Nepal Rastra Bank on Thursday continued the tighter monetary policy aimed at controlling credit expansion fearing that easy availability of credit could again fuel imports leading to a rapid depletion of foreign exchange reserves.

The central bank said in its mid-term review of the monetary policy on Friday that the existing direction of monetary policy will be continued as a possible rise in imports could mount pressure on the external sector of the economy in the context that import restriction measures have been lifted.

The status of the foreign exchange reserves, balance of payment (balance of money going out of the country and coming in from abroad) are some of the components of the external sector of the economy.

Considering the sharp reduction in the government’s revenue, the government lifted a ban on the import of vehicles, expensive mobile sets and alcohols effective from mid-December last year.

In the third week of January, the central also also removed the provision that forced importers to deposit certain cash margins upto 100 percent to open letters of credit to import certain goods.

The NRB said that these relaxations could boost imports. On the other hand, continued high inflation also forced the NRB to maintain a tighter monetary policy.

In order to ensure a tighter monetary policy, the NRB has kept several rates unchanged. For example, it kept the cash reserve ratio (CRR), a certain percentage of a bank's total deposits that it needs to maintain as liquid cash at Nepal Rastra Bank, unchanged at four percent.

Likewise, the statutory liquidity ratio (SLR), which is the minimum percentage of deposits that a commercial bank needs to maintain in the form of liquid cash, gold or other securities, was also kept unchanged at 12 percent.

As the new monetary policy seeks to reduce expansion of credit, it announced the hike in these rates from 3 percent and 10 percent respectively.

The central bank also kept the targets for credit expansion to the private sector and money supply target unchanged at 12.6 percent and 12 percent respectively, which were reduced sharply through the monetary policy.

These measures resulted in slower growth of credit compared to deposits during the first six months of this fiscal, according to the NRB.

The central bank believe cheap credit – made available to the private sector in the last fiscal year through refinancing facilities – were used in imports which resulted in a massive deficit in balance of payment.

The balance of payment has turned positive since the second quarter of the current fiscal year after facing a deficit for 14 months and foreign exchange reserves have also grown in recent months.

According to the central bank, based on the import of six months of current fiscal year 2022-23, the foreign exchange reserves of the banking sector is sufficient to cover the prospective merchandise imports of 10.4 months, and merchandise and services imports of 9.1 months.

“The lifting of the import ban and removal of provision that required importers to deposit upto 100 percent cash margin will contribute to a rise in imports which will increase the supply of goods and services, helping to reduce inflation," said Prakash Kumar Shrestha, chief of economic research department at the central bank.

“But our concern is if it will affect the balance of payment again,” he said.

According to NRB, the balance of payments remained at a surplus of Rs97.10 billion in the first six months of the current fiscal year while gross foreign exchange reserves stood at Rs1337.29 billion and $10.30 billion.

Now, the government has been forced to take a liberal approach on imports due to a reduction in revenue. The government collected Rs506 billion in revenue till February 9 this fiscal year, a sharp decrease from the collection of Rs603 billion during the same period last fiscal, according to Financial Comptroller General Office.

“But the question is can the Nepali economy afford a highly liberal import regime just because there has been certain improvement in external sector indicators of the economy,” said Economist Keshav Acharya.

After import restrictions were removed, the supply of imported goods will grow. But increased supply alone will not ensure that prices will fall.

The central bank stated in a mid-term quarter review of the monetary policy that the rise in the price of petroleum products and depreciation of Nepali rupees has increased the cost of imported goods, putting inflationary pressure on consumer price.

The year-on-year consumer price inflation remained at 7.26 percent in mid-January 2023 compared to 5.65 percent in the same period last year at the same time.

Shrestha said that the rate of change in price of inflation will gradually decline due to base effect. “Inflation will remain higher than targeted,” he said.“We expect inflation to remain around an average of 7.5 percent till the end of the current fiscal year.