Monetary policy: Will the measures counter the shocks?

Half-baked and misguided lending directives might further exacerbate asset-liability mismatches.

In his first annual monetary policy announcement as a governor of Nepal Rastra Bank, Maha Prasad Adhikari rolled out expansionary measures that aim to provide a healthy regulatory environment as well as immediate relief to businesses and households struggling due to the pandemic. The healthcare, economic and employment shocks have been unprecedentedly disruptive. Given the extended period of lockdowns, persistent supplies disruptions and subdued aggregate demand, economic growth in 2019-20 is projected to be much lower than the 2.3 percent estimated by the Central Bureau of Statistics before the virus took hold in Nepal. The shortage of goods and services has increased inflationary pressures, and lending interest rates have remained in the double-digits. The acute cash flow issues faced by businesses, and either layoffs or reduced working hours faced by individuals, have increased the risk of a liquidity crisis morphing into a solvency crisis.