Thukten Zangpo

The money supply in the economy is growing, yet businesses are experiencing sluggish growth, raising questions about where the cash is flowing and how to stimulate economic activity.

Figures from the Royal Monetary Authority (RMA) shows that the money supply in the economy, M2, has grown from Nu 191.31 billion as of December 2021 to Nu 208.95 billion in December 2022, and Nu 218.92 billion in December 2023. 

M2 is a measure of the money supply in an economy that represents the most liquid forms of money readily available for spending, along with some near-liquid assets. 

This reflects the overall health of an economy: a growing M2 often indicates businesses and consumers borrow and spend more to stimulate the economy. 

At closer look, M1, which is the most readily available cash and checking account, is growing at a slower pace than M2. The RMA figures show that M1 grew by 3.1 percent to Nu 118.55 billion as of December 2023, while M2 grew by 4.8 percent.

If M2 grows faster than M1, the overall money supply is increasing, but most readily available cash (M1) is not growing as quickly. It could also mean issues with consumer confidence, bank lending practices, and distribution of new money within the economy. 

An economist, Dr Chandra Dhakal, said that even though the money supply in the economy is growing, more concerning is where that money is going. 

Looking at the country’s credit portfolio, most of the credit in the economy is in the non-enterprising sectors like commercial housing, tourism, and new special education loans. 

Out of Nu 211.58 billion total credit in the economy, about 30 percent or Nu 63.12 billion are in the housing sector, followed by 12.7 percent or Nu 26.96 billion in the hotel and tourism sector as of November last year. 

Education loans stood at Nu 16. 96 billion, while the loan for trade and commerce was at Nu 17.15 billion. 

For the agriculture and livestock that employs over 40 percent of the workforce, the credit stood at only Nu 4.26 billion. 

Despite an increase in money supply, Dr Chandra Dhakal said that the multiplier effect had gone down because of the limited consumer consumption capacity. 

The multiplier effect had been decreasing over the years, with 2.6 in the 5th Plan, which tipped to 3.4 in the 9th Plan, and dropped to 2.9 in the 12th Plan.

The multiplier effect for the 12th Plan of 2.9 means that for every additional Nu 1 the government spends, GDP is boosted by Nu 2.

Along with fewer consumers, Dr Chandra Dhakal also said that businesses were not growing because of the less conducive business environment in the country. He added that access to finance is still a bigger concern, even for businesses that can access credit, the banks ask for high collateral. 

High non-performing loans (NPL) from the past can also make banks wary of extending new credit; banks have deferred loans for over three years for various sectors. 

A banker said that trade and commerce had the highest NPL because of default in overdraft loan accounts or working capital. 

Over the years, many similar businesses came up, leading to decreased distribution in the consumers, Dr Chandra Dhakal said.

A study found that there are 26.53 grocery or general shops, 17.47 restaurants, 1.27 automobile workshops, and 1.55 garment shops per 1,000 population, indicating a high number of business establishments compared to the population.

However, the businesses are expected to pick up in the coming years. 

A banker said that the Nu 15 billion economic stimulus plan would drive the economy, including the government investments, especially in construction sectors. 

An economist said that the investment would increase with the initiation of the Nu 15 billion economic stimulus plan, 13th Plan, and the Gelephu Mindfulness City. However, he added that low government investments would lead to smaller economic activities.

According to the Asian Development Bank, private consumption is expected to grow by 4.6 percent in 2024 because of higher tourism earnings and increase in civil service salaries. Public consumption growth is anticipated to stabilise around 4 percent on expansion in recurrent expenditure. 

An economist said that total consumption, both public and private, is the key driver of the economy. It accounts for more than 70 percent of GDP. 

The finance ministry estimated total consumption to grow by 6.2 percent in 2023 from 3.1 percent in 2022 because of an increase in household income and government consumption expenditure. 

Private investment is estimated at 2.5 percent as economic activities normalise.

However, public investment, which is 12 percent of GDP, is estimated to have declined by 17.1 percent in 2023 because of lower government expenditure. 

According to the RMA, the gradual recovery of economic activities, the pent-up demand, particularly in construction and service sectors, are expected to lift the domestic credit by 21.2 percent in fiscal year 2023-24 from Nu 209.7 billion in fiscal year 2022-23. 

The growth is expected to be propelled by increased demand for investment in hotel and tourism, trade and commerce sectors, and overseas higher education loans. 

Meanwhile, banking credit to the construction sector is anticipated to remain moderate, given the continuation of the ongoing loan moratorium. 

According to the RMA, the Authority remains watchful of banking credit growth, especially in unproductive sectors. This caution is driven by the sector’s direct correlation to higher imports, posing challenges to foreign exchange reserves and exposing vulnerabilities to external factors.