March 31, 2015 Sujeev Shakya

Goals for the Governor

The new governor Chiranjeevi Nepal takes over amidst a laundry list of issues for the Nepal Rastra Bank to undertake. Yet, we should not expect major policy announcements immediately but rather, wait for him to settle down and chalk out a plan for five years. The previous governor completed his full tenure and saw through different combinations of government. Similarly, Nepal will surely see through more than one coalition and it will be important to look at what needs to be done on a five-year time period rather than five days. The planning process can yield a very well thought-out monetary policy as well as interventions through the budget of 2015/2016.

Regulating financial institutions

Economic reforms do provide a platform for private players but it is important to have a strong decision-making regulator. The Nepal Rastra Bank needs to strengthen its regulating capacities and actions while at the same time distinguish between what is regulation and what is micro-level intervention. For instance, financial institutions should have the leeway to decide on products and services, fix salaries for their staff, and hire competent CEOs and folks in senior management positions. The comparative and competitive advantage of financial institutions is based on the freedom to decide for itself. If the central bank continues to decide on every element of a bank’s operations, innovative banks will suffer. Competition between various financial institutions should be healthy and the Rastra Bank should ensure healthy competition. More interventions would mean that financial institutions will start functioning like a cartel.

Further, what Nepal needs to do to unleash the second wave of reforms in the financial industry sector is to make the country attractive for foreign financial firms to enter. If we recall, the first wave of reforms were facilitated a lot by international financial institutions that brought in global competencies, systems, and procedures that has helped the entire industry.

Electronic exchange

When Nepal began economic reforms in the early 1990s, the way foreign exchange was managed changed dramatically. From just having foreign exchange available for a few months’ import, Nepal now maintains healthy foreign exchange reserves. What has changed, however, is the tightening of rules on foreign exchange, which has introduced various difficulties to firms and individuals. It is important to provide foreign exchange easily, especially if one has foreign exchange income. While sources of funds coming into Nepal should be verified, foreign investment clearances should be automatic. If Nepal is now going to make investments by Nepali individuals and firms in foreign funds, portfolios, and companies legally possible, we will need a new framework on approval of foreign investments. Further, as electronic systems have worked well for taxation, approval systems need to be made electronic and probably, allow financial institutions to themselves coordinate such electronic approvals.

In Nepal, the margins between the producer and end consumers are high and a bulk of businesses survive on ridiculous margins between different levels of intermediaries. We need to make electronic payments a reality to ensure that e-commerce businesses are unleashed. Further, payments on the mobile platform should be made possible. We have seen in South Korea and India how payment liberalisation has led to the creation of many e-commerce companies that are benefiting the end consumer. Nepal has near 100 percent mobile phone penetration and with cellphones becoming smarter and cheaper by the day, people across the country should be able to benefit from the proliferation of e-commerce. This will also bring opportunities for people to start logistics businesses as it will be lucrative to relook at a country that has now been connected with more roads and airline connections.

We now have a good opportunity to look at the currency issue once again. As Indian currency gains more global acceptability, it is time for Nepal to also create a new modality for its exchange rate. We need a fixed exchange rate for stability. For that, we first need a system of review in place. With over $6 billion remittances and fiscal surplus, we need to ask if the Nepali Rupee is undervalued. Should the exchange rate with the Indian Rupee be NPR 1.40 or 1.50 instead of the current rate is something that we need to discuss. We need to find our own ways to peg our rupee to the dollar to determine the exchange rates but use research to determine the fixed peg. It could be that nothing needs to change, but it is important to know why we are taking certain decisions.

Incentivise institutions

The Nepali economy has continued to grow despite many problems on many fronts. However, financial institutions have not grown, expanded, or innovated commensurate with economic growth. There is opportunity for the regulator to help banking and financial institutions (BFIs) by incentivising them to increase their reach and increase access to Nepalis. The future platforms of banking are going to be mobile phone, tablets, and laptops, so regulatory approaches should be able to facilitate as well as regulate these platforms. We also need Nepali financial institutions to increase their footprint in the region and elsewhere. Nepali BFIs that are doing well should be able to acquire foreign BFIs; we need to think of platforms that are continuously globalising.

The list can go on. Nepal has five years to bring about changes and I wish the new governor the best to carve out a historical five years so that he can look back in March 2020 on the laundry list of reforms accomplished.

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