Interest Rate Dilemma and its Solution: A partnership between the government and the Central Bank

Any place that facilitates trade i.e. the exchange of goods, services, securities, cash and credit is central to the economy. It would be nice to find an alternative way to express this without wanting to sound ubiquitously monotonous but the financial market is to the economy what an artery is to the heart. NEPSE is 25 years old, still very young with a lot of promise and at the same time risks. The government therefore should take every initiative to help the market metamorphose into functioning at its full potential.

Policy is central in achieving this and perhaps the most impactful directive is interest rates. As most of us are aware there are sporadic mentions of a liquidity crisis. Liquidity crisis simply drives the interest rates up-which in turn depletes circulating cash before finally slowing down and reversing growth. Now, politically we are having a great year because we have achieved the first phase of the local elections, we have inked an important infrastructural commitment to cooperate with China and the World Bank has revised our economy growth to 7.5%. All these are brilliant news but I feel what is lacking is that the government could do better to join in on the party by doing what it can to bring the interest down by helping overcome this liquidity shortage.

One possibility is that last year’s budget allocated a reasonable chunk towards government spending. Sadly, the government has not been able to optimally utilize these funds. Reason dictates that failure to spend on development brings about unpleasant economic consequences. And this has also raised growing concerns among former governors of the central bank. What the government could do is it could collaborate with the central bank to divert the redundant funds by allowing banks to compete with each other to sanction soft loans to businesses that contribute towards growth. Injecting cash will bring interest rates down hopefully and also support the investment confidence.

To end rather simply, we want opportunities to overcome our limitations because we are tired of lacking and the government needs to function at full capacity to help us achieve our dreams.

Moral of the story: Interest rates and the markets are inversely proportional so please keep the interest fluctuations minimum while keeping the rates low because investing in the economy is more fruitful than bank interests. Lastly, sorry about the graph- that’s the best I could do.