KATHMANDU: The central bank’s cost to manage liquidity surplus jumped by nearly 245 percent in the first eight months of the current fiscal year 2015/16 compared to the amount that it spent in the last fiscal year. Nepal Rastra Bank spent a total of Rs 658.2 million to mop up Rs 469.37 billion over the period of eight months in the current fiscal year. The central bank had spent Rs 190.6 million in 2014/15 to absorb Rs 476.8 billion.
The central bank has been absorbing excess liquidity from the market mainly through instruments like reverse repo, deposit auction and outright sale. The central bank returns money it mopped up through reverse repo after seven days with the interest set through bidding to BFIs. While the deposit auction has a maturity period of 90 days, the maturity of outright sale depends on the remaining maturity of the paper that the BFIs hold, but generally does not last more than a year in Nepal.
With BFIs failing to increase their lending and the rise in remittance inflow, banking system has become awash with liquidity for the past couple of years. However, the central bank absorption of excess cash has brought liquidity levels down to a comfortable position, according to NRB officials. Because of the recurring problem of liquidity surplus, the central bank last year announced that it would issue ‘NRB Bond’ to address the problem. NRB, however, has put the plan on hold, concluding that there was no immediate need as the liquidity situation has come down to a ‘manageable level’.
Bankers say that the liquidity surplus has not only increased the cost of the central bank but is also making adverse impact on economy. “Lending of BFIs to business firms, corporations or any projects could have increased economic activities and output of the country. Liquidity surplus is like a lost opportunity,” said a banker.
