Inflation, exchange risks on rise

KATHMANDU, DEC 27, 2012

An accommodative monetary policy in fiscal year 2011-12 had allowed banks additional space to rebuild profitability, but inflation and exchange risks are on rise, suggesting the need to tighten, according to the International Monetary Fund (IMF).

Weak credit demand and the overhang of banks’ excess reserves at the central bank however suggest that, while money growth was excessive, upward pressure on prices from monetary policy was moderate, it said in its report. “Rather, the bulk of inflation stemmed from factors like administered prices, higher import prices through exchange rate depreciation, and the effect of wage and salary increases. However, prices have continued to climb since the end of fiscal year, with headline inflation reaching just under 12 per cent, year-on-year, in August — the ninth consecutive year-on-year increase.

Real interest rates have been negative for over a year, and the wedge between domestic and India’s one month interbank rate has widened to almost 900 basis points on a sustained basis — suggesting a powerful financial incentive for capital flight, and a risk to the exchange rate peg.

According to the report, the central bank shifted policy in July 2012, signalling its intent to bring broad money growth to 15 per cent in the current fiscal year, consistent with a targeted average inflation rate of 7.5 per cent. However, it is also not possible due to rising informal economy. The exchange rate peg has served as a pillar of stability and although quantitative estimates suggest some overvaluation, the rupee does not appear fundamentally misaligned, it added.

Source: THT

Be aware of changes happening in India: IMF

KATHMANDU, Sept 15, 2012

International Monetary Fund (IMF) has cautioned the government to remain aware of possible risks that the country might face due to vulnerabilities seen in India.

Todd T Schneider, chief of Article IV mission of IMF, issued such warning note when he meet with Finance Secretary Krishna Hari Baskota on Friday.

During the meeting, Schneider and Baskota shared current status of the economy and changes happening across the globe, particularly neighboring countries, MoF said issuing a statement.

The growth rate of India has declined to a nine-year low of 5.3 percent due to slowdown of the manufacturing sector in the April-June quarter of 2012.

“Even though the government has not been able to announce full-fledged budget, macro-economic indicators of the country are quite positive and the government has laid focus on creating favorable investment environment and channeling invest in the productive sector,” Baskota stated.

Additionally, Baskota informed the mission team that the government is continuously working towards reducing the custom duty rates in order to facilitate international trade.

Source: Republica

Amendment to NRB Act : NRB looking for greater authority in BFI liquidation

KATHMANDU, MAR 16 - 2012

As it prepares to amend the NRB Act 2002, the central bank is seeking greater authority for itself when it comes to liquidating insolvent banks and financial institutions (BFIs).

As per the initial draft of the bill, the Nepal Rastra Bank (NRB) will seek a court order for liquidation of a BFI only after a team appointed by the central bank manages the BFI’s assets and liabilities.

As per the existing NRB Act and Bank and Financial Institution Act, the task of managing assets and liabilities of a BFI to be liquidated is carried out by the liquidator appointed by the court.

The Nepal Rastra Bank (NRB), however, is not ready to accept the suggestions of the International Monetary Fund (IMF) that say that the central bank should itself be empowered to liquidate insolvent BFIs instead of going to the court to determine viability of insolvent BFIs.

In its report published in November 2011, the IMF has said that the current provision of requiring a court order to determine a BFI’s viability delayed action by months and caused forbearance in the full application of the prompt corrective action framework.  Therefore, the IMF has sought the intervention power for NRB subject to review only if the central bank’s decisions were found arbitrary. The IMF had said that the authority given to NRB did not match international standards and it should be given more power by amending the existing laws.

According to the draft, the central bank will form a team of experts from banking, accounting and law to restructure BFIs, if possible, or manage assets and liabilities before sending to them liquidation. “The same team will be responsible for asking the court to liquidate the BFI concerned after doing its utmost to recover assets and pay liabilities,” said an NRB official.

As per the clause 86 (G) of the NRB Act 2002, the central bank can apply to the Appellate Court  for dissolution of an insolvent BFI after ascertaining that there are no possibilities for turning the BFI healthy even after carrying out prompt corrective action and other actions initiated after delclaring the BFI crisis-ridden. “As the current provision allows BFIs concerned to recover on its own under strict conditions and guidance of NRB, the bill being drafted provisions that the central bank-appointed team will carry out the job,” said the NRB official.

The official said their decision not to bypass the court for liquidation as suggested by IMF is to avoid any possible legal hurdles that the NRB-appointed team may face in the event that all liabilities could not be cleared. “Therefore, seeking a court order in the final stage will not only remove such hurdles, but also make the liquidation process shorter,” he said.

Nepali financial sector has so far witnessed liquidation of two financial institutions-Nepal Development Bank and Samjhana Finance.

The liquidation of process of NDB that started in 2009 has not concluded yet, while Samjhana’s liquidation is yet to begin although it has been several months since the central bank applied to the Appellate Court for its liquidation.

Source: Kantipur