Monetary Policy 2016/17

Monetary policy 2016/17 was announced on July 14 2016 under the backdrop of southern border
disturbances and post earthquake reconstruction. It is made compatible with domestic and
international economic outlook as well as objectives and priorities of GoN Budget 2016/17. It aims to
facilitate the implementation of GoN budget to achieve 6.5% of economic growth and 7.5% of
inflation.

Stance of monetary policy 2016/17

NRB publishes the overall tight stance to balance the impact of larger size of the Government budget
(2016/17) on macroeconomic stability. Monetary policy will facilitate to achieve targeted economic
growth of the government and aims at maintaining macroeconomic stability. Other major stances are:

1. Contained the inflationary pressure arise from reconstruction-led government budget

2. Keeping the short term interest rate at desired level-introduction of interest rate corridor
3. External sector stability- that may arise from decelerating remittances and accelerating import
4. Channelizing financial resources to productive sector-agriculture, energy, tourism, cottage and
small industry as well as deprived sector whereby decreasing the credit to real estate and stock
market.
5. Widening the financial Inclusion through literacy and financial access.
6. Ensure financial stability

Economic and monetary target

1. Inflation- as a primary objective Monetary policy aims to contain CPI inflation at 7.5% (price
stability)
2. Foreign exchange reserve- aims to cover imports of goods and services for at least 8 months
(External sector stability)
3. Growth of broad money M2 at 17 %
4. Domestic and private credit growth at 25% and 20% respectively.
5. Necessary liquidity provided to achieve 6.5% of economic growth and currency peg as a nominal
anchor of monetary policy remain unchanged.

Operating target and Monetary Instruments

 Introduction of interest rate corridor (IRC) - a mechanism that guide short-term interest rate. This
keeps interest rate within certain band. Two week repo rate will be taken as policy rate.
 Cash reserve ratio: cash reserve for class A, B and C class bank is 6%, 5%, and 4% respectively.
 SLR: SLR for class A, B, and C bank is 12%, 9%, and 8% respectively.
 Bank rate is unchanged at 7 %
 Credit to earthquake affected people at 2 % and refinance for such loan is at zero percent interest.
 Introduction of liquidity monitoring and forecasting framework (LMFF) in order to measure and forecast
excess liquidity of bank and financial institution.
 Credit type Refinance rate %
Earthquake victims 0 (for earthquake victims)
General refinance 4 (for commercial farming fruits, vegetables, hydropower and specified
productive sectors)
Special refinance 1 (equivalent to export amt for ostrich/cardamom farming & beekeeping
Export LIBOR+0.25 encourage export

 Percentage of total credit to the specified productive sector is 20 percent for commercial bank and
that is of 15 percent and 10 percent to development bank and finance companies respectively.

Macro prudential Regulation

Major Highlights

 No change in CRR and SLR

 Introduction of Interest rate corridor (IRC) to stabilize the short-term interest rate
 Introduction of common equity tier-1 capital ratio
 Mandatory CSR
 Infrastructure development bank
 Strengthening capital base of BFIs- national level MFIs should maintain 600 millions of minimum
paid-up capital
 Relaxation on consortium financing and foreign exchange regulation

Criticism

Force lending provision to certain area may have negative impact on banking sector. So NRB should
try to policy stability through innovative use of monetary instrument.