– NISCHAL DHUNGEL

The opinion piece originally appeared in The Kathmandu Post on 26 July 2023. Please read the original article here.

Almost two months after the Government of Nepal unveiled its fiscal policy for 2023-24, which includes a budget of Rs1.75 trillion, the Nepal Rastra Bank (NRB), on July 23, released its monetary policy for the same fiscal year. The policy aims to support economic recovery, control inflation, stabilise interest rates and ensure credit demand. Nepal experienced a recession until the second quarter of the last fiscal year, leading to a projected annual economic growth of 1.86 percent. Despite the sluggish growth in the past year, the combination of the budget and the recent monetary policy aims to achieve an ambitious growth rate of 6 percent for the current fiscal year.

Monetary indicators

The NRB plans to control inflation by maintaining an accommodative monetary policy. The overall year-on-year consumer price inflation decreased from 8.56 percent in mid-June 2022 to 6.83 percent in mid-June 2023. Despite making profits, the Nepal Oil Corporation (NOC) has decided not to reduce the prices of petroleum products, owing to its outstanding debt. This adds to the burden on consumers, as the high petroleum product costs in Nepal significantly contribute to escalating inflation. In this context, the new monetary policy aims to maintain inflation at 6.5 percent. While the NRB is cautiously optimistic about the inflation trajectory, it remains vigilant about the potential risks that could impact price stability in the future.

The NRB aims to maintain seven months of forex reserves to cover goods and services imports in 2023-24. Based on imports during the 11 months of 2022-23, the banking sector’s forex reserves cover 11.2 months of merchandise imports and 9.6 months of both merchandise and services imports. An import ban was initially implemented to protect dwindling forex reserves, leading to an 11.5 percent increase in reserves when the ban ended. The International Monetary Fund attributes the improvement in forex reserves to monetary policy normalisation. However, import restrictions alone do not address the underlying causes of external pressures, such as persistently high global commodity prices expected in 2023 and robust domestic demand.

Policy rates

The NRB has lowered the policy rate by 50 basis points to 6.5 percent. The policy rate represents the interest rate the NRB charges to commercial banks for overnight loans. Lowering the policy rate is aimed at making borrowing more affordable for businesses and consumers and stimulating economic activity. The bank rate, however, remains unchanged at 7.5 percent. As of November of the fiscal year 2022-23, the average inter-bank rate of banks and financial institutions stood at 6.69 percent, compared to 7 percent a year earlier. Several factors, including the recent decline in inflation, influenced the NRB’s decision. To ensure credit demand, the NRB plans to provide liquidity to banks and financial institutions, reduce the policy rate and increase the lending capacity of banks.

The capital adequacy indicators in Nepal show positive signs for the health of the banking sector as they remain above the minimum requirements. The total average capital-to-risk weighted assets ratio stands at 13.1 percent, surpassing the regulatory minimum of 11 percent. The maximum threshold of 100 percent capital-to-risk weighted assets ratio will be raised to Rs5 million from Rs2.5 million. The deposit collection rate has been lowered to 4.5 percent from 5.5 percent. The Cash Reserve Ratio (CRR) is set at 4 percent, requiring banks to hold that portion of their total deposits as cash reserves with the NRB. The statutory liquidity ratio (SLR) is set at 12 percent for commercial banks, while development banks and finance companies have an SLR of 10 percent. These reserve ratios are essential tools used by the NRB to regulate the money supply, stabilise the financial system and manage inflation by controlling the lending capacity of banks.

On-going concerns

NRB Governor Maha Prasad Adhikari stated that the real sector’s growth has not kept up with the rapid credit flow directed towards it. An abrupt slowdown in the share market and the real estate sector caused a credit surge and subsequent bust, impacting borrowers’ ability to meet loan and interest obligations and negatively affecting manufacturing, construction and trade. The IMF has expressed concern over significant credit fluctuations in Nepal’s financial sector, suggesting that excessive credit expansion and high borrowing rates have reduced borrower repayment capacity. To address the credit concern, the monetary policy states that the NRB will provide clear guidance on loan restructuring and rescheduling for hard-hit sectors and small and medium enterprises facing cash flow crises.

The non-performing loan (NPL) ratio in Nepal, at 2.6 percent, is notably lower than the average NPL ratio of 7.5 percent observed in emerging markets. This suggests that the overall asset quality in the banking sector is considered satisfactory. However, some measures such as classifying overdue loans as “standard” could mask the actual asset quality, and the NPL ratio might be artificially lower. The NRB aims to ensure that banks’ loan classification correctly reflects the asset quality of the banking system and will review the loan classification policy, implement Nepal Financial Reporting Standards (NFRS 9) and the expected credit loss model (ECL). Furthermore, the NRB will review the directed lending guidelines and credit concentration to guide BFIs to concentrate on credit management rather than credit creation.

Commendable step

The NRB has taken steps to decrease the number of microfinance institutions through mergers and acquisitions. As of mid-June 2023, 63 microfinance financial institutions are currently in operation. The NRB is committed to establishing a dedicated regulatory body for the cooperative sector, as outlined in the 2023-24 budget. The lack of regulation has resulted in the collapse of cooperatives and increased instances of fraudulent activities. It is necessary to establish a dedicated regulatory body to tackle these issues effectively. The NRB will also implement a centralised “Know Your Customer” (KYC) system, introduce Macro Stress Testing Framework, improve regulatory capacity, enhance the quality of supervision, and upgrade data and regulatory systems to improve its autonomy and accountability framework.

The NRB disclosed its intention to conduct research on the Central Bank Digital Currency (CBDC) in its monetary policy for the fiscal year 2021-22. The central bank has successfully prepared the concept report titled “Central Bank Digital Currency (CBDC): Identifying Suitable Policy Goals and Design for Nepal” to explore the implementation of the CBDC. On the digitalisation front, the NRB recently amended a digital payment licensing policy that will allow non-business businesses like hotels and travel to establish their digital payment system. Moreover, Nepal also inked an agreement with India, China and Sri Lanka for cross-border digital payment. These developments on the digital front facilitate smooth digital payment services inside and outside the country.

The NRB’s monetary policy presents several positive measures, and its effectiveness in implementing these measures will be crucial. Increased foreign reserves due to higher remittances and lower interest rates are gradually making the country’s economy vibrant. Lower interest rates can encourage borrowing and investment, potentially impacting consumer spending, business expansion and overall economic growth. The central bank appears mindful of the potential adverse effects of higher interest rates on economic recovery while remaining committed to keeping inflation in check. However, taming inflation will require a coordinated approach between monetary and fiscal policies.

– NISCHAL DHUNGEL

The opinion piece originally appeared in The Kathmandu Post on 21 February 2023. Please read the original article here.

The Nepal Rastra Bank (NRB), the central bank of Nepal, took an accommodating policy stance during the pandemic to support households and businesses. The average inflation rate in fiscal year (FY) 2020/21 stood at 3.6 percent and doubled to 6.32 percent in FY 2021/22. For the first six months of the current FY 2022/23, it stands at 7.2 percent. Inflation has significantly increased due to the detrimental effect of the supply chain post-Covid19 pandemic and the Russia-Ukraine war. Rising inflation raised the cost of fuel and raw materials, causing production costs to skyrocket. As a result, the output capacities of both small and large-scale industries have decreased. The government imposed an import ban to safeguard the diminishing foreign exchange reserves, but it lifted the ban recently as the demand for goods and services increased amidst economic recovery.

These factors contributed to the first half of the current fiscal year’s revenue collection falling short of expectations. The revenue collection for the first six months of mid-January 2023 decreased by 15 percent compared to last year. The Finance Ministry reduced the federal government’s budget by 20 percent because of its inability to generate revenue as projected. The increased liabilities for wages, pension, social security, and subsidies for chemical fertiliser and disaster management have strained ongoing government expenses. The government needs to pay the interest on international and domestic loans. The depreciation of the Nepali rupee versus the US dollar will prove expensive to re-pay foreign loans.

World Bank and IMF support

The International Monetary Fund (IMF) approved $395.9 million as part of the Extended Credit Facility (ECF) Arrangement for Nepal. The ECF provides financial support to nations with a persistent balance of payments issues. This arrangement would help the government lessen the pandemic’s effects on people’s health and economic activity, safeguard vulnerable populations, maintain macroeconomic and financial stability, and promote long-term growth and poverty reduction. The program will encourage significant funding from Nepal’s development partners and help reduce funding shortfalls. These actions supported a subsequent credit boom by cutting loan rates early in the pandemic. To aid Nepal’s tenacious recovery from the Covid-19 pandemic and promote sustainable growth, the World Bank approved a $150 million development policy credit. The Nepal Programmatic Fiscal Policy for Growth, Recovery, and Resilience Initiative, funded by the World Bank, will work to enhance the country’s institutions and laws, especially those governing debt management, public capital investment, and tax and customs systems.

Effect of monetary policy

At the beginning of FY22, NRB monetary policy aimed to strike a balance between tightening needed for economic and financial stability and assistance for the nascent economic recovery. The NRB’s main policy targets are maintaining the policy floor of foreign exchange reserves covering seven months of imports and setting the inflation ceiling at 7 percent for the year FY 2022/23. The goal of monetary policy is to limit total credit to the private sector by 12.6 percent and total money supply by 12 percent for FY 2022/23. NRB raised the cash reserve ratio (CRR) from 3 percent to 4 percent. As a result of the credit boom, imports peaked in the first half of FY22, and foreign exchange reserves declined. The NRB increased its policy repo rate targeting both credit demand and supply. A change in monetary policy was in response to worries about faster-than-expected credit expansion, the growing import bill, dwindling reserves, and rising inflation as loan growth soared beyond estimates in the first half of FY22. To bring down inflation and discourage credit lending, the NRB increased the interest rates. The weightage average interest rate for inter-bank rose from 4.76 percent in mid-January 2021 to 7.48 percent in mid-January 2022. Similarly, weightage average interest rates for lending increased from 9.44 percent in mid-January 2021 to 12.79 percent in mid-January 2022.

A credit constraint occurred as the additional liquidity injections weren’t enough to make up for the drop in loanable funds. By the end of FY22, private sector credit had fully returned to FY21 levels as a proportion of GDP due to the higher lending interest rates offered by commercial banks to borrowers, which increased from 8.5 percent to 11.6 percent between mid-July 2021 and mid-July 2022. Credit to the private sector stabilised at comparatively higher prices, falling from 102 percent of GDP at the end of FY21 to 101.5 percent of GDP at the end of FY22. The NRB injected a total of Rs3094.76 billion in liquidity until mid-January 2023. NRB provided Rs318.09 billion through a repo, Rs83.85 billion through an outright buy auction, and Rs2692.83 billion through a standing liquidity facility (SLF).

The NRB introduced a merger and acquisition policy with the aim of strengthening financial stability. After the mergers of the commercial banks, the number of commercial banks decreased from 27 in mid-July to 22 in mid-January 2023. Micro-finance institutions decreased from 70 in mid-July to 64 until mid-January 2023. The central bank of Nepal mandates that banks maintaining higher paid-up capital help reduce the number of banks and financial institutions. Bank and financial institutions’ (BFIs) private sector credit increased by Rs137.33 billion (3 percent) during the first six months of FY 2022/23 compared to a growth of Rs492.63 billion (12.1 percent) during the same time last year. Out of the total outstanding credit held by BFIs until mid-January 2023, 67.2 percent went to real estate and 12.2 percent to current assets (such as goods used in agriculture and non-agriculture).

BFI soundness

Despite liquidity restrictions, indicators of BFI soundness were high. The average capital-to-risk-weighted assets ratio, which measures the sufficiency of bank capital, remained more elevated than the legal requirement of 11 percent. After massive credit expansion, NRB raised interest rates which is also the byproduct of the misuse of loans. In addition, due to the lengthening of loan repayment schedules as part of the central bank’s response to Covid-19, the overall number of BFIs’ nonperforming loans (NPL), defined as loans that are past due by 90 days or more, also marginally decreased. As of mid-July 2022, commercial banks had an NPL ratio of 1.3 percent, development banks had an NPL ratio of 1.5 percent, and finance businesses had an NPL ratio of 7 percent. Even though these numbers are encouraging, some swift forbearance measures should be in place to assess the asset quality in the banking sector. Banks are issuing fresh disbursements to reduce the level of nonperforming assets.

Nevertheless, given the adverse economic effects of Covid-19, the IMF should closely monitor the system to ensure NPLs are accurately measured and that all banks’ provisioning and capital are still sufficient. The NRB should improve the regulatory environment to offer precise restructuring guidance to address BFI assets and loan quality. NRB issued Working Capital Loan Guideline 2079, which mandates banks to issue working capital loans secured by the current assets. Credit Policy Guidelines of the licensed institution shall clearly mention the margin and adequacy of the existing assets required for the security. Hence, the NRB should encourage banks to monitor borrowers’ creditworthiness continuously and establish asset categorisation and reclassification criteria that accurately evaluate banks’ asset quality. Lastly, Nepal should facilitate bank financing to productive businesses, invest in infrastructure and education, and adopt digital technology and research and development.

– NISCHAL Dhungel, Non-Resident Fellow

The opinion piece originally appeared in the Naya Patrika Daily on 22 August 2022. Please read the original article here.

विश्वव्यापी अर्थतन्त्र अझै पनि कोभिड–१९ महामारीबाट गुज्रिरहेका वेला, उन्नत अर्थतन्त्रमा रहेका केन्द्रीय बैंकहरूले ब्याजदर बढाइरहेका छन्, जसले विश्वको बाँकी देशहरूमा ठूलो प्रभाव पार्नेछ । अन्तर्राष्ट्रिय मुद्रा कोषको (आइएमएफ)को ‘विश्व आर्थिक परिदृश्य’ प्रतिवेदनले विश्वव्यापी वृद्धि घट्ने अनुमान गरेको छ । विशेष गरी उदीयमान र विकासशील राष्ट्रहरूका लागि बढ्दो सामाजिक र आर्थिक जोखिमहरूको पूर्वानुमान पनि गरेको छ । रुस–युक्रेन द्वन्द्वले नीतिगत ट्रेड अफलाई सन्तुलनमा राख्न चुनौतीपूर्ण बनाएको छ ।

मुद्रास्फीतिसँग लड्न, आर्थिक सुधारको संरक्षण गर्न, अर्को कमजोरहरूलाई मद्दत गर्न र वित्तीय बफरहरू पुनस्र्थापित गर्न चुनौती छ । रुस–युक्रेन द्वन्द्व र आपूर्ति शृंखला अवरोधका कारण खाद्यान्न र इन्धनको मूल्यवृद्धि बढ्दै जाने देखिन्छ । विशेष गरी कम आय भएका देशहरूको कमजोर जनसंख्यालाई हानि पुर्‍याएको छ । हालै संयुक्त राज्य अमेरिकाको फेडरल रिजर्भले उपभोक्ता मूल्य ८.७ प्रतिशत बढेपछि मुद्रास्फीतिविरुद्धको लडाइँलाई तीव्र पारेको छ । १५ जुन २०२२ मा फेडले १९९४ पछिको उच्च ब्याजदर वृद्धिको घोषणा गर्‍यो । फेडले आगामी दिनमा ब्याजदर अझ बढाउने योजना बनाएको छ । अमेरिकामा ब्याजदर बढाएर मुद्रास्फीति घटाउने फेडरल रिजर्भको प्रयासले बाँकी विश्वलाई नोक्सान पुर्‍याउन सक्छ । अमेरिकाको बढ्दो ब्याजदर मध्यम र न्यून आय भएका देशहरूका लागि दुस्प्रभावी हुने थुप्रै कारण छन् । 

पुँजी पलायन
विकसित राष्ट्रहरूमा कम ब्याजदरको लामो युगपछि लगानीकर्ताले उच्च प्रतिफलको खोजीमा विकासशील र उदीयमान बजारहरूमा आफ्नो अधिक पुँजी केन्द्रित गर्न थाले । विकसित देशहरूमा ब्याजदरमा भएको तीव्र वृद्धिले अमेरिकामा ठूलो पुँजी प्रवाह र विकासोन्मुख देशहरूबाट निकासी बढ्नेछ । अमेरिकामा ब्याजदर बढ्दै जाँदा उदीयमान बजारहरूमा लगानी गर्ने लगानीकर्ताले उच्च प्रतिफलको फाइदा लिनका लागि अमेरिकामा पुँजी स्थानान्तरण गर्ने निर्णय गर्न सक्छन्, किनभने उनीहरूका लागि अमेरिकामा लगानी गर्नु बढी फाइदाजनक हुनेछ । 

ऋण संकट र मुद्रा अवमूल्यन
इतिहासले देखाउँछ कि राष्ट्रहरूको तीव्र आर्थिक विस्तारक्रममा ऋण बढ्ने गर्ने गर्दछ । विशेष गरी विकासोन्मुख देशहरूमा ‘ऋण पासो’ (डेब्ट ट्र्याप) तब हुन्छ, जब उत्पादकता र ऋण सन्तुलनमा रहँदैन । अमेरिकामा बढेको ब्याजदरका कारण विश्वव्यापी ब्याजदर बढ्न सक्छ । धनी देशहरूको केही केन्द्रीय बैंकले ब्याजदर बढाइसके । अन्तर्राष्ट्रिय मुद्रा कोष (आइएमएफ)का अनुसार ३८ उदीयमान अर्थतन्त्र खतरामा छन् वा हाल ऋण संकटमा छन् ।

सन् २०१९ र २०२१ को बीचमा महामारीले विकासशील अर्थतन्त्रहरूमा सार्वजनिक ऋणमा (जिडिपीको ५४ प्रतिशतबाट ६५ प्रतिशतसम्म तीव्र वृद्धि ल्यायो । कम्तीमा २५ विकासशील अर्थतन्त्रले आफ्नो सरकारी आयको २० प्रतिशतभन्दा बढी विदेशी सार्वजनिक ऋण सेवामा खर्च गर्छन् । आइएमएफले विकसित अर्थतन्त्रहरूमा ब्याजदर वृद्धिले उदीयमान बजार र विकासोन्मुख देशहरूका लागि बाह्य वित्तीय अवस्थालाई असर पार्न सक्ने उल्लेख गरेको छ ।

विकासोन्मुख देशहरूको मुद्रा अवमूल्यन, जसले क्रय शक्तिलाई कम गर्छ र अमेरिकी डलरजस्ता विदेशी मुद्राहरूमा ऋण तिर्न गाह्रो बनाउँछ । यस कारण बढ्दो ब्याजदर उदीयमान अर्थतन्त्रका लागि अर्को जोखिम हुन सक्छ । सन १९८० को प्रारम्भमा फेड ब्याजदर वृद्धिले संयुक्त राज्यमा दोहोरो अंकको मुद्रास्फीति कम ग¥यो, तर विश्वव्यापी रूपमा धेरै देशमा नराम्रो असर पर्‍यो । विशेष गरी ल्याटिन अमेरिकी देशहरूमा ऋण डिफल्ट भयो । बेरोजगारी र गरिबी बढ्यो र जिडिपीमा ठूलो गिरावट आयो । त्यो समयलाई ‘हराएको दशक’ (लस्ट डिकेड) भन्ने गरिन्छ, जहाँ ल्याटिन अमेरिकी देशहरू क्रमिक र असमान पुनरुत्थानमा गुज्रिरहेका थिए । अफ्रिकाका भारी ऋणी राष्ट्रहरूले ल्याटिन अमेरिकाजस्तै समान समस्या झेल्नुपर्‍यो ।

चीनको उदाहरण : ऋण दिगोपन र ऋण व्यवस्थापन
उच्च र बढ्दो ऋण–जिडिपी अनुपात सामान्यतया गैरजिम्मेवार उधारोपनाको संकेत हो । यस्तो गैरजिम्मेवार उधारो कटौती गर्नुपर्छ । बढ्दो ऋणलाई उच्च सरकारी तलब वा ठूला निवृत्तिभरणका लागि उपभोग गर्ने कि शिक्षा र पूर्वाधारजस्ता उत्पादनशीलता बढाउने सार्वजनिक वस्तुहरूमा लगानी गर्ने भन्ने कुरामा ध्यान दिनुपर्छ । ऋण–जिडिपी अनुपात बढ्दा दीर्घकालीन पूर्वाधारमा लगानी कति भयो र उत्पादनशीलता र प्रतिफल कति बढायो भन्ने कुरा महत्वपूर्ण हुन्छ । यस विषयमा श्रीलंका र अफ्रिकी मुलुकबाट पाठ सिक्न सकिन्छ ।

चीनले १९९७–१९९८ र २००८–२००९ मा वित्तीय संकटबाट बच्न विस्तारित वित्तीय र मौद्रिक नीतिको प्रयोग गरेर पूर्वाधार र सामाजिक खर्चहरूमा सार्वजनिक लगानीलाई प्रोत्साहन गरेको थियो । आफ्नो पुँजी खातालाई पूर्ण रूपमा उदारीकरण नगर्दा पनि चीनले राम्रो आर्थिक नतिजा हासिल गरेको छ । विगत ४७ वर्षमा चीनको आक्रामक वृद्धिलाई प्रभावकारी आर्थिक योजना र कार्यान्वयनलगायत स्थिर नीतिले बल दिएको छ ।

नेपालजस्तो देश विकासको प्रारम्भिक चरणमा छ र छोटो अवधिको राजस्व आर्जनलाई परियोजना छनोटका लागि प्राथमिकता दिनुपर्दछ । चीनजस्ता धेरै देशले विकेन्द्रीकृत वित्तीय प्रणाली अपनाएका छन्, जसले वित्तीय स्थायित्वको विश्लेषणलाई जटिल बनाउँछ । चीनमा धेरैजसो सार्वजनिक सामाजिक खर्च स्थानीय सरकारहरूमा निहित हुन्छ, जबकि राजस्व विनियोजन केन्द्र सरकारले नियन्त्रण गर्छ । स्थानीय सरकारहरूले आफ्नो आवश्यकता पूरा गर्न ऋणपत्र जारी गर्छन् र स्थानीय सरकारले आफ्नो वित्तीय प्रणाली बुझ्न महत्वपूर्ण छ । 

अर्थतन्त्रको आकार र संरचनामा धेरै फरक भए पनि नेपाल र श्रीलंकाजस्ता देशले चीनको विकास अनुभवबाट फाइदा लिन सक्छन् । चीनको विकेन्द्रीकृत आर्थिक विकासले स्थानीय सरकार र वित्तीय संस्थाहरूलाई संघीय सरकारभन्दा बढी महत्व दिन्छ, जसले गर्दा लगानी र वित्तीय निर्णय गर्न मद्दत हुन्छ । दीर्घकालीन विकास लक्ष्य हासिल गर्न स्थानीय विकास रणनीति र नीतिहरू राष्ट्रिय प्राथमिकतासँग मिल्नुपर्छ । तर, स्थानीय आर्थिक कार्यसम्पादनका लागि स्थानीय निकायलाई जवाफदेही बनाउनुपर्छ । 

नेपालको सन्दर्भ 
नेपाल एउटा यस्तो राष्ट्र हो, जसलाई संरचनात्मक परिवर्तनको नितान्त आवश्यकता छ । समस्या मौलिक भएकाले संरचनात्मक सुधार नै छोटो र दीर्घकालीन जवाफ खोज्ने एक मात्र उपाय हो । भुक्तानी सन्तुलन कायम गरी बाह्य क्षेत्रमाथिको दबाब कम गर्न ऋण विस्तार र क्षेत्रगत वितरणको व्यवस्थापन, अत्यधिक आयात घटाउने र औपचारिक माध्यमबाट रेमिट्यान्स आप्रवाहमा सुधार गर्न आवश्यक छ । मौद्रिक नीतिले बैंकिङ र निजी क्षेत्रहरूलाई वर्तमान वातावरणमा ऋण प्रयोग गर्दा बढी सावधानी र जवाफदेहिता अपनाउन निर्देशन दिनुपर्छ । तीन दशकसम्म उच्च कर्जा वृद्धि भए पनि आर्थिक वृद्धिदर ४.४ प्रतिशत मात्रै रह्यो । यसले हाम्रो कर्जा वृद्धि नीतिले आर्थिक वृद्धिमा सकारात्मक प्रभाव पार्न नसकेको देखाउँछ । आगामी दशकमा आर्थिक वृद्धिलाई प्रत्यक्ष रूपमा सहयोग गर्ने क्षेत्रमा ऋण प्रवाह केन्द्रित हुनुपर्छ । कर्जाको वृद्धि पनि निक्षेप वृद्धिसँग मिल्दो हुनुपर्छ ।

आयात प्रतिस्थापनको सन्दर्भमा निजी क्षेत्रले जिम्मेवार र सक्रियताका साथ काम गर्नुपर्छ, आयातको सट्टा स्वदेशी उत्पादन वृद्धि गर्नुपर्छ । निजी र बैंकिङ क्षेत्रले घरेलु उत्पादन बढाउन सहयोगी सरकारका नीतिहरूसँग मिलेर काम गर्नुपर्छ । आयात र व्यापारमुखी अर्थतन्त्रलाई उत्पादक अर्थतन्त्रमा परिणत गर्ने, अर्थतन्त्रलाई विश्वव्यापी मूल्य शृंखलामा जोड्ने, घरेलु कच्चा पदार्थमा आधारित औद्योगीकरणलाई प्रोत्साहन गर्ने, खुला सिमानाका कारण लामो समयदेखि चलिरहेको आर्थिक घाटा कम गर्ने केही दीर्घकालीन उपाय हुन् ।

हालको कोभिड प्रकोपको सामना गर्न र कठिन परिस्थितिमा विकासका आवश्यकता पूरा गर्न केही नीतिगत विकल्प छन् । संयुक्त राष्ट्रसंघको व्यापार र विकास सम्मेलनले सार्वभौम ऋणको पुनर्संरचनाका लागि बहुपक्षीय कानुनी ढाँचाका लागि वकालत गरेको छ, जसले निष्पक्ष र व्यवस्थित ऋण संकट समाधान ल्याउनेछ, जसले सार्वजनिक र निजी ऋणदाता दुवैलाई समावेश गर्दछ । आइएमएफले थप ऋण जारी गर्न सक्छ । आइएमएफ, विश्व बैंक समूह र क्षेत्रीय वित्तीय व्यवस्था (आरएफएएस)लाई थप आपत्कालीन तरलता ऋण जारी र वितरणलाई छिटो गर्न सकिन्छ । पहिले नै सम्पन्न सार्वजनिक सम्पत्ति परियोजनाहरूमा आधारित नवीन वित्त पोषण र पुनर्वित्त योजनाहरू डिजाइन गर्ने अर्को उपाय हुन्छ, जसलाई ‘सम्पत्ति–आधारित पुनर्वित्त’ पनि भनिन्छ । विश्वव्यापी ऋण–राहत संयन्त्र, जसले संघर्षरत राष्ट्रहरूमा वित्तीय संकट रोक्न सक्छ र थप विवेकपूर्ण उधारो र ऋणका लागि दिशानिर्देश आवश्यक हुन्छ ।

अन्त्यमा, उन्नत देशहरूको ब्याजदर वृद्धिले न्यून आय भएका देशहरूलाई प्रत्यक्ष वा अप्रत्यक्ष रूपमा असर गर्छ । कम आय भएका देशलाई संरचनात्मक सुधारको आवश्यकता छ, जुन आफ्नो ऋण व्यवस्थापन गर्न छोटो र दीर्घकालीन समाधान खोज्न एकदम महत्वपूर्ण छ ।

– NISCHAL Dhungel, Non-Resident Fellow

The commentary originally appeared on the East Asia Forum, a forum based at the Crawford School of Public Policy at the Australian National University, on 18 August 2022. Read the original article here.

The International Monetary Fund’s recent World Economic Outlook report paints a bleak economic future. It has downgraded global growth predictions from 6.1 per cent in 2021 to 3.2 per cent in 2022. While the global economy is still recovering from the COVID-19 pandemic, central banks in advanced economies are hiking interest rates — a policy change that will have a significant global impact.

The depressing growth predictions are a consequence of tighter monetary policy and the increasing threat of social and economic risks, particularly for emerging and developing nations. Food and fuel prices have skyrocketed due to the Russia–Ukraine war and supply chain bottlenecks. The Russia–Ukraine conflict has made it challenging to balance fighting inflation, supporting the global economic recovery, helping the vulnerable and restoring fiscal buffers.

The US Federal Reserve (Fed) stepped up its fight against inflation after consumer prices increased 8.6 per cent in the United States. On 15 June 2022, the Fed voted to raise the target range for the federal funds rate to 0.75–1 per cent. It plans to implement additional hikes for the rest of 2022. But efforts to reduce inflation by increasing interest rates in the United States could harm the rest of the world.

As interest rates rise in the United States, those who invest in emerging markets to receive higher rates of return may invest in the more appealing US market. This will result in massive capital inflows to the United States and increased outflows from the developing world. Without proportionally tighter domestic monetary policies, the ensuing rise in borrowing costs will deplete foreign reserves, appreciate the US dollar and result in balance sheet losses for nations with US dollar-denominated net obligations.

Rising US interest rates have the greatest impact on economies with higher macroeconomic vulnerabilities. Between 2019 and 2021, the COVID-19 pandemic caused a sharp rise in public debt in developing economies — on average increasing from 54 per cent to 65 per cent of GDP.

Thirty-eight emerging economies are now in danger of a debt crisis or are currently experiencing one. At least 25 developing economies spend over 20 per cent of government income on servicing foreign public debt. This is why interest rate hikes in advanced economies could tighten external financial conditions for emerging markets and developing countries.

There is a worrying comparability between today’s economy and the economy of the 1970s and early 1980s which was rife with high inflation, slow growth and rising borrowing costs. In the 1970s, oil exporters benefitting from increasing energy prices used their surpluses to increase funding for debt markets in emerging market economies. Fed rate hikes in the early 1980s reduced inflation in the United States but drove up global interest rates, causing many emerging economies to default on their debts.

The debt crisis that followed the Volcker shock was distressing for developing nations. The Fed interest rate hike had a devastating effect on Latin America. The region experienced plummeting GDP and ballooning unemployment and poverty. The subsequent decade was lost to gradual and uneven economic recovery. The consequences of the Latin American debt crisis were similarly experienced in Africa’s heavily indebted nations. The Fed did not pay enough attention to how its choices would affect the rest of the world.

Though today’s economic situation has similar origins to that of the 1970s and 1980s, there are some significant distinctions. Today, oil producers acutely feel the world’s reducing dependence on oil. Real oil price increases are smaller than they have been historically. Policy tightening in response to the economic downturn has also begun sooner than it did in the 1970s and 1980s, especially in certain emerging markets and developing nations. Unlike the 1970s and the 1980s, there has not been as much time for recycled petrodollars to fuel imbalances in developing and emerging market economies.

Despite these encouraging developments, new risks have emerged. Due to increased exposure to sizeable bilateral creditors and the recent COVID-19 pandemic, public debt has risen and stunted the growth potential of many countries.

While international financial institutions are doing their part to provide debt relief and stop punitive measures like surcharges — additional fees imposed on countries that fail to make debt repayments —  there needs to be swift and systematic action on debt resolution. This must involve collaboration with private creditors and large state creditors like China. Major food and fuel businesses must be prevented from profiteering and speculating.

Special drawing rights (SDRs) — a foreign reserve asset issued by the IMF that can be used for foreign exchange stability in addition to gold or US dollars — must be redistributed to those countries that urgently require them. A new release of special drawing rights with an equivalent value of US$650 billion is necessary for immediate relief. The UN Conference on Trade and Development has advocated an alternative way to facilitate fair and orderly debt crisis resolutions. It would involve a multilateral legal framework for restructuring sovereign debt using both public and private creditors.

Interest rate increases in advanced countries will always impact low-income countries. But that does not negate the need to pursue structural reform in low-income countries. Structural reform is the only way to find short and long-term solutions to debt management.

Domestic Updates

Bangladesh Nationalist Party (BNP), the marginalized opposition party in Bangladesh, held a protest against Prime minister Sheikh Hasina for her ‘defamatory’ remarks. During a press conference, Prime Minister Hasina insinuated that Khaleda Zia, chairperson of BNP, be dropped from the Padma Bridge. Hasina and Zia were political rivals, but Hasina and her party, Bangladesh Awami League (BAL), have dominated Bangladesh politics since 2009.

Human rights violations and marginalization of the opposition have been a hallmark of the BAL regime. Khaleda Zia was sent to jail after she was sentenced to five years imprisonment by a special court in the Zia Orphanage Trust corruption case on 8 February 2018. In addition, observers have questioned the integrity of the 2014 and 2018 elections held under BAL.

BNP has been a shadow, with little representation in the national parliament. Currently, they are protesting against inflation, demanding elections under a neutral government and the release of the party chairperson. However, questions remain over their sustenance and impact on Bangladesh politics.

Bangladesh has seen spectacular economic growth in the last two decades. Yet, Bangladesh’s foreign reserve peaked at USD 48 billion in August 2021 but dropped to USD 42 billion by May 2022. Global price increase of oil and wheat because of the Russian invasion of Ukraine, import growth due to Covid-19 free situation, and low remittance inflow are the significant causes. This has raised fear in some quarters that Bangladesh is following Sri Lanka’s path. As a result, the Bangladesh Bank has hardened its import policy for luxury and non-essential items like sports-utility vehicles, washing machines, air conditioners, and refrigerators to mitigate the situation.

Regional Engagement

Bangladesh’s foreign minister, Abdul Momen, attended a two-day NADI-3 (Natural Allies in Development and Interdependence) Conference, which began on 28 May in Guwahati, Assam. Indian External Affairs Minister S. Jaishankar and Chief Minister of Assam Himanta Biswa Sarma also attended the conference. In his inaugural speech, Momen said, “We have developed strong connectivity with our neighbours, particularly India. We have developed robust connectivity by road, railways, waterways, and air routes. We have more to do in waterways because it is cost-effective. I am looking forward to a new Indian subcontinent where we can help improve the connectivity of all the waterways. We also developed connectivity in our energy sharing.” Momen urged Nepal and Bhutan to join in connectivity. However, BBIN motor-vehicle agreement (MVA), which brings all four countries together, is languishing.

Global Engagement

Bangladesh observed 29 May as the International Day of United Nations (UN) Peacekeepers. Nearly 7000 Bangladeshis serve as the UN peacekeepers, 9.2 percent of a total of 75,516. Bangladesh is the largest troops contributor to peacekeeping operations. Hasina has assured that Bangladesh is ready to contribute more peacekeepers.

The Ukraine war has also resulted in the price hike in necessary food items, especially wheat. Even though India banned wheat export, it will continue to export to neighbouring countries. Bangladesh, which had successfully engaged China, India, and other major powers through open regionalism, is facing a new challenge because of increasing competition between China and the US (and Quad). All Quad members are key development partners of Bangladesh.