Inflation fears as banks signal large withdrawals ahead of local elections

Over the past two weeks, NMB Bank has witnessed an increase in cash withdrawals from savings accounts, as is usually seen before major festivals.

“We guess it’s because of the election,” said Sunil KC, chief executive of NMB Bank. “Such withdrawals usually take place during festivals like Dashain and Tihar.”

Local elections are scheduled for May 13 in a single phase across the country. The Electoral Commission has set Tuesday midnight as the deadline for parties and candidates to campaign before the start of the silence period.

Campaigns need money.

Observers say elections are like festivals where huge amounts of cash flow into the market. And during election season, the market actually sees more money than during festivals, because money from outside the banking system also comes out.

The general perception is that the more money is released into the market, the more dynamic the economy becomes. But there are also disadvantages – it can increase inflation and put pressure on the liquidity situation of banks and financial institutions.

“During elections, demands for consumer goods, including food items, increase due to election campaigns pushing up their prices,” said economist Keshav Acharya.

Inflation in Nepal is already on the rise due to rising food, energy and metal prices due to the war in Ukraine. In mid-March, consumer price inflation in Nepal hit a 67-month high of 7.14%.

The World Bank, in its publication “Nepal Development Update”, said last month that although the direct impact of higher world fuel and edible oil prices on consumer inflation is expected to be small given that the share of these products is only about 5% of consumption expenditure, higher inflation is likely in Nepal due to indirect effects such as increased transport and other food prices and non-food.

“And election spending is fueling the fire amid already high inflationary pressure,” Acharya said.

Campaign spending by Nepalese parties has already been on an upward trend.

The Electoral Commission has set spending limits at 750,000 rupees for candidates running for chief and deputy chief of metropolitan cities, 550,000 rupees for those running for the same positions in sub-metropolises, 450,000 for municipalities and Rs 350,000 for rural municipalities.

Candidates for other positions can spend a maximum of 300,000 rupees in metropolitan cities, 250,000 rupees in sub-metropolitan cities, 200,000 rupees in municipalities and 150,000 rupees in rural municipalities, according to the commission.

However, it appears from various reports and studies that candidates spend far more than the limit set by the electoral body.

A study by the Nepal Election Observation Committee, a poll monitoring body, found that the average expenditure of a mayoral candidate in the 2017 local elections was $1.73 million. rupees, while a deputy mayor hopeful spent an average of 1.38 million rupees.

With candidates having to spend more money on election campaigns and the government having to mobilize its employees for the elections, cash withdrawals increase during the elections, according to central bank officials.

Revati Prasad Nepal, executive director at the head of the currency management department at the central bank, told the Post that the currency in circulation in the market had increased by around 4 billion rupees in the past 10 days.

Currency in circulation refers to the amount of cash – in the form of paper notes or coins – in a country that is physically used to conduct transactions between consumers and businesses.

“Currency in circulation has risen to around 647 billion rupees now from 643 billion rupees 10 days ago,” Nepal said. The previous week, the currency in circulation remained in the range of 643-644 billion rupees.

According to Nepal, the central bank expects the currency in circulation to increase by 10 to 15 billion rupees due to increased cash withdrawals.

“Increase in currency in circulation means more cash in people’s hands. This leads to increased demand for goods and services, leading to higher inflation,” Nepal said.

The country’s banks and financial institutions are already under pressure, facing a shortage of loanable funds. And there are fears that the increase in withdrawals will affect the liquidity situation.

Kiran Kumar Shrestha, managing director of Rastriya Banijya Bank, said his bank has yet to see a substantial increase in withdrawals. “Maybe withdrawals are high in other banks. The general public withdrawing money on a large scale will of course affect banks’ liquidity,” he said.

The existing credit-to-deposit ratio of banks and financial institutions also suggests a tightening of liquidity in the banking system.

The credit/deposit ratio of banks and financial institutions is currently above 90%. Although they are supposed to keep the credit to deposit ratio below 90%, Nepal Rastra Bank has allowed them to lower it to 90% by the end of the current fiscal year ending mid-July given the need for credit expansion to stimulate the economy. activities during the first months of the current financial year.

The credit-to-deposit ratio exceeding the regulatory threshold means that the banking sector is unable to lend more.

Cash withdrawals from the banking system rose as government capital spending disappointed at just over 30% on Monday, according to the Office of the Comptroller General of Finance.

“We will ensure that the increase in currency circulation remains within our estimate range,” Nepal said. “We will intervene if the traffic exceeds the beach.”

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