A year ago banks faced a severe liquidity crunch. Now, they are flooded with extra cash with no proper outlet for their deposits. According to Nepal Rastra Bank (NRB), the banking sector had an estimated deposit of over Rs 64 billion whereas their lending was only Rs 11 billion as of end of last fiscal year. Laxmi, the goddes of prosperity and wealth, is considerd fickle. For a reason. If money stays in one place it does not grow. But that is exactly what is happeing in Nepali banks. At a time when loan outlets are nearly exhausted, Nepali banks which flourished in the past decade, are now under the pressure of excess deposits. They have thus been forced to lower interest rates and invest in less productive NRB treasury bills.
Talking to bankers at his office last December, Finance Minister Barsha Man Pun stressed on the need for increased investment in productive sectors by utilizing the surplus liquidity in banks and financial institutions. “The liquidity in banks should be floated in the market,” he said, adding that the government and NRB will prepare programs to develop infrastructure for investment. However, bankers are less optimistic than the finance minister would believe.
In November, 2011, NRB issued treasury bills worth Rs 5 billion to sooth the outlet problem of commercial banks, but the step turned out to be insignificant. Currently, the deposited amount at banks is more than Rs 64 billion and lending only Rs 11 billion. The banks’ lowering of interest rate and asking the government for further concessions on housing loans are a measure of their anxiety. Crucially, borrowings from banks dwindled after the governmental imposed limitations on investment in the property market.
Thus on one side there is a large amount of money waiting for better investment outlets and on the other a large labor force, both semi-educated and skilled who are looking for jobs. If this gap is not bridged with judicious policies, the country could be headed for trouble. One of the ways the government could bring parity is through the establishment of a semi-government or independent institute to research on the ways to bridge this gap.
Some of the available investment sectors in Nepal are industry, infrastructure, energy, education and health. But which of them have bright long-term investment future is less obvious.
Our banks are awash with cash. Important sectors are crying out for investment. How do we reconcile the two?
Industry is Nepal is a failed experiment. Hundreds of them including several large joint ventures—Nepal Lever, Hindustan Unilever, Dabur Nepal and Surya Nepal—have either closed or are facing closure due to labor strikes and energy crisis, among other reasons. Uncontrolled entry of cheap Chinese and Indian goods has as good as suffocated national industries. Labor shortage and energy crisis are other major impediments.
Following Chinese Premier Wen Jiabao’s visit, China has vowed to accelerate plans to build a railway network joining Tibet and Nepal; as well as promising to consider a railway link between Nepal and India. Meantime, India has also put forth several such plans, which should not be difficult to execute since Indian Railways already ply many border cities in India. These initiations, which they might definitely catch the eye, will make Nepal’s industries even more miserable. Both our giant neighbors are industrializing at breakneck speeds and have huge quantities of cheap labor. Easy transit facilities are likely to lead to a flooding of Nepali market with cheap goods.
Other sectors like infrastructure and energy also are ripe for large investments; but their gestation time makes such investments risky and inaccessible to small unorganized investors. Investment in education still holds some promise, however, it is by and large a saturated market. Moreover, high competition has spawned unethical practices and led to declining returns.
More promising are agriculture, tourism and health sectors. Value added agriculture such as livestock and dairy industry, carpet and dyeing, apple/orange and whiskey production hold bright prospects. These are industries where the value is added on indigenous products by semi-skilled labors.
Tourism is the evergreen investment sector in Nepal with its treasure trove of mountains, hills, rivers, glaciers, temples, and important religious sites. But it is upon the state to sooth the nerves of wary tourists and to expand the road system. According to the United Nations World Tourism Organization, about 16 million international tourist visited Thailand in 2010, while 22 million visited Austria, a small landlocked country in Europe. But less than half a million visited Nepal in the same period, according to Nepal Tourism Board.
Another sector of high promise is health. With the ever growing per capita income, demand for better healthcares service will surge.
There are just the promises. Whether the country can capitalize on them is of course an entirely different matter. We will all have to wait and watch.
The writer is Associate Professor of Statistics, TU
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