Nepal Rastra Bank has revised the inflation target for this fiscal to 9.5 per cent, as supply disruptions along Nepal-India border points pushed up consumer prices beyond the level predicted earlier.
Launching the annual Monetary Policy in July, the central bank had said inflation would be contained at an average of 8.5 per cent in the fiscal year.
But after supply system was disrupted by blockade at the border points, prices of almost everything went up, with inflation hovering around 12.1 per cent in January. This has compelled NRB to revise the target upwards.
“Lately, however, the supply situation has normalised. This will gradually subside the pressure on prices.
But effects of price rigidity, depreciation in the value of Nepali currency and post-earthquake reconstruction activity, which is expected to increase demand, are likely to build inflationary pressure,” NRB Governor Chiranjibi Nepal told a function organised to conduct mid-term review of the Monetary Policy.
Another reason that is likely to create inflationary pressure this fiscal year is rise in money supply.
Earlier, the central bank had predicted money supply to increase by 18 per cent. “But because of rise in flow of remittance income and foreign loans and grants, money supply is expected to go up by 21.5 per cent in the current fiscal year,” Nepal said.
Despite rise in money supply, domestic lending is not likely to expand in the manner predicted at the beginning of this fiscal. “This is because of slackness seen in economic activities,” Nepal said.
NRB expects total lending to increase by 20.7 per cent in the current fiscal year, as against the previous growth forecast of 23.4 per cent. Also, lending to the private sector is expected to go up by 17.5 per cent, as against the previous prediction of 20 per cent.
One of the reasons for lower credit growth is deceleration in capital spending of the government.
The government spent only 6.5 per cent, or Rs 13.63 billion, of the capital budget in the first six months of the current fiscal year through mid-January because of supply disruption, which created shortage of petroleum products, construction materials and other goods.
Because of this, the government’s treasury surplus stood at Rs 81.89 billion in the six-month period. Since the government is sitting on top of piles of cash, it has not been able to raise debt from the domestic market.
“This has prevented NRB from floating securities, such as bonds, which is expected to affect liquidity management drive of the central bank,” Nepal said.
The government had earlier said it would raise Rs 88 billion from the domestic market to finance its expenses.
Against this backdrop, bankers were expecting NRB to introduce measures to mop up excess liquidity, which has also exerted pressure on deposit rates.
However, the central bank only said it would continue to use existing tools to absorb excess liquidity.
“The problem of excess liquidity is not a long-term problem and the level of excess cash is expected to come down once government spending picks up. But if the situation worsens, then we will issue NRB bonds to mop up excess funds,” Nepal said.