There is more Rs 90 billion lying idle, and it threatens to play havoc with the economy.
Nepal may be a country facing a severe resource crunch, but it is also one hampered by lack of opportunities to invest accumulated wealth. That sounds like a contradiction but the fact is Nepal is presently awash in cash.
The dozen commercial banks have more than Rs 40 billion cash in hand waiting to be invested. There are also 50 or so finance companies, co-operatives and trusts sitting on an estimated Rs 45 billion. Add to that the 5 percent or so of their savings that Nepalis tend to keep at home, and one comes up with a colossal Rs 90 billion lying around unproductively. That, of course, doesn't take into account the investments in gold which cannot even be estimated.
The availability of so much money has had a direct impact on the country's capital market, leading to a drop in interest rates to the lowest levels ever-lower even than the inflation rate. Several banks do not accept new accounts, and many have begun investing in foreign banks.
Indications of surplus capital were already evident two years ago when Tara Gaun Regency Hotel issued shares worth Rs 160 million, and the public oversubscribed the offer, with applications for shares worth Rs 260 million within a week. There was a repeat of the same phenomenon last month, although on a grander scale, when shares worth Rs 120 million issued by Radisson Hotel were oversubscribed to the tune of Rs 710 million.
Unlike the much-sought-after bank shares which distribute dividends regularly, hotel shares generally do not attract investors. A chartered accountant told us that he subscribed to Radisson Hotel shares, even though he was fully aware that his investment would not earn dividends anytime in the near future. It can only be the lack of investment opportunity that is forcing investors to "gamble" with their money.
Since an economic revival can't be foreseen for the near future, other potential investors seem to be in the wait-and-see mood. This attitude has lowered the demand for loans, leading to an unnatural accumulation of money. Consequently, potential investors have turned to treasury bills as an alternate option, creating a different kind of pressure in that market.
The excess liquidity is also reflected in the fast plummeting interest rates banks offer. Till four years ago the banks paid 12 percent interest on fixed deposits, now they offer less than 7 percent. The interest paid on saving accounts has slipped even lower-to 5 percent. Given the government's average inflation rate of 5 percent, the value of bank deposits is decreasing by the day. Unable to invest elsewhere, Nepal Bank Limited and Rastriya Banijya Bank have thrown money into various government bonds and treasury bills, which earn them 5 percent interest, just enough to cover their own interest payments.
No one seems capable of explaining where all the money has come from. There have been no studies, but our own investigation pointed out three main reasons:
1. Remittances from Nepalis working outside the country (over Rs 70 billion annually, see Nepali Times # 8).
2. Increasing barter trade with Tibet. Nepal Rastra Bank has raised the ceiling for barter trade with Tibet to Rs 2 billion, but nobody keeps records of the actual trade volume. An economic analyst claims that unaccounted barter trade could be 10 times more than the recorded volume, and says that once the two proposed passes are opened for trading imports from Tibet could outpace imports from India.
3. The favourable monsoon in the last few years. Bumper crops have contributed to increasing exports and the consequent increase of cash in the market.
Moreover, the large volume foreign aid entering Nepal through non-governmental channels is another source of the excess liquidity in the banking sector. But, managing the cash that is outside the banks will pose even greater challenges. Gold and cash with individuals and cross-border transfers with India are more difficult to account for.
Income sources may be varied, but the main reason for the pile-up of cash in the economy is the lack of investment opportunity compared to the funds available. According to banking sources, deposits are increasing by 20 percent annually whereas the investment is growing by 10 percent only. Industrialists, business people and the banking sector alike blame the prolonged economic slowdown caused by political instability for all the money sitting idle.
Not that Nepal lacks areas for investment. Rural Nepal, for example, is capable of absorbing a large part of the available resources. But investors are reluctant to venture into rural areas because the infrastructure to start industry is not adequate. A ranking official with the Nepal Rastra Bank said investment in rural areas had declined in recent years. About a hundred or so commercial bank branches have packed up operations, while the Agriculture Development Bank, the institution entrusted with taking financial resources to villages, is transferring its deposits to urban areas in search of potential investors.
Although the banks don't articulate it, the Maoist insurgency is another reason for their reluctance to invest in villages. They do not want to work in Maoist-affected areas and remove deposits to urban branches that are considered to be safer. Nepal Rastra Bank seems sympathetic to their anxiety, and consequently, even it has begun over-looking commercial banks disregarding the rule that requires them to invest 12 percent of their total investment in rural areas.
Lack of policies and laws to facilitate long-term investment is also hampering investment. Some economists believe that the moribund state of the state-controlled Nepal Industrial Development Corporation is also responsible for the excess cash floating around. The Corporation could have
played a major role in ensuring long-term loans and equity
to potential investors and promoters and also encouraged them to seek new arenas for investment.
The government has so far failed to find a way to manage the ever-increasing liquidity in the Nepali economy. According to Dr Shankar Sharma, member of the National Planning Commission, the establishment of an infrastructure bank to cash in on the available liquidity is being considered. But the Nepal Rastra Bank that should have been the lead agency in addressing the issue remained crippled by the cold war between the finance minister and the governor (although that should change with the appointment of a new governor).
The real danger now is that excess liquidity may lead Nepal to an economic crisis. Lack of investment opportunities is discouraging savings and increasing consumerism which in turn results in a drop in savings. That is a dangerous turn for a country that already is one of the world's worst savers. The excess cash could also lead to fund outflows. Indian banks just across the border offer 8 percent interest. In a situation where the Nepali rupee has been steadily depreciating against the dollar individual savings could be siphoned to foreign countries. The effect of excess liquidity is already visible in the share market. Analysts caution that the unnatural value added to the overloaded share market may lead to a crash any time. That would indeed be disastrous.