Hom Nath Gaire
Money, in a money exchange economy may become both problem and solution. If the changes of money stocks (supply) were not adequate enough to fulfill the growing needs of economy, the level of aggregate economic activity would be retrained. On the other hand unwarranted growth in money supply would create inflationary pressure and unfavorable balance of payment (BOP). Economic fluctuations in the form of trade cycles are also caused by money. Money, therefore needs well management, regulations and control for a better and smooth functioning of the economy.
The Federal Reserve Bank (FED) publishes weekly and monthly data on three money supply measures -- M1, M2, and M3 -- as well as data on the total amount of debt of the non-financial sectors of the U.S. economy... The money supply measures reflect the different degrees of liquidity -- or spend ability - that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; traveler's checks; demand deposits, and other deposits against which check can be written. M2 includes M1, plus time deposits. While, M3 include M2 plus various types of near money also known as the broad money liquidity.
In the context of Nepal, NRB publishes quarterly data on two money supply measures-- M1 and M2. For smooth functioning of the economy, the growth of money supply (M1 & M2) should be matched with the economic (GDP) growth of the same period. In the situation of deflation or economic slow down, the supply of money should be increased to get together the growing need of people. On the contrary, in the situation of inflationary pressure, the supply of money should be decreased to match with the GDP growth. However, it has been proved that a little higher growth of money supply over growth of GDP is indispensable to induce the private sector. That would be helpful to endorse private investment and creating more employment opportunities.
In Nepal, since some 7-8 years, the money supply measured by M1 & M2 has been ever-increasing by an annual average rate of 15-16 percentages. For the same time, an annual average growth of real GDP is only around 2-3 percentage. This fact is not acceptable by any sorts of doctrine of monetary economics. Because, the higher growth of money supply is not backed up by the real growth of the economy. Because of this reason some economists have been complaining that the double digit inflation in the economy is resulted only by monetary phenomenon. Considering this view in mind, NRB the monetary authority of the country, pursued a rigid monetary policy since last fiscal year. But, the consequence of this walk of the NRB is somewhat contradictory and resulted in the liquidity crunch in the banking segment of the economy.
A liquidity crunch is a business condition that results in having too little cash and other current assets to be able to pay current liabilities as the liabilities mature. A liquidity crunch is a timing issue: not having enough liquidity can force you to make an emergency borrowing at a less than favorable interest rate. In broad sense, liquidity crunch is a situation or phase where physical money is not flowing in the economy, resulting shortage of liquid assets or cash. Because, money remains with the people itself, people like to hold and hoard liquid cash in this situation. People hold cash because they are confused about financial ups and downs and have less confidence on banks. Due to this dilemma, people usually hold physical cash with them which results in liquidity crunch.
The liquidity crunch that is playing out in the global markets is a result of crisis of confidence among banks. The collapse of large banks and financial institutions such as Bear Stearns, Lehman Brothers and AIG has shaken the confidence of banks to freely lend to each other, as everyone is guessing who is next. As a result, many banks which relied on short-term wholesale funds from other banks, are finding it difficult to raise such funds any longer, leading to a liquidity crunch. The roots for this crisis can be traced to securities invested by banks that are backed by sub-prime mortgages. Sharp erosion in value of such securities and lack of transparency are the main causes for the crisis of confidence in global markets.
In contrast, the liquidity crunch in Nepali markets is largely a localized and short-term phenomenon, triggered by factors such as press on tax payments, regulatory intervention in markets to ensure the financial health of the banks, compliance of anti-money laundering guidelines, etc. There is some indirect effect of the global liquidity crisis on Nepal as well because foreign employment is affected to some extent. That is resulted in the reducing remittance inflow exacerbating pressure on current account deficit. However, this has only a marginal impact on liquidity; there is no crisis of confidence among banks in Nepal to lend to each other, as is being seen in global markets. Every country has gone through liquidity crises in the past - for instance the US in 1998 during the LTCM (Long-Term Capital Management) collapse, Egypt in 2001, the UAE (United Arab Emirates) in recent times have all seen liquidity crises. However, the simultaneous occurrence of this crisis in all major financial markets and the magnitude make the current crises the most severe in anyone's living memory.
To tackle the liquidity crunch in the Nepali credit markets, the CRR (cash reserve ratio) should be reduced to the previous level by the NRB. That will be appreciable moves, as these infuse the much-needed liquidity into the banking system. As said by the experts, the liquidity crisis in Nepali markets is temporary, and we believe the move by the NRB will be some release, at least for the time being, to ease the liquidity pressure. At the same time, NRB should take away the SLR (statutory liquidity ratio) that was reintroduced by the last year's monetary policy. Moreover, the regulator still has significant lee-way in managing the domestic liquidity well, though this may interfere with its efforts in containing inflation should be continued.
In contrast, the measures taken by the regulator still lack clarity, and have not yet eased the crisis of confidence among peoples despite repeated attempts to inject liquidity. In such a situation, getting to the root of the problem, forcing all banks to disclose all their exposures (both on and off balance sheet) and significant direct capital injection into the weakest banks will be the most effective way to bring back confidence among people as well as banks to freely transact with one another. Other indirect measures, such as insurance of all bank deposits, relaxing anti-money laundering guidelines, slackening the process of land transaction along with the lowered capital-gain tax would yield positive results to tackle with the current crisis.
Money, in a money exchange economy may become both problem and solution. If the changes of money stocks (supply) were not adequate enough to fulfill the growing needs of economy, the level of aggregate economic activity would be retrained. On the other hand unwarranted growth in money supply would create inflationary pressure and unfavorable balance of payment (BOP). Economic fluctuations in the form of trade cycles are also caused by money. Money, therefore needs well management, regulations and control for a better and smooth functioning of the economy.
The Federal Reserve Bank (FED) publishes weekly and monthly data on three money supply measures -- M1, M2, and M3 -- as well as data on the total amount of debt of the non-financial sectors of the U.S. economy... The money supply measures reflect the different degrees of liquidity -- or spend ability - that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; traveler's checks; demand deposits, and other deposits against which check can be written. M2 includes M1, plus time deposits. While, M3 include M2 plus various types of near money also known as the broad money liquidity.
In the context of Nepal, NRB publishes quarterly data on two money supply measures-- M1 and M2. For smooth functioning of the economy, the growth of money supply (M1 & M2) should be matched with the economic (GDP) growth of the same period. In the situation of deflation or economic slow down, the supply of money should be increased to get together the growing need of people. On the contrary, in the situation of inflationary pressure, the supply of money should be decreased to match with the GDP growth. However, it has been proved that a little higher growth of money supply over growth of GDP is indispensable to induce the private sector. That would be helpful to endorse private investment and creating more employment opportunities.
In Nepal, since some 7-8 years, the money supply measured by M1 & M2 has been ever-increasing by an annual average rate of 15-16 percentages. For the same time, an annual average growth of real GDP is only around 2-3 percentage. This fact is not acceptable by any sorts of doctrine of monetary economics. Because, the higher growth of money supply is not backed up by the real growth of the economy. Because of this reason some economists have been complaining that the double digit inflation in the economy is resulted only by monetary phenomenon. Considering this view in mind, NRB the monetary authority of the country, pursued a rigid monetary policy since last fiscal year. But, the consequence of this walk of the NRB is somewhat contradictory and resulted in the liquidity crunch in the banking segment of the economy.
A liquidity crunch is a business condition that results in having too little cash and other current assets to be able to pay current liabilities as the liabilities mature. A liquidity crunch is a timing issue: not having enough liquidity can force you to make an emergency borrowing at a less than favorable interest rate. In broad sense, liquidity crunch is a situation or phase where physical money is not flowing in the economy, resulting shortage of liquid assets or cash. Because, money remains with the people itself, people like to hold and hoard liquid cash in this situation. People hold cash because they are confused about financial ups and downs and have less confidence on banks. Due to this dilemma, people usually hold physical cash with them which results in liquidity crunch.
The liquidity crunch that is playing out in the global markets is a result of crisis of confidence among banks. The collapse of large banks and financial institutions such as Bear Stearns, Lehman Brothers and AIG has shaken the confidence of banks to freely lend to each other, as everyone is guessing who is next. As a result, many banks which relied on short-term wholesale funds from other banks, are finding it difficult to raise such funds any longer, leading to a liquidity crunch. The roots for this crisis can be traced to securities invested by banks that are backed by sub-prime mortgages. Sharp erosion in value of such securities and lack of transparency are the main causes for the crisis of confidence in global markets.
In contrast, the liquidity crunch in Nepali markets is largely a localized and short-term phenomenon, triggered by factors such as press on tax payments, regulatory intervention in markets to ensure the financial health of the banks, compliance of anti-money laundering guidelines, etc. There is some indirect effect of the global liquidity crisis on Nepal as well because foreign employment is affected to some extent. That is resulted in the reducing remittance inflow exacerbating pressure on current account deficit. However, this has only a marginal impact on liquidity; there is no crisis of confidence among banks in Nepal to lend to each other, as is being seen in global markets. Every country has gone through liquidity crises in the past - for instance the US in 1998 during the LTCM (Long-Term Capital Management) collapse, Egypt in 2001, the UAE (United Arab Emirates) in recent times have all seen liquidity crises. However, the simultaneous occurrence of this crisis in all major financial markets and the magnitude make the current crises the most severe in anyone's living memory.
To tackle the liquidity crunch in the Nepali credit markets, the CRR (cash reserve ratio) should be reduced to the previous level by the NRB. That will be appreciable moves, as these infuse the much-needed liquidity into the banking system. As said by the experts, the liquidity crisis in Nepali markets is temporary, and we believe the move by the NRB will be some release, at least for the time being, to ease the liquidity pressure. At the same time, NRB should take away the SLR (statutory liquidity ratio) that was reintroduced by the last year's monetary policy. Moreover, the regulator still has significant lee-way in managing the domestic liquidity well, though this may interfere with its efforts in containing inflation should be continued.
In contrast, the measures taken by the regulator still lack clarity, and have not yet eased the crisis of confidence among peoples despite repeated attempts to inject liquidity. In such a situation, getting to the root of the problem, forcing all banks to disclose all their exposures (both on and off balance sheet) and significant direct capital injection into the weakest banks will be the most effective way to bring back confidence among people as well as banks to freely transact with one another. Other indirect measures, such as insurance of all bank deposits, relaxing anti-money laundering guidelines, slackening the process of land transaction along with the lowered capital-gain tax would yield positive results to tackle with the current crisis.
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