Half of credit amount issued by banks contributing to widen Nepal’s trade deficit: CBFIN report

Kathmandu / July 7: About half of the total credit issued by banks and financial institutions (BFIs) is contributing to increase the trade deficit significantly, shows a study report conducted by the Confederation of Banks and Financial Institutions Nepal (CBFIN).

Unveiling the report at a program organized on Thursday, the umbrella organization of BFIs revealed this rather shocking finding. “A 100 rupees increase in bank credit to the private sector causes an increase in the trade deficit by almost 50 rupees in the long run,” reads the CBFIN report.

The CBFIN in association with the Central Department of Economics, Tribhuvan University, carried out a time series analysis of the past 24 years. It assessed the relationship of the trade deficit mainly with the economic variables like interest rate, inflation rate and per capita GDP growth.

As of now, the BFIs have provided the private sector with Rs 4.707 trillion in loans. In 11 months of the current fiscal year alone, the issued credit to the private sector stands at Rs 539.18 billion. It means a total of Rs 2.353 trillion was utilized in imports.

Speaking at the program, CBFIN President Pawan Golyan said Nepal Rastra Bank (NRB) needs to devise a policy to compel the private sector to use the credit in production business rather than imports. He urged the central bank to introduce measures to ease the liquidity problem persisting in the country’s banking system along with curbing the unnecessary credit being issued in unproductive businesses.

Golyan sought the central bank’s intervention to promote the industries that produce goods with more than 30 percent of value addition. He also urged the central bank to increase the current credit-deposit ratio from existing 90 percent to 95 percent through the upcoming monetary policy. “However, the increased threshold should be scrutinized on whether they are to be issued for productive sectors,” Golyan added.

Presenting a paper, Associate Professor of Economics at TU Ramesh Paudel said NRB should facilitate the money earned from remittance to retain in reserves rather than in consumption. “If migrant workers are facilitated to send remittance through banking channels along with encouraging them in production business, it will also help improve the depleting foreign currency reserves seen at present,” Paudel said.