Is FinMin backtracking on his earlier stance as governor?

Kathmandu, October 4

Nepal Rastra Bank (NRB) has expressed dissatisfaction over unnecessary intervention from the Ministry of Finance (MoF), at the cost of the autonomy of the central bank.

Finance Minister Yubaraj Khatiwada, who has been floating flop ideas, like loan against collateral of academic certificates, among others, is allegedly tampering with the initiatives taken by the central bank on open market operations and intervening in day-to-day works of the NRB.

Ironically, Khatiwada, who used to advocate for the autonomy of central bank when he was NRB governor, seems to be doing just the opposite after he became the finance minister.

Recently, the Cabinet approved subsidised loan scheme for youths against the collateral of academic certificates, which the banks and financial institutions are not willing to entertain citing the chances of default. Analysts have compared the scheme with the Youth Self-Employment Fund, which was established to provide seed money to youths to encourage them to embrace entrepreneurship. The fund has, however, been politicised and a large chunk has been misappropriated.

Khatiwada recently introduced a similar programme of subsidised loan for the youths, which they can acquire by pledging their academic certificates as collateral.

Former governor of NRB Tilak Bahadur Rawal said that it was natural for BFIs to hesitate while floating loans under such schemes as they had experienced waiver of such loans from the government in the past.

BFIs believe that this is a politically motivated programme.

In another example of his high-handedness, Khatiwada urged the central bank to refrain from presenting its projection on economic scenario in its monthly economic outlook. The central bank used to analyse the economic situation and prospects briefly in its macroeconomic outlook. However, it has been stopped from the beginning of this fiscal.

Similarly, finance minister has instructed the central bank not to execute the interest rate corridor that the NRB had been executing on short-term interest rates like interbank rate, repo rate, and treasury bills, among others. Consequently, the yield that BFIs used to get by investing in government securities has gone down and has thereby affected their base rate. BFIs add the difference of yield in government securities and the interest rate in general savings they have been providing on base rate.

“The government stands to benefit as it can raise domestic debt at low rate, but the move will ultimately affect the borrowers, who are hoping the lending rates will come down,” a high-level source at the central bank claimed.

Khatiwada used to criticise the interest rate corridor introduced by the central bank in fiscal 2016-17, which had kept the repo rate at mid-point, and termed it as ‘interest rate highway’. However, the central bank has fixed the lower and upper bounds of the corridor from fiscal 2017-18 and the Monetary Policy of fiscal 2018-19 has determined the
lower bound at 3.5 per cent and upper bound at 6.5 per cent.

It is reported that the Finance Ministry has also stopped the central bank from publishing the ‘borrowing calendar’. The public debt department of the central bank used to publish the calendar for domestic borrowing and borrow for the government as per the calendar. However, the MoF has not granted permission to publish the borrowing calendar in this fiscal, as per central bank sources. In the absence of the calendar, it would be difficult to figure out the amount that the central bank will borrow
from the market for the government in each quarter.

Sources claim the finance minister’s interference reached a new height when the MoF began taking a call on the NRB candidate to participate in the international forums. Recently, the MoF directed the central bank to ensure that the deputy governor participated in the meeting of Financial Action Task Force (FATF) Plenary and Working Group meetings in Paris, France from October 14 to 19. In retaliation, the central bank has refused to participate in the FATF meeting, according to MoF sources.

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