The government appointed economist Chiranjeevi Nepal as the 16th governor of Nepal Rastra Bank following a Cabinet meeting on Thursday.
Nepal was chosen ahead of two other final candidates—NRB Deputy Governors Gopal Kafle and Maha Prasad Adhikari—for the top central bank job. Nepal, who has had a long affinity with the ruling Nepali Congress, had been serving as the economic advisor to Prime Minister Sushil Koirala.
A strong supporter of free market economy, Nepal has been credited for a series of reforms in the securities market under his watch as chairman of the Securities Board of Nepal (Sebon). Though his critics say he has relatively less experience in monetary issues, his stint at Sebon, the regulator of the country’s securities market, is expected to be useful for running the central bank.
As the new governor, Nepal has a big challenge to continue the legacy of his predecessor Yubaraj Khatiwada, who is credited for maintaining financial stability in banks and financial institutions (BFIs) from alarming loan exposure to real estate sector and problems related to corporate governance.
Former Finance Secretary Rameshore Khanal said the new governor should continue most of the policies adopted by his predecessor, including the cap on real estate lendings, direct lending policy on hydropower, agriculture and other productive sectors.
“As the real estate sector continues to be a thorn in financial stability in many countries, the lending in the sector must be supervised properly,” said Khanal, who had also worked as a director on the NRB board.
Khanal suggested that the new governor should establish a mechanism at the central bank to forecast factors that could affect the financial system and devise policies to avert crisis. “Interest rate corridor for better regulation of interest rate in the market, policies that enhance increased access to finance in the rural areas and implementation of service fee-related directive should also be given priority,” Khanal added.
BFIs’ massive loan exposure to the real estate sector was one of the biggest challenges that Khatiwada had faced when he took over the central bank reins five years ago. On top of loan exposure, slow growth in remittance—the lifeline for the country’s economy—is another big challenge facing the new governor.
A former NRB deputy governor said that the central bank chief would have to deal with a slow growth in remittance despite rise in the number of migrant workers. “Although the use of remittance for gold smuggling has been blamed for the slowdown, it may not be the only contributing factor,” he said.
Gold might have been smuggled into India but the country does not have stack of India currency, which suggests there might be other factors responsible for the sluggish remittance growth. “Growing capital flight from the country is another challenge facing the new governor,” he pointed out. “A lower interest rate in the banking sector has led to the growing capital flight from the country.”
According him, there has been a growing trend among businessmen to take short term loans and deposit the amount in India at a higher interest.
Former governor Dipendra Bahadur Kshetry said that maintaining corporate governance would continue to pose a challenge to the new governor.
“Reports are swirling that some of the central bank officials themselves have been involved in promoting bad governance for personal benefits,” said Kshetry. “The new governor should maintain strong discipline in the central bank.”
As the government’s main economic advisor, his every move will be followed closely. As the governor has presence in the Industrial Promotion Board, High-Level Financial Sector Reform Committee, among others, his role will have a far-reaching impact on the economy.
Most importantly, Nepal will also be under constant scrutiny as to how he tackle the issue of ‘black money’. The central bank is holding back Rs 3.5 billion belonging to businessman Ajeya Raj Sumargi. The money, transferred in from British Virgin Islands, is currently stuck at two local banks.