The tightening of liquidity is expected to continue for a few months

With the shortage of loanable funds forcing most banks and financial institutions to suspend their loans, the crisis is expected to continue as the government plans to withdraw more money from the banking sector for income tax purposes by the end of the year. mid-January next year, officials and experts said.

According to Section 93 of the Income Tax Act 2002, taxpayers must pay 40% of the estimated tax by mid-January as the first installment. According to Shovakanta Poudel, director general of the Inland Revenue Department, the department plans to collect more than Rs 80 billion in income taxes by mid-January in addition to other taxes, including the value tax. added and excise duties, which are paid monthly.

Banks and financial institutions themselves are required to pay the first installment of income tax by mid-July, while other businesses are also pulling money from the banking sector to pay taxes to the government, thus draining liquidity from the banking system.

“In view of the potential worsening of the liquidity crisis, the central bank decided this week to inject into the banking sector a refinancing of 92 billion rupees,” said Prakash Shrestha, head of the economic research department of the central bank. “The government has also decided to allow banks to account for up to 50% of local authority reserve funds as deposits, up from the previous threshold of 50%.

Local government funds are expected to add around Rs50 billion in liquidity to the banking system. But the situation is critical with the average credit / deposit ratio of banks and financial institutions already at 92%, while the threshold set by the central bank is 90%, according to Nepal Rastra Bank.

“The liquidity crisis situation may not deteriorate as a result of the measures we have taken, but the situation is likely to remain tense for at least 3 to 4 months,” said Shrestha. “We can expect the situation to improve in March, when government spending increases and import controls are likely to slow lending.”

Shrestha does not rule out the possibility of a prolonged period of liquidity crisis in the banking sector. During the 2018-19 financial year, the banking sector experienced a shortage of loanable funds for an entire year.

The current liquidity crunch is the result of excessive lending in the first five months of the current fiscal year, coupled with the government’s inability to spend its fiscal resources.

According to central bank statistics, banks and financial institutions have collected 116 billion rupees in deposits through December 21 since the start of fiscal year 2021-22 in mid-July. During the same period, credit reached 438 billion rupees.

In addition to the cash shortage and surging imports, falling remittances, depletion of foreign exchange reserves, rising inflation, damage to rice crops from unwanted rains in October and shortage of Fertilizer for winter crops, among other factors, indicates that the economy is in crisis.

Central bank officials in an interaction on Wednesday said most of the loans in the past five months had been spent on financing imports.

The continuing liquidity crisis means that even the productive sector can be denied credits that would ultimately affect economic growth, even though Finance Minister Janardan Sharma has claimed, although without evidence, that the economy is doing well. .

Bidyadhar Mallik, former federal affairs minister and finance secretary, also believes the cash shortage will continue for the time being, not least due to a looming tax payment deadline.

“But the measures taken by the government and the central bank will ultimately ease the situation,” he said. “If government spending increases and Finance Minister Sharma, as he said, shifts the budget from underperforming projects to performing projects, the situation should ease by February-March.”

There are over Rs 250 billion in cash reserves due to the inability of the three levels of government to spend the allocated funds, according to the Office of the Comptroller General of Finance, the government agency responsible for accounting for revenues and accounts. government spending.

Federal government spending is only 25 percent, with capital spending accounting for 7 percent, according to the office.

New tax collections will result in an accumulation of resources in the accounts of the federal, provincial and local governments.

Mallik said the government could delay tax collection without imposing fines on taxpayers if it is unable to speed up spending.

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