By Sajana Mainali 25 Mar, 2022 Business

Nepal Liquidity Crunch: What's going on?

A liquidity crunch is characterised by a substantial shortage of cash. It refers to a situation in which there is a scarcity of cash to lend to businesses and consumers, and the interest rate is high due to the same reason. Because the Nepalese Rupee (NPR) is a non-convertible currency with a large trade imbalance, it is a typical occurrence in Nepal. The present liquidity issue has arisen as a result of increased loan disbursements to promote economic activity and recovery in the country. For the past few years, Nepal has struggled to maintain macroeconomic balance. Low GDP, high unemployment, a huge balance - of - payments deficit, a rising trade deficit, and high and persistent inflation are only a few of the current macroeconomic issues. 

 

 

 

 

 

 

 

 

Regardless of the fact that the BAFIs have raised the interest rate on deposit, they have not been able to attract the deposit to meet the expectations. The major reason behind the low collection is due to the aftershocks impacts of COVID 19, as thousands of people have lost their jobs and hundreds of businesses have shut down their operation.  This has resulted in individuals losing their jobs, which has had a direct influence on the flow of liquidity in the market as people are unable to earn revenue that can be deposited in banks.The bare minimum income the people are generating after the COVID 19, is hardly enough to live their life. Furthermore, compared to prior years, the flow of remittance has diminished as a result of thousands of individuals returning back  to Nepal due to the impacts of COVID 19. Massive imports of commodities, unemployment, and a drop in remittances have all contributed to Nepal's liquidity crisis. As per the report issued by NRB, there has been a 42.8% increase in the import compared to year to date data of previous year and the Forex reserve has decreased by 16.2%during the  mid Feb 2021/22. Even though the export has increased by 88 % on a year to year basis for 2021/22 mid January, the amount of export still remains negligible as compared to the volume of the import. This  has led to the flow of currency from domestic boundary to the international market, leading to the scarcity of the liquid funds in Nepalese market. Similarly, the rise in the  inflation rate of goods and services is also a major factor contributing to the liquidity crisis. The inflation rate remained 5.65% in mid January 2021/22, based on the report issued by NRB. 

Factors contributing to the liquidity crunch:

- Low deposit

- Increased lending 

- Decline in the forex reserve

- People investing in commodities like gold  and silver

- Low increasing rate of remittance 

- Decrease in export

- Increase in import

- Increased living standard of the people which leads to excessive consumption of luxurious goods

- Investment in unproductive sector 

- Investment made in the foreign land, where people feel safe about their investment made in foreign land

- Illegal Hundi of Money to the foreign country 

- False advertisement and fake news trend about the banking sectors which makes people more and more suspicious about the bankruptcy of the banks and starts to withdraw the money. 

- Political instability 

Indicators of the Crisis: 

- Decrease in reserve money 

- Increase in Inter Bank Transaction Rate 

- Decline in Liquidity Assets

Major causes of liquidity crisis in Nepal (Statistical Data) 

1. Deposits & Credit and BAFI 

- The deposits in the Banks and Financial Institution has decreased during the FY 2021/22, the lending to the private sector has increased heavily as compared to the deposits obtained.

- Domestic credit increased by 26.6% in mid january 2022

- The Monetary Sector’s claims on the private sector increased by 27.4% in mid- January 2022. 

- Deposits at Banks and Financial Institutions (BFIs) increased by 15.5% in mid- January 2022.

- Credit to the private sector from BFIs increased by 28.0% in mid- January 2022

 

 

 

 

 

 

 

 

 

2. Government Expenditure and Revenue :

- During the six months of 2021/22 total expenditure of the Federal Government according to data of the Financial Comptroller General Office (FCGO), Ministry of Finance, stood at Rs. 506.70 billion. 

- The recurrent expenditure, capital expenditure and financing expenditure amounted to Rs. 406.41 billion, Rs. 50.81 billion and Rs. 49.47 billion respectively in the review period.

 

 

 

 

 

 

 

 

 

 

Other causes of liquidity crisis in Nepal: 

- Remittances decreased by 5.5 percent in NPR terms and 6.2 percent in USD terms.

- Balance of Payments remained at a deficit of Rs.241.23 billion.

- Gross foreign exchange reserves stood at USD 9.89 billion.

- Federal Government spending amounted to Rs.506.70 billion and revenue collection Rs.542.05 billion.

- Deposits at BFIs increased by 15.5 percent and claims on the private sector by 27.4 percent

Way Forward:

It is unclear when the Nepalese economy will find the way to take the surplus economy. The Nepalese economy is in the hands of a small group of people who have easy access to the Nepalese market. Thus, the control of the economic market from the countable people should be shifted to the general public. Further, the regulatory body should also revise and improvise the monetary policy . The government should take steps to promote foreign direct investment (FDI), remittance flow, and capital market regulation. The Nepalese economy looks very challenging at the current scenario. The ratio of lending by the bank has increased as compared to the deposit ratio in the BAFIs. The liquidity problem can not be solved in a single slot. This isn't the first time Nepal has had a crisis. Despite taking measures to resolve the situation, however, only the difficulties are discussed. Since decades, crises have resurfaced on a regular basis. Hence, the short term, midterm, and long term measures of resolving the liquidity crisis should be discussed.   The short-term strategy should concentrate on resolving the problem in the interim, such as regulating liquidity injection, lowering the interbank lending rate, and reducing the CRR. The mid-term and long-term solution could be carried out by making investments in areas where remittances can contribute, encouraging the inflow of foreign and domestic tourists, reducing imports of goods such as petroleum products, whose prices are skyrocketing, and focusing on alternative energy solutions.The creation of adequate jobs in the country can help the economy and alleviate the problem to some extent. The closed industry should be encouraged to reopen by offering a rebate or concession, which would aid in the creation of job prospects and money for the government. These are long-term solutions that will aid in the prevention of future crises.

At this time, the problem will not be readily resolved. The regulatory body and the government's strategic actions might help to alleviate the problem in the short run. However, the crisis shall begin to subside as businesses that have been closed starts to  reopen, the tourism sector begins to pick up, and individuals begin to retain employment.