May 24, 2022, Tuesday
Nepal 1:37:26 pm

Increasing interest rate is no solution: CNI

The Nepal Weekly
February 15, 2022

The Confederation of Nepalese Industries (CNI) has said that the decision to increase the interest rate on deposits by the banks and financial institutions was unexpected at a time when the economy was facing one problem after another.

The decision by BFIs to raise interest rates at a time when the government, Nepal Rastra Bank (NRB), private sector and all stakeholders are trying their best to solve the problems of the economy indicates that the economy is at a greater risk, said a statement issued by the CNI on Sunday.

The current liquidity problem is not likely to be solved after the increase of the interest rates, it said.

“We understand that this will only increase the transfer of deposits and increase the risk to financial stability. Its direct adverse effects are certain to be felt in industries, agriculture and tourism businesses which are facing problems due to various reasons, including COVID-19 pandemic. Rising interest rates have made investment more expensive and rising market prices have had a negative impact on consumers,” read the press statement.

In the current situation, the industry, which is weak, seems to be further deteriorating, said CNI. The CNI urged all concerned authorities to be vigilant to protect the country’s economy in time.

The Confederation said maintaining the institutional deposits of large government-owned savers at the old interest rates would reduce competition in the market to raise interest rates. In the current crisis, the central bank needs to temporarily relax the regulatory ratios that commercial banks have to meet, said CNI

“It seems necessary for the central bank to temporarily relax the regulatory ratio that commercial banks have to meet in the current crisis,” it said. The Confederation is confident that this will facilitate liquidity management and provide relief to small, cottage, medium and large enterprises and help in job creation. This will help keep the economy afloat even in the current economic crisis, it read.

With the objective of stabilising the interest rate and making it transparent, the NRB has implemented the rule of publishing the interest rate for the coming month on a monthly basis.

The Confederation urged the NRB to make arrangements to change the interest rate only every three months.

Similarly, the CNI objected to the provision introduced by the NRB to open letter of credit with 100 per cent margin on import of various consumer goods. “Even though this is done due to the declining foreign exchange reserves in the country, we understand that it will reduce imports and will not be able to meet the demand and will also lead to high inflation,” it said.