Liquidity Crisis: Higher Import Duty Likely

The government plans to hike the customs duty on major goods to control soaring imports if the monetary measures taken by Nepal Rastra Bank (NRB) fails to solve the liquidity crisis. Rising imports against declining exports have been cited as the major reason behind the persisting cash crunch.

Senior economic advisor at the Finance Ministry Keshav Acharya said that the government would take fiscal measures including hiking the duty on gold at first and other commodities whose volume surged one after another calculating the situation to rescue the economy from a rising trade deficit. "We have not finalised the goods on which we will be imposing extra duty at the moment," he said.

Exports declined by 23.7 percent against a rise in imports by 27.8 percent during the four months of the current fiscal year leading to a trade deficit of 48 percent, as per the latest NRB report on the country's macro-economic situation.

Terming gold imports as the major factor behind the surge in total imports that stood at Rs. 25 billion during the last five months as per the data of the Department of Customs, the central bank took stringent measures including forcing importers to deposit at least 40 percent cash of the amount sought for bank guarantee. Earlier, importers could import gold on the basis of a bank guarantee even if they didn't have cash at hand.

The central bank has also directed banks and financial institutions not to surpass the loans and advances 80 percent of total deposits and primary capital in order to force them to maintain comfortable liquidity. Another major decision taken by the central bank is the capping of loans in the real estate sector forcing them to maintain the loan exposure to real estate under 40 percent by the current fiscal year.

NRB has already injected Rs. 20 billion in the market through repo (central bank injecting money to the banks against their treasury bills) and outright purchase over the last two months. About Rs. 5 billion was injected into banking system through repo on Sunday.

NRB's executive director Lila Prakash Sitaula said that the latest injection of liquidity by the central bank eased the crisis and the interest rates of inter-bank lending and standing liquidity facility (NRB giving money to banks to address short-term liquidity problems) went down to around 10 and 11 percent respectively from above 12 and 14 percent in the past. He said that the various measures taken by the central bank in recent days would not let banks face an acute cash crunch in the coming days.

But chief executive officer of Kumari Bank Radhesh Pant said that the banks which didn't own much treasury bills (TBs) to offer to the central bank for repo were still in a cash crunch, whereas those having TBs and liquidity offered very few interest rates resulting in low liquidity in the banking system. "That's why inter-bank lending has not come down to a comfortable level," he said.
Source:eKantipur