It takes time for a bud to blossom into a flower, and the process is not always straightforward. Some buds never bloom, some simply dry up. Budding democracies are the same way. They need nurturing. The weeds of existing customs and practices that cling to the status quo constantly pose a roadblock. Then there are times when righteous individuals or institutions rise to the occasion, which helps clear out the weeds and lay the foundation of a shift in thinking. Lots of times, the current generation fails to realise the significance of what is taking place. But the future generation will be thanking them for having the courage to do the right thing.

Nepal is a young democracy. The current constitution is only six years old. Under the new system of governance, apart from a federal government at the centre, there are seven provinces and 753 local units. It can get chaotic at times. It is a new system, but it is made up of the same old politicians and bureaucrats. It is hard to let go of beliefs and philosophies that have been hard-wired into the brain over years and decades of practice. Old habits die hard, as the saying goes. Corruption was, and is, the way of life—and a necessity at times as incomes for many are not sufficient to meet the basic needs. Abuse of authority is not invariably looked down upon.

Good precedent

KP Oli’s second stint as prime minister lasted from February 2018 to July 2021. During his tenure, the Supreme Court stopped him twice from dissolving the House of Representatives. The first attempt took place last December. Lawsuits followed. Many, including a section of Oli’s own party, took to the streets. Come February this year, the court deemed the dissolution unconstitutional. Mired in intra-party conflict, Oli again dissolved the House in May. Once again in July, the court reinstated the House. Hindsight is 20/20, but it is safe to say that a decision to the contrary had the potential to push back political and economic reforms years, if not decades.

Time and again, Oli as prime minister showed the characteristics of an autocrat, and was willing to test the system—an embryonic system in many respects. A bad precedent would have been set if the court had not asserted its independence. The country’s other major independent body, Nepal Rastra Bank, the central bank, is currently at a similar juncture. It, too, is under pressure from Oli’s successor Sher Bahadur Deuba’s administration to change a policy in which the ink is barely dry. By nature, politicians care about the next election cycle. Institutions like the Supreme Court and Nepal Rastra Bank have a greater purpose, but they get tested here and there.

Nepal Rastra Bank aims to formulate, and manage, monetary and foreign exchange policy needed to maintain price and balance of payment stability. It is independent, but with a twist. One of its seven board-of-director seats is occupied by the finance secretary, who probably will fall in line with the policy of the ruling party. In addition, the 2016 second amendment to the Nepal Rastra Bank Act added section 106 C, which states that (1) The government of Nepal may give directives to the bank as relates to currency, banking and finance, and that (2) It will be the bank’s duty to abide by them. This gives politicians an opportunity to needlessly interfere.

The monetary policy for the fiscal year 2021-22 was unveiled on August 13. One of the new changes involved margin debt. The 2020-21 policy had raised the amount banks and financial institutions (BFIs) were allowed to offer in margin loans from 65 percent of the value of shares to 70 percent. This was left unchanged in the current policy, but there were limits elsewhere. Investors are now allowed to borrow only Rs40 million from one BFI and a combined Rs120 million from multiple lenders. As of mid-August, BFIs held Rs108.5 billion in these loans, up from Rs50.4 billion as of mid-July last year. Investor appetite for leverage has jumped.

This is what a rip-roaring rally does. The NEPSE, Nepal’s major equity index, bottomed in March 2019 at 1099, and in June last year at 1150. On August 12, a day before the monetary policy was announced, it closed at 3179, peaking at 3227 on August 19. Then, the rug was pulled from underneath, tagging 2779 on September 5, for a quick 14-percent tumble. The drop is nothing to sneeze at, but this also precedes a 14-month, 181-percent surge. Longs nevertheless are blaming the new margin loan policy for the drop. In protest, they have organised a motorcycle rally and a sit-in, and held discussions with officials including the finance minister.

The goal is to compel Nepal Rastra Bank to reverse its new policy. Finance Minister Janardan Sharma poured petrol on the fire by calling Governor Maha Prasad Adhikari to tell him to review the policy. The protesters are now calling for Adhikari’s resignation. What should have been a run-of-the-mill policy change has unnecessarily turned into a circus. Longs want stocks to rally. Finance ministers, too, would want the stock market to do well during their tenure. But the central bank as a regulator has responsibilities, not the least of which is investor protection. It is important to remember that gains get multiplied with the use of leverage, but so do losses.

Thus far, Adhikari has rightly refused to bend under pressure. Central bankers cannot be at the beck and call of politicians. If need be, the issue can always be reviewed at the upcoming quarterly review. But changing the policy just because some leverage-drunk longs are demanding it will be whimsical and set a bad precedent. Regulators are humans, and can make policy mistakes. In a democracy, citizens can—and should—cry foul when that happens. This is not one of those times. The leverage party is starting to get too rowdy, so it is time to take the punch bowl away. This should help shore up a budding capital market, not weaken it.