Five decades ago, Milton Friedman, perhaps the most celebrated monetary economist in the 20th century, introduced the term 'helicopter money' in his 1969 book, The Optimum Quantity of Money to illustrate the inflationary effect of money supply. But these days, helicopter money is synonymous to expansionary policies, whether fiscal or monetary, and is considered to positively affect real growth. The policy of helicopter money is compared to 'debt-financed fiscal stimulus combined with a quantitative easing programme by the central bank'.

Nepal Rastra Bank, the central monetary authority of Nepal, while announcing its monetary policies for the new fiscal year on July 17, has heavily relied on 'helicopter money' to address the demand for additional financial resources. At times, proposals like the one to expand the refinancing fund fivefold, from the current Rs50 billion, appear to be pure hyperbole—in light of the central bank’s inability even to identify the possible source for this.

However, the proposed monetary policy has made fairly plausible propositions to unlock a significant amount of loanable liquidity in the market. A 5 percent increase of the credit to core capital plus deposit (CCD) ratio from 80 to 85 percent, the reduction of compulsory cash reserve ratio (CRR) by 1 percentage point from 4 to 3, a suspension of the provision on banks to set aside funds for countercyclical buffers and the reduction of repo rates would make about an extra Rs300 billion available to the financial system for investment.

Large firm bias

These are exactly the reasons why Nepal's corporate sector enthusiastically welcomed the monetary policy, albeit with an equally strong stress on implementation in the same breath. It is understandable as the leaders who now represent the private sector through interest group organisations and whose voice is now heard loud are from among these large corporate entities and are better positioned to take benefit of the proposed pandemic-focused special incentives. But one of the biggest caveats of this monetary policy is that it is heavily skewed towards these organised and large borrowers; it barely facilitates accessibility for the small and medium enterprises (SMEs) to these funds. It also blatantly ignores the micro, informal, cottage and street (MICS) set of enterprises that are key to generating self-employment and greasing the growth wheel.

According to the new monetary policy, out of the total investments of banks and financial institutions exactly 50 percent of the loan has gone to the ticket size of Rs10 million or more. But in terms of the number of borrowers, this 50 percent loan disbursement has been enjoyed by less than 10 percent of the about 1.5 million borrowers in Nepal's financial system. The results of the government-sponsored National Economic Census 2018 shows that out of 923,356 business establishments in Nepal, 460,422 (49.9 percent) are not registered and about 34,000 are street businesses. Of the 3.2 million people employed, half of them, nevertheless, are engaged in these unregistered 'firms'. This is exactly the lot that cannot have access to any of these monetary policy incentives but have been hit hardest by the Covid-19 pandemic in terms of jobs losses and shuttered businesses. They are unlikely to restart their operations without direct cash injection; barely with policy support like marginal interest rebates and slight deferral on instalment repayment dates as proposed by the policy.

Banks under duress

Although the monetary policy plans to compel the commercial banks to disburse concessional loans at 5 percent interest rate in the areas specified to a minimum of 500 clients and national level development banks to disburse at least 300 such loans, the institutional mechanism for the same simply does not exist. The monetary policy does not envision the role of provincial or local governments to coordinate or contribute in selecting the right candidates for these loans. This, in turn, may turn out to be a major bottleneck both in investment and loan recovery. The end result could be either non-disbursement or the proceeds landing on the wrong hands.

This monetary policy has heavily relied on the principle of directed lending which, Nepal Rastra Bank itself recognises, 'is not considered to be consistent with the financial sector liberalisation policy'. The central bank, therefore, was gradually phasing out several of these since the beginning of financial sector reform in 2002.

But the cumulative weight of the directed lending imposed by the current monetary policy constitutes 45 percent of the total loan disbursements. The commercial banks must invest 15 percent in agriculture, 15 percent in SMEs, 10 percent in hydropower and 5 percent to the deprived sectors. There are, however, a few multi-year targets and there may be some unspecified insignificant overlaps in computations. Most of these schemes have also enforced the interest rate caps. These stringent provisions directly impact on the profitability and, then, the financial health of the BFIs; approximately 85 percent of which is owned by the private sector. This poses risks, both to financial sector stability and towards mass potential lay-offs when earnings spiral down. It is essentially an anti-free market move.

Structural corrections

Despite all tall claims of increased financial access, the new monetary policy also fails to address three key issues, namely, the absence of appropriate institutional framework to employ the policy instruments right at the target, a deficit of digital infrastructure and financial education and high cost of funds regressively extracted from the most deprived of the borrowers.

As a phenomenal policy retreat, this monetary policy has once again brought the Agricultural Development Bank to the centre stage of agriculture-related financing. It may be recalled that this bank was converted into a general commercial bank only a decade ago as part of 'reform'. Loan securitisation and a high rate of default still remain as the unaddressed structural challenges in agricultural loans. Financing without embedded financial education on cash flow and basic project management remains a key bottleneck in productive utilisation. The microfinance model of financial inclusion has, in essence, failed in Nepal due to high operational costs. The current monetary policy puts a 15 percent cap on the interest rates charged by the microfinance institutions. These institutions are unlikely to sustain from earnings at this rate of return, while the rates are still too high for borrowers. This paradoxical situation is unlikely to facilitate the pandemic-hit small enterprises that are served by these microfinance institutions.

Without proper follow-through and plug-ins on the ground, ambitious propositions of the helicopter money are unlikely to provide windfall gains to an already tattered economy.

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