On Monday, the central bank made a downward revision of the growth forecast to 5 percent citing poor performance in the farm sector which accounts for one-third of the national economy. The revised estimate is lower than the 5.2 percent growth rate attained in the last fiscal year.

Unveiling a mid-term review of the monetary policy for this fiscal year, NRB Governor Yubaraj Khatiwada said that the agriculture sector had grown a mere 2 percent.

“In order to meet the targeted growth, the non-farm sector will have to grow at a rate of more than 8 percent, which is impossible at best under the current circumstances,” he added. He said that the revised estimate had been made based on discussions with the government.

The Ministry of Agricultural Development has already revealed that key cereal production has dropped this fiscal year with paddy output down 5.1 percent to 4.78 million tonnes, and maize, the second most important staple crop, down 6 percent to 2.14 million tonnes.

According to the ministry, paddy production shrank largely due to a late monsoon and untimely rainfall followed by other reasons like expanding urban areas, land plotting for residential development and natural disasters.

However, the ministry has attributed the drop in maize output to crop diversification as many farmers have switched to vegetable farming because of the higher and quicker returns.

While the government has aimed at a growth rate of more than 8 percent for the next eight years to upgrade the country to the status of a middle income country, the failure to attain the targeted growth this year will be a setback.

According to the Finance Ministry, it has been a long-standing tradition for the country to constantly miss the growth target. The country has consistently set the growth target at 5-6 percent during the past decade, but the growth rate has been averaging 4.1 percent throughout.

Meanwhile, Governor Khatiwada said that inflation would hover around 7 percent based on an internal assessment made by NRB.

“As non-monetary factors such as supply disruptions may take place at any time, no downward revision in the rate of inflation was made officially,” he said.

The central bank, which has the responsibility of holding down inflation to keep the economy healthy, has targeted to maintain it at 8 percent this fiscal year. Inflation was recorded at 6.8 percent in the sixth month of this fiscal.

Similarly, the country’s exports have decreased continuously over the first six months of this fiscal year while imports have surged resulting in a massive trade deficit.

As shipments to India, the largest foreign market for Nepali goods, have slumped despite a rise in exports to China and other third countries, the overall export performance remained negative during the first six months, said NRB. Exports to India took a dive of 17 percent during the period.

Imports swelled 13.3 percent during the period, but the growth rate is still lower than the 23.1 percent leap recorded during the same period last year, largely due to a fall in oil prices. Meanwhile, the trade deficit jumped 16 percent to Rs 334.83 billion.

The balance of payments situation during the six month period showed a surplus of Rs 34.26 billion. The surplus amounted to Rs 77.19 billion during the same period of the previous year.

Guv asks banks to hike interest rates on deposits

Nepal Rastra Bank Governor Yubaraj Khatiwada on Monday asked banks and financial institutions (BFIs) to make upward revision in interest rates on deposits, terming the current rate “too low”.

After a two-year liquidity surplus, the situation is now tightening, which is evident with the fact that inter-bank lending rate has soared to 5 percent.

Khatiwada warned the banks may have to again face liquidity crunch which they faced three years ago if they don’t hike interest rates on deposits. “To ensure the interest rate does not reach to 13 percent from the current 3 percent, they must hike the rate now,” he said.

With deposit growth slowing and credit growth expanding, the average credit-to-deposit (C/D) ratio has already reached 76-77 percent, according to NRB. “So the banks don’t have more space to make reckless lending,” said Khatiwada, speaking at the unveiling of the Mid-Term Review of the Monetary Policy.

With the surplus liquidity situation ending and  the government’s treasury holding over Rs 90 billion at the end of the first half, Khatiwada said the banking system could face “stress” in liquidity this year if government fails to spend.

Expressing worry over slow remittance growth, the governor expressed surprise how could the remittance slow at a time when the number migrant workers has grown and their wages has not declined.

In the first six months this year, remittance growth stood at just 3.9 percent against a rise of 34.4 percent in the same period a year ago. According to the NRB, decrease in remittance is one of the reasons why banks’ deposit growth slowed— at 6 percent in the first half this year, against 8 percent in the same period last year.

However, Khatiwada said he does not think a slow remittance growth would lead to liquidity crunch in banks, at least this fiscal year. He stressed on the need for making efforts to bring in remittance through formal channels by providing incentives to migrant workers and taking other administrative measures against those using illicit medium like Hundi.

MFIs told to reduce spread rate

KATHMANDU: NRB Governor Yubaraj Khatiwada said micro-finance institutions (MFIs) must reduce the gap between the interest rates on deposits and credit, warning them that central bank could control on their dividend. Given commercial banks already reducing their spread rate to 4.5 percent, Khatiwada said the MFIs cannot do business by maintaining a spread rate at 15-16 percent despite. “If this situation is not controlled, we have to control your dividend,” Khatiwada warned, congratulating banks for earning “good profit” despite reduced spread rate.