Funny that NepaliTimes didn't publish my comment on their article
NepaliEconomy
2010)
http://www.nepalitimes.com/issue/2010/02/20/Business/16813
I wrote the following comments and THEY DIDN'T PUBLISH IT.... may be
they thought I was trying to advertise the website, www.NepaliEconomy.com...
yes I was.... but the website if Non-Profit.... it does NOT have any
ads....duh!
Nepal is confronting financial difficulty. Bankers and the government
each blame the other. Obviously there is plenty to go around. Amidst
this back-and-forth there is confusion as to the exact nature of the
problem. The bottom-line is this; the financial difficulty Nepal is
facing CANNOT be characterized as liquidity crisis. Liquidity crisis
occurs when customers stop doing business with banks because they
think banks are insolvent. In Nepal, that’s not the case. Banks are
not only solvent, they are very profitable. Their profitability comes
from aggressive growth of their balance sheets, which requires lots of
deposits. Hitherto, that was not a problem. Nepal ran BoP surplus
which meant foreign currencies were flooding into Nepal. NRB converted
them to NRs and that money flowed into the banking system as deposits.
But now things have changed. Since six months go, BoP surplus became
BoP deficit and NRs started to move in reverse direction from banks to
NRB to pay for foreign currencies. This eroded the deposit base at
Nepal’s banks and hence the financial crisis. There are three ways to
rectify the problem (a) make deposits attractive by raising rates –
over 90% of cash in Nepal are in the hands of public (b) reduce loan
growth (c) turn to NRB. The easiest is (c) and that’s what’s happened.
NRB has injected Rs. 20 billion into the banking system. BUT THIS IS A
STOP GAP MEASURE. The long-term solutions are (a) curtail loan growth
(b) increase exports and reduce imports (c) not rely on remittances to
finance trade deficits.