export goods, except some of handicrafts items, tea , coffee, ginger export. Palm oil, ghee, wires major export items taking SAFTA benefits in India else no much GDP contribution we get out of our export. Our imported goods primarily for consumption, like petroleum, steel and wires, vehicles etc, that not contributing any value to economy but destroying our much needed BOP.

Employment, Production, Consumption and Saving. 

Nepal is again not a industrial nation. 70% above population depends upon agriculture as an their employment while contribution to the GDP from agriculture sector is below 35%. Remittance is major sources of income of almost every household but frist time in many years it’s growth started to fall. Service sector contributes highest value of GDP while manufactoring sector contributes below 20% value to the economy. After covid 19 and it's pandemic, thousand of abroad worker returned to the country and numbers of internal worker waiting re-call from factories. With very less numbers of manufacturing units, industries and due to lack of skilled manpower; majority of industrial workers requirement are being met by Indian laborers. Employment generating activities, new ventures and industries etc start-ups, either are seriously damaged their financial due to covid or under wait and see status due to ongoing pandemic and uncertainty. 

Saving is below 10%. Remittance is main sources of income of majority of household, but most of the remittance fund is being utilised for consumables, or utilised for non productive sectors. Government would have No 1 priority to utilize remittance income into productive sectors so that further investment into industries, manufacturing and large scale fund requirement can be done but no exemplary policies are formulated  yet from the government. Therefore, saving or retention of fund within the country, is not found. 

Liquidity Crisis 

NRB recently noticed the impact of overwhelming loan growth of banking sector. About 50% of full year targeted growth are achieved within first 4 months of fiscal year. Deposit growth was Rs20 billion while banks lending growth is more than Rs3.5 trillion and above. Governments capital expenditure is in pathetic rate only 6% around budget is expensed in 4 months of this fiscal year however it is expected that additional Rs60-70 billion amount of tax from private sector is assumed to transferred in government account with next month. Remittance is started to fall in first time, import is hoovering, BOP and current account of the country is decreasing heavily during the period; NRB realizing a huge economic crisis in immediate future, has revised their policies for banks credit to deposit (CCD) ratio , credit period and changed some short term policies to prevent the economy. Due to the CD ratio policy, about Rs4.5 trillions of investable fund disqualified for further lending.

Lending institutions now can't utilise their capital  and reserve towards additional lending, any excess over regulated ratio i.e. 90% to be maintained within next Ashadh 2079. Majority of banks are already over 90% CD ratio hence there has a acute investable fund crisis in the market, fueled interest rate upto 10.05% even after NRB's intervention or aspirations to maintain lending rate below double digits. 

Share market was all time high above 3200 during covid period. More than 4 million investors injected their cash in the market with the hope of further increase of market, NEPSE. all of certain, after NRB restrictions of CD ratio, ongoing economic crisis, inability of government financing etc, share market started bearish trend; falling every week 100 basis points and now downed to 2400 within a two months periods. Heavy voice AGAINST NRB and Governor of NRB, political parties, ministry of revenue  started to seen in the roads, reciting against them and  groups are saying it's NRB Governor's and government’s culprit against them etc. 

What actually may be the reason 

Country has not reported such a severe economic crisis even during covid 19 period and not even during 2008 world economic crisis, and not amidst of Nepal India boarder dispute etc. Banking sectors CD RATIO jumped over 91% while capital adequacy ratio of the major banks are mearly at par to maintain existing business. Even to finance regulated and priority sector business, banks doesn't have cash or deposit. Why all these happened all of certain? Is that occurred out-rightly or who is responsible for that? How condition will be improved, whether there have way!!! 

Major reason of this crisis. 

1. Covid pandemic and yes it’s outbreak or economic outbreak started to seen now. 

2. Huge import, above 6.5 trillion (in 4 months) it was about Rs10 trillion in fy 2077/78 (full economic year)

3. Downward remittance flow 11% as compared with immediate previous year. Majority of developed or skill migrant retained their income in abroad or invested in share, home, crypto etc themselves. 

4. Governments enability for capital expenditure only 6 % amount expensed till now and progress still very low pace! While, tax collection however is above their mark.

5. Excessive growth in lending by banks, above 30% only in 4 months of fiscal year which is about 50% of full year projections. 

6. Irresponsible population, show offs life style, consumption vs saving vs productive investment 

7. NRB recent CD and CCD Policy 

8. Irresponsible traders, industrial sectors who are capitalist in nature, money minded and speculative only in some cases. 

It  has been believed that economic crisis will further deepened. Due to fear and uncertainty of new variant Omicorn, world is again at the juncture of lock down and restrictions , impact will be/can be more fatal if it became more severe than of previous variants of Covid virus. Nepal, being one of the heavy dependent nation intern of employment, income, production, consumption and its saving, internal as well as external cash flow is sure to down,  BOP will be possible further sluggish, current account will be decreased additionally and we will have to experience much hard days in term of economic downturn. 

We can’t restrict import nor can increase our export. Remittance income is not expected immediate improvements.  Bankers and private sector will have  to bear more hard days in terms of capitalism, deposit and investable funds. Countries BOP and current account will be in tough pressure for sure, NRB or government certainly come-up with much tougher restrictions in very immediate times. Industrial, trade and private sectors will have hard days to experience. 

With these drawings, setback and to prevent the economy with severe impacts, NRB is or shall impose much strick regulations to the banks and private sector that will be relatively good idea for short term.

Easing everything in short term, May be the days like Sri Lanka, counter productive and there is possible that our banks LC or import documents may be rejected by exporting country's bank and we may import goods on advance  or we may default payments under LC's and external loans etc. 

What to do 

Short term solutions are to hold import except very essential goods. Restrict to foreign travel for a time being, promote  electricity consumption including use of electricity for transportation, cooking and industrial use. Use of internal resources for manufacturing like clinker for cement. Government should expedite their expenditure and release of fund early. Transfer and parking of state/provincial government money's to banking channels, allow banks to consider such fund as a deposit  to use specially for priority sectors ie infrastructure and agriculture, tourism etc. NRB to allow bankers to take monies from abroad, government ask and request foreign donors for long term loan, make proactive policies to invest NRNs in Nepal, or easy foreign direct investment policies. All above however should be implemented with immediate effect. 

Thank you, 

2021-12-11( 17:33)