Nepal Rastra Bank’s misguided focusThere is a need to balance the environment and development, but it's not the central bank's job.
The Swedish Riksbank, established in 1668 with a charter to lend the government funds and act as a clearing house for commerce, is recognised as the world's first central bank. In 1694, the Bank of England was founded. Besides funding the government’s debt, these pioneer central banks engaged in banking activities themselves. Because they held the deposits of other banks, they became the lender of last resort in times of crises. In 1913, the United States Federal Reserve was created with a mandate to provide a uniform and elastic currency and to serve as a lender of last resort. As they were bound by their adherence to the gold standard, price stability was their primary commitment, but not the stability of the economy.
This began to change post-World War I, as employment became a top concern. In 1931, England suspended the gold standard. Three years later, the US revalued the metal from $20.67 per ounce to $35, enabling it to massively expand the money supply; come 1971, then president Nixon ended the direct convertibility of dollars into gold, and the era of fiat money was born. Inflation gradually began to go rampant; this was eventually tamed by Paul Volcker’s Fed. His successor Alan Greenspan, who assumed office shortly before the October 1987 stock market crash, essentially widened the Congress-mandated goals of price stability and maximum employment. Financial stability by default became the third mandate.
Greenspan’s successors—Ben Bernanke, Janet Ellen and now Jerome Powell—went along with this. Central bankers today do not rein in stock market and housing booms/bubbles but are quick to respond to busts with loads of liquidity. After the 2007-08 financial crisis, quantitative easing—an unconventional policy using the balance sheet—became the norm. The Fed is spreading its tentacles wider. It has joined the Network of Central Banks and Supervisors for Greening the Financial System, which was launched in December 2017 to develop recommendations for central banks’ role for climate change. In a subsequent financial stability report, the Fed explored climate change for the first time.
Acting beyond mandates
The risk in this is that central bankers are spreading themselves too thin. These are institutions with immense power and will probably serve their purpose better by staying closer to their mandates. Climate change is a noble goal, but it is a slippery slope. Nepal Rastra Bank, Nepal’s central bank, is at risk of committing this error. In February, it unveiled a checklist on climate risks for banks and financial institutions to complete before financing any projects. Global temperature is rising. A drought-prone area today could very well be flooded in 20 years. Experts struggle to assess the magnitude of man-induced climate change. Banks, which have professionals on the payroll to assess these risks, do not need to be told what to do.
As per its mandate, the Nepal Rastra Bank Act 2002 states that (1) The objectives of the bank are: (a) To formulate, and manage, monetary and foreign exchange policy needed to maintain price and balance of payment stability for the achievement of economic stability and sustainable development of the economy; (b) To raise public confidence toward the banking and financial system by making the sectors stable and by increasing access to financial services; (c) To develop a secure, healthy and efficient payment system. (2) The bank, without adversely impacting the objectives outlined in subsection 1, will extend cooperation to the government of Nepal in the implementation of economic policy.
One can argue that climate change has the potential to adversely impact economic stability; hence it falls within the purview of Nepal Rastra Bank. As a case in point, in the last harvesting season a year ago, yarsagumba, an expensive caterpillar fungus harvested in the high altitudes for its supposed aphrodisiac properties and which is in high demand in China, collectors returned empty-handed. Lots of livelihoods in remote districts such as Dolpa depend on this income. Last year, the yarsa was not fully mature. Of late, the Himalayan region has gotten routinely hit by erratic monsoons and warmer weather. Snowlines have receded and glaciers have shrunk, increasing the danger of floods downstream.
Climate change no-brainer
To many, climate change is a no-brainer. It is happening right in front of us. Studies showed how reduced emissions of nitrogen oxides due to Covid-19 lockdowns in the early months of 2020 apparently caused a global drop in ozone pollution. This highlights the extent of pollution generated by human industry and transportation. At the same time, global warming is a touchy subject. Not everyone buys it. And not everyone is affected equally. There are zealous sceptics, as there are fanatic believers. There are scientists—including Nobel laureate Ivar Giaever—who do not completely pooh-pooh the notion of global warming, but claim that the data is not nearly as compelling as the anti-carbon crowd would have us believe.
Sadly, the issue has become political. In countries like Norway, belief in climate change spans political parties. But in the US, it is politically divisive. There is little common ground between Democrats and Republicans on what causes it, let alone how to solve it. Donald Trump, who referred to global warming as a “hoax”, withdrew from the Paris Climate Agreement in 2017. Republican Trump’s Democrat successor Joe Biden recommitted the US hours after being sworn in as president in January 2021. It is these politicians that appoint officials like Fed Chair Powell, a Republican, who joined the Network of Central Banks and Supervisors for Greening the Financial System in December 2020.
Therein lies the problem. At the risk of oversimplification, liberals and conservatives see climate-related matters through different lenses. Change in political leadership hence can entail change in policy. Understandably so, as, let us say, the Communist Party of Nepal (UML) and the Nepali Congress—the leading two parties in Nepal—operate on different political philosophies. Hence the need for institutions like Nepal Rastra Bank to be able to focus on its mandate no matter who is in power. A wider focus makes it vulnerable to political intervention. Climate change is real. Nationally, there is a need to create a right balance between environment and development. But this is not a central bank’s job.