Amidst liquidity shortage, government delays increase in domestic lending

It is almost mid-December, but the government has yet to start raising internal loans, citing the lack of liquidity in the banking system. Banks and financial institutions in Nepal say they are running out of loanable funds.

The open market operations committee, chaired by the vice-governor of the central bank, recommended in October that the finance ministry program a debt increase from mid-November, according to management office officials. of public debt.

But the Ministry of Finance has not yet made a decision on this matter.

“We have not received the timetable for raising internal borrowing from the finance ministry,” said Hira Neupane, undersecretary at the Bureau of Public Debt Management. “I don’t think we’ll start raising internal loans anytime soon given the shortage of liquidity in the market.”

Domestic debt is a device envisioned in the federal budget whereby the government borrows from domestic sources – citizens and institutions, including banks and financial institutions – by selling debt instruments in order to fill the necessary resource gap. to expenses.

Treasury bills, development bonds, citizens’ savings bonds, national savings bonds, and foreign employment savings bonds are some of the debt instruments that governments have used to borrow. internal. Banks and financial institutions are big buyers of government debt instruments.

During the 2020-2021 fiscal year, the government began to raise internal borrowing in early October.

The government of Sher Bahadur Deuba has reduced internal lending for the current fiscal year to 239 billion rupees through a replacement bill of 250 billion rupees proposed by the previous government led by KP Sharma Oli. The proposed amount of internal loans is 14.62% of the total budget for the current year. The total budget size for the current fiscal year is 1.6 trillion rupees.

Successive governments in Nepal have a poor track record when it comes to spending their resources.

Government spending is one of the tools that helps stimulate the economy.

Even though Finance Minister Janardan Sharma pledged in September that the government would spend 10 percent of the capital budget each month, this has not been reflected on the ground.

According to the Office of the Comptroller General of Finance, as of December 11, overall government spending was only 22.66% of the total budget, while capital spending was only 6.13% of the allocated investment budget. The government has allocated a total of 439.65 billion rupees to the investment budget for this fiscal year, according to the office which maintains records of government income and expenditure.

The current situation of liquidity shortage in the banking system is due to excessive lending in the first months of the current fiscal year, according to Nepal Rastra Bank, the country’s central bank.

Prakash Kumar Shrestha, head of the economic research department at the central bank, said excessive lending in recent months relative to deposit taking has led to a shortage of liquidity.

According to the central bank, deposits have only increased by 52 billion rupees through December 9 since the start of the new fiscal year in mid-July, while loans have jumped by 416 billion rupees during the year. same period.

This means that the credit / deposit ratio of banks and financial institutions stands at 95.8%, well above the regulatory limit of 90%. As a result, banks and financial institutions are no longer able to lend money.

The central bank, through its quarterly review of monetary policy, has asked banks and financial institutions to submit an action plan to reduce the credit / deposit ratio within the limit by the end of the current fiscal year to mid-July 2022.

The central bank had targeted an average credit growth of 19% for the current fiscal year.

“But loans have increased by as much as 32%, which has resulted in a cash shortage,” Shrestha said.

With the banking sector facing a liquidity shortage, interest rates have skyrocketed.

“Raising funds in the current scenario will cost the government dearly as it will have to pay more interest on internal loans,” Shrestha said. “Since government spending has remained low, it has enough money in its treasury. Thus, the government may not have felt the urgency to raise internal loans. “

Shrestha considers the delay in increasing internal lending at the moment a good decision. He said, however, that the government could raise a certain amount of internal loans to avoid being overburdened by internal loans in the last few months.

One of the factors behind the delay in raising internal borrowing could also be the change in the budget, the amount of which has been reduced.

“The main reason for not raising internal loans is the shortage of liquidity,” Neupane said. “At a time when the private sector is struggling to obtain loans from the banking sector, the liquidity situation can get even worse if the government starts raising internal loans from the system. “

According to the Public Debt Annual Report 2020-21 recently released by the Public Debt Management Bureau, Nepal’s domestic debt stands at Rs 802.94 billion while the external debt stands at Rs 934.14. billion rupees.

The country’s total debt stock stands at Rs 1,737.08 billion.

Bidyadhar Mallik, a former finance secretary who also served as federal affairs minister, said there was no point in raising internal loans until the government spent available resources.

“How would the government spend additional resources when it is struggling to spend the money it already has in state coffers,” he said.

According to him, the government will end up paying higher interest if it unnecessarily increases internal lending in the event of a liquidity shortage in the banking sector. “It will also deprive the private sector of the necessary financial resources,” Mallik said.

While political instability has been the bane of the Nepalese economy, it has been further reduced by the Covid-19 pandemic. The road to recovery still seems rocky. The government, however, can at least stimulate the economy by channeling resources and ramping up spending, experts say.

“If the government starts spending its resources, the money will go into the banking sector. Once banks and financial institutions finance the private sector, it will lead to increased economic activity, ”Mallik said.

After the 2017 elections, the country was expected to experience steady growth, as a strong government was in place with a five-year term to govern. However, infighting within the then ruling Communist Party of Nepal (PCN) led to the fall of the government of KP Sharma Oli in July of this year.

Nepal was back in the days of the coalition government. Experts and analysts say that a coalition government has its own problems, which usually hamper economic activities also because different parties have different interests.

Officials from the Bureau of Public Debt Management say that with spending low, the open market operations committee has recommended increasing debts by small amounts for now due to the liquidity crisis.

“The committee also suggested raising larger amounts of domestic debt in the final months of the fiscal year after the liquidity situation eases,” the official said.

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