Sunday, January 5, 2014
Nepali Stock Bubble
Below is my observation of the Nepali Stock Market Bubble that we are experiencing currently.
Nepali Stock Bubble
By: Mukesh
Khanal
Successful elections like the
recent one in Nepal accomplish a number of things. They bring changes in
government by ousting incumbents and bring opposition forces back in control of
government. A renewed optimism spreads through the economy when the new
government is presumed to be more democratic, free-market oriented, and
investor friendly. As a result, the stock market rallies to record highs. The
same has happened in Nepal according to Nepali media. Nepse, the Nepali stock
market index, jumped by over 200 points on December 19 to reach 805.65 points, highest
level in the last five years.
Recent unusually high stock index
increments suggest that investors feel more confident to invest, and have
started pouring in money into the economy. It means they have added more
liquidity to an economy that is already going through a case of excess
liquidity. Throughout this year, our economy has observed increasing liquidity.
Nepal Rastra Bank (NRB) has already issued reverse repo five different times
this past year to rein in excess liquidity. The NRB does this by selling
treasury bills (t-bills), which are interest-paying promissory notes sold by
NRB and bought by banks and financial institutions (BFIs) with the extra cash in
their vaults. This way, the NRB absorbs or “mops” excess money supply from the
market. However, the optimism that has been created among investors with recent
election results has started to hurt the NRB’s efforts.
In addition to optimism from
recent election results, there are four other reasons why excess liquidity has
persisted throughout this past year. First, 0.2% return rates on t-bills are low
while average interest charged on consumer borrowing in the market is around 4%-6%. Most BFIs
are making this comparison and are deciding that they would rather wait for
consumers to come asking for credit than invest in t-bills. However, consumer
borrowing is at a much lower level than supply of liquidity. But, that doesn't mean t-bills are not selling; they're all sold out. However, that is not an indicator of good news. It shows the desperation among the BFIs. They don't know what to do with excess money in their vaults. So, they're buying the t-bills as the only remaining option.
Second, the financial market is
still afraid of lending, in general, because it has only just recovered from a
liquidity crisis that started in late 2009 and lasted for three years. The
market could be practicing caution in identifying investment opportunities.
They definitely do not wish to lend to real estate and housing markets which
are going through a recession.
Third, even if BFIs were in an
investing mood, they are facing difficulty due to NRB’s new criteria: at least
20% of available liquidity in financial market has to be invested in
“productive sector” in addition to 12% that have to be invested in hydro and
agriculture. Our BFIs are so accustomed to lending their entire supply to
housing and real estate that they are unable to identify which sectors are
productive sectors. As a result, cash has stayed in their vaults instead of
being invested.
Fourth, political instability has
affected Nepal’s economic prospects as entrepreneurs and businesses have been
reluctant to start new projects due to instability. As a result, they have not
had the need to borrow funds. However, a semblance of political stability in
the months to come may encourage them to start taking on new projects and
risks. That would mean renewed demand for loans and borrowings which, in turn,
would reduce excess liquidity from the market.
A general understanding among
economists is that a return of risk-taking behavior among borrowers takes care
of excess liquidity. If we achieve political stability in coming days, this
risk-taking behavior will likely increase, and thus excess liquidity will be
used up. So, why worry?
Rallying stock market is not a
worry for developed economies that have low inflation. For them, increase in
money supply due to rallying market increases the price of investment
opportunities such as stocks, bonds and real estate without affecting prices of
basic commodities such as rice, milk or vegetables. However, for a developing
economy like ours, which already suffers from high inflation, a rallying stock
market and subsequent increase in money supply will push prices of everything
in the market higher. Everything—real estate and basic commodities—will become
more expensive for consumers.
There is a second reason why we
should be worried. Historical data shows that liquidity creation is always high
right before a liquidity crisis. Money supply decreased after Nepali economy
was liberalized in 1990. After 2001, it increased right up until the end of
2009 when a liquidity crisis hit our economy hard. Unusually rallying stock market
this year is clearly a sign of another impending liquidity crisis. Some of this
buoyancy will be corrected due to stabilizing remittance in the near future.
Remittance has increased every passing year for last two decades, and is about
25% the size of GDP. However, because it is already huge, it will grow only marginally
over the next few years, thus blunting some of its impact on money supply and
the stock market.
Any emerging economy like ours
relies on cheap credit to undertake development activities. Risk takers today don’t
have cheaper access to credit which, in turn, is hurting our economic progress.
On top of that, we have a stock bubble in the making due to excess liquidity in
our financial market. If history has taught us anything, we know the bubble is
going to burst because fundamental values and principles of the financial
market are going to assert themselves eventually. We have two options: the NRB
should devise better monetary policies than what we have today, or we better
get ready for our financial market to crash in 2016.
Labels: bubble, liquidity, nepse, stock market
Wednesday, August 24, 2011
Links for August 24, 2011
.
1. Korean Language Test results out
*50,043 applicants had taken the test
*only 15,298 passed
*13,298 applicants will work in production related job and remaining 2,000 in agriculture sector
*South Korea is a lucrative destination for Nepali workers with a monthly average income of $1,000
2.Deposits in commercial banks up in Q4
3. Chinese team to study Ring Road widening has arrived in Kathmandu
4. Indian overland tourist arrivals up 74pc
*298,821 Indian tourists visited Nepal in 2009 via land routes
*520,522 Indian tourists visited Nepal in 2010 via land routes
*This is a 74 percent increase
*154,086 third-country tourists entered Nepal by land in 2010
*Major entry points for Indian tourists were: Vittamod (Janakpur) with 17 percent, Birgunj with 13 percent, Kakarbhitta with 8 percent, Biratnagar with 5 percent, Nepalgunj and Mahendranagar with 3 percent each and Dhangadhi with 1 percent.
*96,928 vehicles entered Nepal through eight border points in 2010, an increment of 22 percent over the previous year's figures.
*46 percent of tourists coming via Indian land routes came by public bus and 39 percent by private vehicles.
*For 2010:
Entry Point // Number of Tourists // Percent Of the total
Birgunj // 89,544 // 13 Percent
Vittamod (Janakpur) // 112,038 // 17 Percent
Kakkarbhitta // 55,098 // 8 Percent
Biratnagar // 32,320 // 5 Percent
Nepalgunj // 17,919 // 3 Percent
Dhangadhi // 8,730 // 1 Percent
Mahendranagar // 21,117 // 3 Percent
Bhairahawa // 337,842 // 50 Percent
5. BFIs barred from opening accounts amongst themselves
According to the NRB:
6. Whole-Genome Study proves that Nepalese UN-peacekeepers brought Cholera to Haiti that has killed 6000 people so far
7. Bhutanese refugee numbers in Nepal nearly halved after re-settlement overseas
8. New Hydropower rules in Nepal makes it difficult for Indian investors to invest in Nepal
1. Korean Language Test results out
*50,043 applicants had taken the test
*only 15,298 passed
*13,298 applicants will work in production related job and remaining 2,000 in agriculture sector
*South Korea is a lucrative destination for Nepali workers with a monthly average income of $1,000
2.Deposits in commercial banks up in Q4
RBB, which has the highest deposit base among commercial banks, saw its deposits rise 13.44 percent in Q4 against a growth of 4.02 percent in the previous quarter. The bank collected deposits worth Rs 8.75 billion during Q4. RBB’s total deposits as of the end of fiscal 2010-11 amounted to Rs 73.92 billion.
Nepal Bank Limited collected more than Rs 4.47 billion in deposits during Q4. Its total deposits at the end of fiscal 2010-11 stood at Rs 46.80 billion, up 10.56 percent from the previous quarter.
Agricultural Development Bank saw its deposits going up 6.17 percent in the last quarter against a growth of 1.61 percent in previous quarter.
3. Chinese team to study Ring Road widening has arrived in Kathmandu
The 18-member team has geotechnical engineers, traffic engineers, material engineers and other technical experts.
The team will spend 40 days in Kathmandu to do a survey for widening 9.5 km of the 27-km long Ring Road in the first phase.
The Ring Road improvement project will upgrade the current four-lane road to eight lanes (a four-lane, two-way main road, a four-lane, two-way relief road, a two-way bicycle path and a two-way pedestrian path, including bus stations and parking lots).
The road widening work is expected to be completed by 2013 utilising resources received as grant assistance from China annually.
On Feb 28, 2011, the Chinese government had agreed to provide a grant assistance of RMB 50 million (Rs 547 million) for widening the Ring Road and other projects. The technical team will design a simple urban flyover; three pedestrian overpasses will also be built. Even though the locations for the flyover and overpasses have not been fixed, the project is likely to select Kalanki Chowk to build the flyover with a signalised intersection underneath for pedestrians.
4. Indian overland tourist arrivals up 74pc
*298,821 Indian tourists visited Nepal in 2009 via land routes
*520,522 Indian tourists visited Nepal in 2010 via land routes
*This is a 74 percent increase
*154,086 third-country tourists entered Nepal by land in 2010
*Major entry points for Indian tourists were: Vittamod (Janakpur) with 17 percent, Birgunj with 13 percent, Kakarbhitta with 8 percent, Biratnagar with 5 percent, Nepalgunj and Mahendranagar with 3 percent each and Dhangadhi with 1 percent.
*96,928 vehicles entered Nepal through eight border points in 2010, an increment of 22 percent over the previous year's figures.
*46 percent of tourists coming via Indian land routes came by public bus and 39 percent by private vehicles.
*For 2010:
Entry Point // Number of Tourists // Percent Of the total
Birgunj // 89,544 // 13 Percent
Vittamod (Janakpur) // 112,038 // 17 Percent
Kakkarbhitta // 55,098 // 8 Percent
Biratnagar // 32,320 // 5 Percent
Nepalgunj // 17,919 // 3 Percent
Dhangadhi // 8,730 // 1 Percent
Mahendranagar // 21,117 // 3 Percent
Bhairahawa // 337,842 // 50 Percent
5. BFIs barred from opening accounts amongst themselves
According to the NRB:
Financial institutions should collect deposits and lend...If they park their deposits in other institutions, it will create anomalies. Therefore, we have decided to stop itI believe this is a good step by the NRB especially because:
NRB’s latest statistics show that commercial banks have deposits worth Rs 670 billion, development banks Rs 90 billion and finance companies Rs 84 billion.
6. Whole-Genome Study proves that Nepalese UN-peacekeepers brought Cholera to Haiti that has killed 6000 people so far
7. Bhutanese refugee numbers in Nepal nearly halved after re-settlement overseas
8. New Hydropower rules in Nepal makes it difficult for Indian investors to invest in Nepal
Labels: ADBL, Bhutan, china, cholera, haiti, hydroppower, korean language test, liquidity, migration, NBB, nepal rastra bank, refugees, ring road, tourism
Monday, August 15, 2011
Easing the Nepalese Liquidity Crisis: Part 2
.
The Republica link for part 2 is here
The Republica link for part 1 is here
Part 1 in my blog is here
This opinion piece was published in the Republica on August 15, 2011
The Republica link for part 2 is here
The Republica link for part 1 is here
Part 1 in my blog is here
Recently, I wrote in Republica about the liquidity crisis that we are going through in Nepal (“Easing the Nepali liquidity crisis” published on August 7). I elaborated on why our banking and financial system is suffering from the crisis. Also, I wrote that conventional monetary policy does not help us in solving this crisis. Fiscal policy i.e. government expenditure is the best solution at hand today.
Some bankers, including those in the Nepal Rastra Bank (NRB), believe that lowering the Cash Reserve Ratio (CRR) and lowering the interbank lending rate will help ease the current liquidity crisis. In the previous article, I wrote about why lowering the CRR will not help ease the crisis. In this article, I wish to discuss why lowering the interbank lending rate will not help ease the liquidity flow in Nepal today.
Interbank lending rate is the interest rate that is charged by one bank to another when the former lends money to the latter. The interbank lending is a market where a bank that has “surplus money” sells it to another bank at a price. The price that the borrower pays is the “interest” on that loan. So, like any other market, whether the transaction occurs between the two is determined by the equilibrium of demand and supply.
There are two reasons why lowering the interbank lending rate will not help ease our liquidity crisis.
First, the interbank lending rate of 3 percent is too low. Since the interest rate is low, the banks that need money are willing to borrow as much as possible. This is basic economics: when the price for a product is low, demand always increases. However, the main player in this transaction is not the buyer but the lender who has to agree to give the money at the low interest rate.
If the rate is too low, like in the current context, the banks that have surplus money are not willing to loan it to others because the "price" i.e. interest they are getting is very low. So, they don't feel like selling their product. That is, the buyers and sellers are not agreeing at the price of 3 percent. So, no transaction is occurring in the interbank lending market these days in Nepal.
Second, if the market were not suffering from a crisis, the banks with surplus money would be willing to lend the money even at that lower interest rate. However, the current state of our financial system is such that there is uncertainty over the continued existence of many of these struggling banks and financial institutions. The skepticism on the part of richer banks is understandable. Think about it from the lender banks’ perspective. Why would a bank that has surplus money loan it to another bank that is undergoing a crisis, and which might not return even the principal amount of the loan let alone the interest?
What if the banks that borrow money go bankrupt anyway? This is why even banks that have money with them are refusing to loan it to others. And, this is making the liquidity crisis in Nepal even worse. The distrust and uncertainty is fanning the flame of liquidity crunch in Nepal.
I believe that the richer banks in Nepal have enough money to lend to struggling banks in order to ease the liquidity crunch. But, they are not sure that the struggling banks will survive. So, they are not willing to take the risk by lending to them. Therefore, if some bankers and the NRB seem to believe that lowering the interbank lending rate further is going to solve this liquidity crisis, they are forgetting their basic economic theory of demand and supply along with the cost-benefit risk analysis.
In my opinion, monetary policy is not a solution to this crisis. Even then, if the NRB is going to keep pursuing the monetary policy anyway, I believe that lowering the interbank lending rate is the exact opposite of what the NRB should be doing.
If I were making decisions in the NRB, I would actually increase the interbank lending rate. If it is increased, it will mean that the price that richer banks receive for lending the money to struggling banks will increase. This would mean that despite some of the uncertainty and distrust, a higher interbank lending rate would encourage the banks with surplus money to take a risk and lend some money to the struggling banks because the risk could bring higher rewards in interest income. The richer banks will be willing to sell more loans when the price of loans increases. Again, this is basic economics.
In fact, lowering any interest rates—conventional open market rates for purchase of short-term government debt by the central bank or the interbank lending rate—is fraught with additional danger. If the rates are lowered so much that it comes close to being zero percent, then we risk turning this liquidity crunch into a “liquidity trap”. The zero percent lower bound that a liquidity trap creates will severely constrain any monetary policy that the NRB wishes to pursue.
Lastly, we should learn some lessons from the US. The current US debt crisis is a product of the liquidity crunch that started in and around 2007 after the collapse of the real estate—housing and land—market. Like the US, our liquidity crisis has also occurred due to the slowdown of our real estate market. We could also face a debt crisis very soon if we do not solve this crisis. The current downgrading of the US credit status from AAA to AA resulted in an immediate 4 percent decline in the US stock market. Nepal’s economy could also suffer a similar blow if the current liquidity crisis is not contained, and if it is allowed to bring forth a debt crisis.
The only good thing going on for us is that credit rating agencies like Standard and Poor’s do not rate Nepal. If they did, we would be in a heap of economic trouble.
This opinion piece was published in the Republica on August 15, 2011
Labels: central bank of nepal, liquidity, liquidity crisis, nepal rastra bank
Sunday, August 7, 2011
Easing the Nepalese liquidity crisis
.
The Republica link is here.
In case you have not heard it, Nepalese banking and financial system is going through a crisis phase. The central bank has liquidated a number of banks while urging others to merge. Although Nepal receives remittance money equivalent to almost 30 percent of its GDP, our banks seem to be running out of cash. Nepalese banking and financial system is under a liquidity crisis.
Where is all that remittance money going then? Well, the 2010 National Living Standard Survey’s preliminary finding shows that 79 percent of remittance income coming into Nepal is spent on household consumption. Only 2.4 percent is invested in capital formation activities. And, that is one of the reasons why banks in Nepal are having problems. People are not saving their money in banks; they’re spending it.
However, to put the blame of Nepalese liquidity crisis on the public is foolish. The main culprits of this crisis are the banks themselves. They used to have money in their vaults. In fact, they had so much money that they did not know what to do with it. So, they gave it to anyone who came asking for it.
So, who came asking for it? The land plotting and housing people did. In their bid to collect some quick cash as interest payments, the banks distributed the money without proper documentation and backing. Through reckless lending, they created the artificial asset bubble that we have experienced in the last few years. As long as the asset market was hot, the brokers and the banks were getting richer. But, like all good things, the merry did not last. Housing and land market has cooled off since last year. As a result, the brokers are unable to pay interests on their loans. Therefore, banks now have no money to collect and play with.
Historical data will show that liquidity creation right before any liquidity crisis is always high. This suggests that maybe the crisis isn’t really a crisis but a downward adjustment towards the equilibrium steady state. But, this is no time to point fingers or regurgitate history.
Like any financial crisis, the solutions for this mess are carried out by Nepal Rastra Bank (NRB) through its monetary policy. The NRB has been putting some efforts to mitigate the crisis by liquidating some banks and urging others to merge. It also lowered the Cash Reserve Ratio (CRR) from 5.5 to 5 percent. This was expected to infuse Rs 3-4 billion into the market and ease the liquidity crunch. However, that is akin to feeding peanuts to a starving elephant.
During normal conditions, the NRB’s monetary policy is effective in tackling liquidity problems. Approximately 90 percent of bank liquidity is created by large and medium sized banks. A monetary policy, however, does not significantly affect the liquidity creation of large and medium sized banks. These banks are impervious to most monetary policy tightening or loosening due to their own structural compositions. So, loosening the monetary policy by NRB will have insignificant effects in creating liquidity. Also, worldwide evidences show that monetary policy during a liquidity crisis becomes weaker in creating liquidity in banks of all sizes, not just the large and medium size banks.
NRB has two tools that it can use to minimize this crisis: interest rates and liquidity injection. So far, it has done very little in terms of liquidity injection. If it cannot infuse liquidity into the market, it can lower the interest rates. Lowering the interest rates will make it easier for everyone to borrow money. That would ease the crunch. The failure of NRB in cutting down the interest rates could be eroding the financial stability of Nepalese financial sector. That is why our banks could be going bankrupt.
Or, maybe the whole situation should be seen from a different angle. Maybe NRB’s reluctance in lowering the interest rates stems from the fact that lower interest rates in Nepal would encourage people to send money to India due to high interest rates in India. Their money could earn more interest income in India. It doesn’t help that the NRs and IRs are pegged, and the two currencies can be converted from one to another very easily. If the peg and easy convertibility could be avoided, lowering the interest rates in Nepal would definitely help ease the liquidity crunch we face today.
The other real danger of lowering the interest rates is that inflation, which is already very high in Nepal, can spiral out of control. NRB cannot lower the interest rates without giving the impression of loosening its anti-inflationary stance. It is difficult to convince the market that lower interest rates are being pursued without affecting NRB’s anti-inflationary stance.
Even if monetary policies could ease the crisis, they should not be pursued. A monetary policy should be pursued only if a financial disturbance has the potential to affect inflation or the real economy. It should not be pursued to solve a financial distress. Today’s liquidity crisis in Nepal has the tendency to affect neither the inflation nor the real economy. Any monetary policy, such as lowering the CRR or lowering the interest rates, has a high probability of aggravating the inflation situation without contributing much to easing the liquidity. So, monetary policy is not the intervention that our market needs to solve this crisis.
Fiscal policy is a better solution for the current mess. The government could incur expenditure to purchase the debts of these struggling banks. If our government does not have enough cash, it should print money to make the purchases. Now, in most instances, printing money is not a good idea. If the money were to be spent on consumption, it could aggravate the inflation. But, my suggestion is to spend that printed money not on consumption but on asset purchase i.e. buying the private banks. Therefore, the printed money would be used in stabilizing the balance sheet of the Nepalese banking and financial system.
I am not advocating for changing the size of our financial balance sheet. I am simply advocating an alteration to the composition of the financial balance sheet. Unlike consumption expenditure, this will actually count as an asset purchase. Once the private banks are purchased and made public, the government can sell the banks back to private buyers when the financial system stabilizes, and the banks become sustainable. Through such intervention, the government can actually make capital gains on its investment.
This would be a win-win situation. The banks would survive, and the government would make some money during the process.
This opinion piece was published in the Republica on August 7, 2011
The Republica link is here.
In case you have not heard it, Nepalese banking and financial system is going through a crisis phase. The central bank has liquidated a number of banks while urging others to merge. Although Nepal receives remittance money equivalent to almost 30 percent of its GDP, our banks seem to be running out of cash. Nepalese banking and financial system is under a liquidity crisis.
Where is all that remittance money going then? Well, the 2010 National Living Standard Survey’s preliminary finding shows that 79 percent of remittance income coming into Nepal is spent on household consumption. Only 2.4 percent is invested in capital formation activities. And, that is one of the reasons why banks in Nepal are having problems. People are not saving their money in banks; they’re spending it.
However, to put the blame of Nepalese liquidity crisis on the public is foolish. The main culprits of this crisis are the banks themselves. They used to have money in their vaults. In fact, they had so much money that they did not know what to do with it. So, they gave it to anyone who came asking for it.
So, who came asking for it? The land plotting and housing people did. In their bid to collect some quick cash as interest payments, the banks distributed the money without proper documentation and backing. Through reckless lending, they created the artificial asset bubble that we have experienced in the last few years. As long as the asset market was hot, the brokers and the banks were getting richer. But, like all good things, the merry did not last. Housing and land market has cooled off since last year. As a result, the brokers are unable to pay interests on their loans. Therefore, banks now have no money to collect and play with.
Historical data will show that liquidity creation right before any liquidity crisis is always high. This suggests that maybe the crisis isn’t really a crisis but a downward adjustment towards the equilibrium steady state. But, this is no time to point fingers or regurgitate history.
Like any financial crisis, the solutions for this mess are carried out by Nepal Rastra Bank (NRB) through its monetary policy. The NRB has been putting some efforts to mitigate the crisis by liquidating some banks and urging others to merge. It also lowered the Cash Reserve Ratio (CRR) from 5.5 to 5 percent. This was expected to infuse Rs 3-4 billion into the market and ease the liquidity crunch. However, that is akin to feeding peanuts to a starving elephant.
During normal conditions, the NRB’s monetary policy is effective in tackling liquidity problems. Approximately 90 percent of bank liquidity is created by large and medium sized banks. A monetary policy, however, does not significantly affect the liquidity creation of large and medium sized banks. These banks are impervious to most monetary policy tightening or loosening due to their own structural compositions. So, loosening the monetary policy by NRB will have insignificant effects in creating liquidity. Also, worldwide evidences show that monetary policy during a liquidity crisis becomes weaker in creating liquidity in banks of all sizes, not just the large and medium size banks.
NRB has two tools that it can use to minimize this crisis: interest rates and liquidity injection. So far, it has done very little in terms of liquidity injection. If it cannot infuse liquidity into the market, it can lower the interest rates. Lowering the interest rates will make it easier for everyone to borrow money. That would ease the crunch. The failure of NRB in cutting down the interest rates could be eroding the financial stability of Nepalese financial sector. That is why our banks could be going bankrupt.
Or, maybe the whole situation should be seen from a different angle. Maybe NRB’s reluctance in lowering the interest rates stems from the fact that lower interest rates in Nepal would encourage people to send money to India due to high interest rates in India. Their money could earn more interest income in India. It doesn’t help that the NRs and IRs are pegged, and the two currencies can be converted from one to another very easily. If the peg and easy convertibility could be avoided, lowering the interest rates in Nepal would definitely help ease the liquidity crunch we face today.
The other real danger of lowering the interest rates is that inflation, which is already very high in Nepal, can spiral out of control. NRB cannot lower the interest rates without giving the impression of loosening its anti-inflationary stance. It is difficult to convince the market that lower interest rates are being pursued without affecting NRB’s anti-inflationary stance.
Even if monetary policies could ease the crisis, they should not be pursued. A monetary policy should be pursued only if a financial disturbance has the potential to affect inflation or the real economy. It should not be pursued to solve a financial distress. Today’s liquidity crisis in Nepal has the tendency to affect neither the inflation nor the real economy. Any monetary policy, such as lowering the CRR or lowering the interest rates, has a high probability of aggravating the inflation situation without contributing much to easing the liquidity. So, monetary policy is not the intervention that our market needs to solve this crisis.
Fiscal policy is a better solution for the current mess. The government could incur expenditure to purchase the debts of these struggling banks. If our government does not have enough cash, it should print money to make the purchases. Now, in most instances, printing money is not a good idea. If the money were to be spent on consumption, it could aggravate the inflation. But, my suggestion is to spend that printed money not on consumption but on asset purchase i.e. buying the private banks. Therefore, the printed money would be used in stabilizing the balance sheet of the Nepalese banking and financial system.
I am not advocating for changing the size of our financial balance sheet. I am simply advocating an alteration to the composition of the financial balance sheet. Unlike consumption expenditure, this will actually count as an asset purchase. Once the private banks are purchased and made public, the government can sell the banks back to private buyers when the financial system stabilizes, and the banks become sustainable. Through such intervention, the government can actually make capital gains on its investment.
This would be a win-win situation. The banks would survive, and the government would make some money during the process.
This opinion piece was published in the Republica on August 7, 2011
Labels: central bank of nepal, liquidity, liquidity crisis, nepal rastra bank, Nepalese Economy
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