“The new tax rates announced in the budget have already looked to tighten consumption. Now we do not need to maintain our grip on credit policy,” said Governor of Nepal Rastra Bank (NRB) Dr Yuva Raj Khatiwada.[break]
Amid soaring consumption, which had jacked up imports of vehicles and spare parts, the central bank had instructed banks to tighten their lending in the latter half of the last fiscal year.
Nepal had imported vehicles and spare parts Rs 23.77 billion worth of in 2009/10, which was well over 47 percent rise over what was recorded in the previous fiscal year.
Dr Khatiwada also debunked the claims that the budget´s huge deficit financing and increased recurrent and development expenditure could spiral inflation upwards. He said the budget has neither planned excessive monetary operations nor raised direct tax and value added tax.
“It has not also hiked salary to buoy market expectations. Domestic borrowing and rise in excise, in such a situation, will only have nominal impact, which is very natural given the kind of growth the budget has targeted to achieve,” he said.
As for the waiver of tax on merger of banks and financial institutions is concerned, Dr Khatiwada said it has been announced as planned previously. “This has lifted tax related burden on merger and has sent encouraging signal to the players in the market,” he said, expressing hope that the market will respond to it positively.
He even added that the central bank could provide further incentives from its side as well if the banks and financial institutions (BFIs) really wanted to tap this benefit.
“Bankers by now have already realized that they need to cut operating cost and scale up operations if they want to be really competitive and survive. I am sure the new fiscal incentive will attract BFIs to pursue merger,” he added.
Dr Khatiwada further added that the central bank will also formulate a separate directive to guide and facilitate mergers.
Governor Khatiwada said that the central bank does not plan to open licensing of commercial banks anytime soon.
As for the long-running BoP deficit, Dr Khatiwada said the budget has categorically looked to address this macroeconomic woe.
But given that export substitution policy will take time to deliver result and rebounding commodity export will not be enough, he said the central bank might have to rely largely on reimbursement of capital spending from donors and mobilization of aid to reverse the deficit.
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