Covid-19 had forced the Nepal Rastra Bank to pursue a liberal monetary policy in the last two fiscal years. With a view to expand credit to revive the pandemic-hit economy. Therefore, Monetary policy reins in credit expansion to control inflation
With the situation now changed with over expansion of credit causing a steep jump in imports leading to depletion of foreign currency reserves. Besides contributing to rising inflation, the central bank has come up with a plan to reduce the expansion of credit and money supply in the market.
Measures have also announced to help banks and financial institutions to maintain more liquidity as excessive lending in the initial months of the last fiscal year. Resulted in a shortage of loanable funds to finance the productive sector in the later months.
Unveiling the monetary policy, central bank governor Maha Prasad Adhikari announced that credit expansion to the private sector would be confined within 12.6 percent, a sharp reduction from the targeted 19 percent in the last fiscal year.
Credit expansion
Likewise, the new monetary policy aims to limit the growth of money supply (cash, demand deposits, non-cash assets that are very liquid and that are easily convertible into cash) to 12 percent from the last fiscal year’s target of 18 percent.
This is the first time that the growth target of credit expansion and money supply has been kept at such a low level in many years.
The greater the money supply and credit expansion, the greater the possibility of increased inflation because of the demand they create in the market. During the first 11 months of the last fiscal year, credit expansion to the private sector stood at 16 percent as banks and financial institutions stopped further lending in the second half of the last fiscal year. Therefore, Monetary policy reins in credit expansion to control inflation
