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World Bank recommends structural change for higher economic growth

The World Bank has asked the government to introduce structural reforms for sustainable higher rate of economic growth.

The government should boost the private sector confidence,” said the multilateral development partner. “The new government will need to define clear priorities and selectively invest its energy in catalytic interventions,” the World Bank report ‘South Asia Economic Focus,’ suggested, adding that Nepal could however, achieve 4.5 per cent growth, if capital spending picks up in the second half in the current fiscal year.

However, the government had projected 5.5 per cent economic growth in the budget for the current fiscal year. The Asian Development Bank (ADB) has also recently projected economic growth at 4.5 per cent for the fiscal year.

According to Financial Comptroller General Office, the government has been able to spend Rs 24.11 billion – only 28 per cent of the total allocation – under capital budget by April 2.

The World Bank report also revealed that Nepal is the only country in South Asia to have budget surplus, particularly due to the government’s lack of spending capacity.

However, the 4.5 per cent growth is propelled by increased agriculture output and better performance of the services sector as result of increased remittance inflow could help spur growth this year, the report added.

The country is still struggling to attract investment, the report further said, despite buoyant revenue growth, modest indebtedness and high liquidity due to large remittance inflows.

The World Bank has also sought clear policy in line with Nepal’s planned graduation to a developing country by 2022.

“Nepali authorities have not articulated the vision for development that would underpin that achievement, nor has identified the policies and reforms that are the most important and urgent,” the report said, highlighting the financial sector’s health as the single most important macroeconomic risk of the country.
Despite having adequate liquidity, the sector has not been able to boost investment, the development partner said, questioning the ability of financial sector in providing adequate credit to deserving borrowers due to lack of proper policies, low levels of effective access to finance, poor risk management practices by monetary authorities, inadequate information to banks and limited alternatives for banks to find protection from offending borrowers.

Releasing the report here in the Valley today, senior country economist for Nepal at the World Bank Aurelien Kruse said that the monetary policy should play a crucial role in safeguarding investment of banks and financial institutions that are not performing well.

 

Reconsider spread rate

Likewise the World Bank has also asked the central bank to reconsider its proposed cap on spread rate. The difference between borrowing and lending rates of banks and financial institutions is said spread rate. The central bank has asked the banks and financial institutions to cap spread rate at five per cent from the next fiscal year 2014-15. The financial regulator should find other ways to regulate the market instead of fixing spread rate – that has discouraged the banks from increasing their investment as well as bringing new banking products – Kruse added.

However, average interest spread of commercial banks stood at 6.76 per cent — according to the central bank’s latest macroeconomic report – as of mid-February.
He said the central bank should be explicit about two sets of risks that the proposed cap on the interest rates spread could create for financial sector stability and access to finance. “The spread rate cap is likely to induce banks to reduce their exposures to sectors that carry higher interest rate,” he said, adding that Small and Medium Enterprises (SMEs) sector and long-term finance are likely to feel the heat by the cap.

“While credit to private sector remains high, rate of credit growth has decreased significantly from the beginning of the current fiscal year,” the report said, adding that the large interest spread between risky assets and low risk assets is significant, indicating reluctance from banks to use the price mechanism to attract greater demand for loanable funds. The report has also suggested the central bank to come up with a long term monetary tool to address excess liquidity in the long run. The banking sector has liquidity excess of more than Rs 70 billion currently.