Liquidity crisis budding from frozen land price

Kathmandu: Liquidity has become the solid topic for discussion of late: Why banks and financial institutions are strapped for hard cash?

Economists outright blame frozen land prices and government’s market-distorting decisions and slow spending for the current liquidity crunch.

“Land prices must be allowed to collapse to let frozen assets thaw, which will turn on the market heat to generate liquidity,” says former finance secretary Rameshwor Prasad Khanal. “Market dynamism sans price collapse is impossible.” Khanal strongly objects to the idea of central bank ‘generously’ refinancing whenever BFIs face crisis. “The market players must be ready to face losses,” he says. “Nonetheless, in short term, refinancing along with strong reform plan will allow BFIs time to generate cash from their frozen assets.”

In the long run, the BFIs have to manage their portfolio and assets-liability mismatch. But still the BFIs can bank on the fact that total banking asset has not eroded in past four months, notwithstanding current crisis.

“There was erosion last year, but the BFIs are slowly recovering,” says Khanal, adding the aggregate Credit to Deposit ratio is close to 90 per cent which implies, even if there is aggregate value loss of 20 per cent, the depositors’ money will be safe and they don’t need to panic.

But it’s not easy for the depositors to be confident in the wake of series of reports that BFIs are facing liquidity.

“People’s confidence has yet to restore,” says economist Bishwhambher Pyakurel, who blames the government for taking some market-distorting decisions of late. “The root cause of recent trouble is politics-driven economy,” says Pyakurel. “The political leadership is not accountable to the people; it is accountable to the party. The government itself is responsible for the current crisis.” Pyakurel, who terms the fiscal policy a complete failure, says, “Had the fiscal policy supported, there would not have been liquidity crunch.” But Pyakurel refuses to issue a blank cheque to financial institutions. “They are also to be blamed. In some institutions, there is excess liquidity and others are in trouble.”

But bankers simply pass the buck and blame the government for current liquidity crunch.

“Accelerated government spending could help, but slow government spending is not the only reason,” argues Khanal adding that unspent government money always remains in the government system. “It goes to the market through open market operations, and it helps lubricate the market, which ultimately will generate more liquidity.”

Economists, nonetheless, blame both the central bank’s ‘slack’ monitoring and the government. “Government is apathetic towards economy; it has put the economic agenda on the back burner,” says entrepreneur and lawmaker Binod Chaudhary.

source:The Himalayan Times

1Ropani