Chiranjibi Nepal was appointed governor of the Nepal Rastra Bank, the central bank, on March 19, 2015, a month before a 7.9 magnitude earthquake rocked the Kathmandu Valley, which, along with a series of aftershocks, damaged more than 800,000 buildings. Nepal ordered the banks to open their doors on the day after the quake, which most of them did. Nepal’s fragile economy then endured a five-month trade blockade with its main trading partner India, which appears to have done more economic damage than the earthquake. Amid the crises, Mr Nepal has pushed ahead with his policies to firm up the country's banking system.
Q: You are pushing the 28 Nepalese commercial banks to raise their capital base to Nrs8bn [$75.1m] by 2017, in a bid to consolidate the system. Is it working?
A: A few commercial banks have merged but I don’t think the final number of banks will be below 15; maybe 20 to 25. But that is not my [main] target. They must be strong. That is my main concern. To make banks strong, the main thing you need in the banking sector is [sufficient] paid-up capital.
Q: Despite the earthquake last year and a five-month trade embargo with India, bank profits in Nepal were up about 25% in fiscal year 2015/16. Where are the banks making their money?
A: We have no [industry] here. We exported about Nrs70bn in goods and services in the last fiscal year, but we imported Nrs773bn of goods and services, so the trade deficit was about Nrs703bn. So the banks had plenty of room in which to play because they provide most of the money for trading.
Q: Did the trade blockade hurt the country?
A: Yes, India is our biggest trade partner, accounting for 65% of our imports and 67% of our exports. But one good thing is that because of the five-month trade embargo, our trade deficit was a bit less in the last fiscal year. Without the blockade, it would have really shot up.
We had the earthquake but we couldn’t restart our reconstruction activities in Nepal [because of the slowdown in imports of construction materials from India]. We had to cut down on our daily necessities as well. Inflation at the time of [the blockade] went up to 12.9%, but it came down once the embargo was lifted [in January]. So the average was 9.9% for the whole fiscal year [ending July 15 2016].
Q: What’s your inflation target for fiscal year 2016/17?
A: It’s a bit ambitious at 7.5%. Nepal’s inflation is mostly [influenced by inflation rates in India], so if India has inflation of 5% we have 7.5% in Nepal, because all our necessities come from India. Last year, we imported Nrs8bn-worth of vegetables from India, we consumed Nrs2bn-worth of tobacco and Nrs24bn of rice from India. If we could produce these things ourselves, our trade deficit would definitely come down.
Q: Remittances from Nepali workers overseas saved the economy in the last fiscal year, and continues to be the engine of growth for the country and a mainstay for the banks.
A: Remittances account for about 29% of gross domestic product, which is $22bn. Last year remittances were $6.5bn in the formal channels. There is no accurate data but we estimate that only 39% of the flow is coming through formal channels, but it’s a good business for the banking sector here.
Q: With slowing economies in the Middle East and Malaysia, are you worried about a slowdown in remittances?
A: It’s a big concern for the central bank. The number of labourers going abroad is decreasing and the remittance growth was 7% [in 2015] compared with 15% [in 2014]... This is a problem because we have a foreign exchange reserve of about Nrs1039bn, and that is sufficient to cover 18 months of goods and services, but it is because of remittances. If the remittances come down, then it will be a problem.
So we need to concentrate on what kind of activities could substitute for remittances. During the trade blockade we came to see that we need to export more. We are between two of the world’s largest economies – China to the north and India to the south – so why should we worry? They will lift us up.
