Nepal’s central bank raises policy rate, warns of pressure on foreign exchange reserves

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Reuters

July 23, 2022, 10:10 a.m.

Last modification: July 23, 2022, 10:15 a.m.

File photo: Vendors in a market wait for customers/RSS

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File photo: Vendors in a market wait for customers/RSS

Nepal’s central bank on Friday raised its key rate at which it lends to commercial banks from 7% to 8.5%, as part of efforts to rein in inflation which is at its highest level in six years, and put warns against the pressure on the decline of foreign exchange reserves.

“There is pressure on domestic prices,” Nepal Rastra Bank Governor Maha Prasad Adhikari said, adding that pandemic-related monetary expansion measures would be gradually lifted.

“The discount rate has been raised to maintain economic stability given the pressure on prices and foreign exchange reserves,” Adhikari said as he read a statement in Nepali.

The central bank had already raised the rate by 5% in February.

Annual retail price inflation accelerated to 8.56% for the month ending mid-June, pushed by soaring food and fuel prices amid pressure on the country’s currency.

Foreign exchange reserves shrunk to nearly $9 billion, barely enough to cover imports for about 6 months, from nearly $12 billion a year earlier.

The government had previously set an inflation target of 7% for the fiscal year, while aiming for annual economic growth of 8%.

“This decision is a way to bring down inflation,” former central bank governor Deependra Bahadur Kshetri said after the rate hike, noting that it would impact consumer demand via higher interest rates. global bank interest.

The rise could also slow economic activity after two years of the pandemic, industrialists said.

“The increase in bank rates will have a negative impact on the industry as interest on loans will increase,” said Pashupati Murarka, an industrialist and former president of the Federation of Nepalese Chambers of Commerce and Industry.

Nepal, a country of 29 million people landlocked between China and India, earlier this week extended a ban on imports of luxury goods until the end of August, in a bid to curb the outflow of capital following a decline in foreign exchange reserves.

ECONOMIC INSTABILITY WARNING

Adhikari warned that the depreciation of the Nepalese rupee against the US dollar had added to inflationary pressure, driven by a global spike in crude oil and other commodity prices, after Russia invaded Ukraine. in February.

The rupee depreciated 6.64% against the dollar in the 12-month period to mid-July, he said, making imports of petroleum products, fertilizers and foodstuffs more expensive.

Without giving further details, Adhikari said it was necessary to take measures to maintain foreign exchange reserves to cover at least seven months of imports, while warning against pressure on external payments.

The current account has been in deficit for five years, with the potential to reach 13% of GDP in the 2021/22 financial year, he said.

“The current account deficit affects overall economic stability for a long time and poses a challenge to achieve a higher growth rate.”

Nepal’s external debt has more than doubled from $3.8 billion in 2012 to $7.77 billion in 2022, a government official says, with Sri Lanka’s recent default in the region raising concerns about the impact of a decline in a country’s foreign exchange reserves.

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