Monetary Policy Formulation in Nepal
Monetary Policy Formulation in Nepal

Monetary Policy Formulation in Nepal

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Economy of Nepal

Nepal’s per capita income is $1085 according to the Economic Survey of 2019/20. Geologically, Nepal is a landlocked country located between two giants of the world economy China and India and Nepal has a very small size of the economy compared with these two neighboring countries. The GDP of Nepal in 2019 was about $30 billion and is beyond comparison with that of China, and India. GDP of China was $14140 billion and India was $3202 billion in 2019 at a nominal price.  The GDP of China is 472 times more than Nepal and the GDP of India is 107 times more than the GDP of Nepal. High hilly geography with the highest Himalayan range in the north bordering China compared to a strip of plain land bordering India has compelled Nepal to seek its access to the marine and intercontinental markets by way of India only.  Therefore, the country is highly dependents on India even for a supply of necessities of life.

Nepal has commenced economic planning at par with India and China intending to obtain balanced and inclusive development. But, Nepal is still hanging on a strong rope of least developed countries. India started their First Five Year Plan in 1951, China in 1953 and Nepal in 1956.  

So far, Nepal has completed nearly six and a half decades with 14 development plans after its first five-year plan. And Nepal has been implementing a series of five-year and three-year economic plans for moving forward in the economic development process.

Despite some remarkable signs of progress, several challenges remain on the economic front. Furthermore Nepalese economy witnessed several political changes ranging from party-less Panchyat era to multiparty system with constitutional monarchy to the federal republic in the span of the last six decades.

Monetary Policy in Nepal

As a zenith financial institution with the duty of conducting or formulating monetary policy and regulating the financial system, the task and association of Nepal Rastra Bank in shaping the structure, direction, and performance of the macroeconomy have remained decisive.

Monetary policy is a tool used by a national government to manipulate the economy. It means, with the help of monetary authority (to control the supply and availability of money), a state attempts to persuade the overall level of economic activity in line with its political and economic objectives. Usually, the goal is macroeconomic stability-that is low unemployment, low inflation, economic growth, and a balance of external payments.

For Nepal, the formulation and implementation of monetary policy is the major function of NRB as the central bank of Nepal. The central bank’s priority during the initial decade of its establishment was on the development of banking and payment system in the country. Through circulars and directives, it was in 1996 NRB has introduced instruments of monetary policy. In the decades of the 60s, 70s, and 80s, NRB depends or relied more on the direct method of monetary policy implementation. Since the late 1980s, with deregulating interest rate determination and reforms in monetary strategy, instruments and operating procedures among others NRB has started to emphasize the indirect monetary instruments rather than direct monetary instruments.

The initial decade of the 21st century signaled a major penetrate in the monetary policy history of Nepal by formulating and implementing the NRB Act, 2002. NRB Act, 2002 provided a clear legal and institutional framework for monetary policy formulation in Nepal. The monetary policy operating process has been changing in response to the evolving needs of time and situations. Here lest us talk on how monetary policy of Nepal is being formulated.

Formulation of Monetary Policy

  • Monetary Policy formulation and implementation is the key function of Nepal Rastra Bank.
  • NRB Act, 2002 provided a clear legal and institutional framework for monetary policy. It means the NRB Act, 2002 largely provides the guiding principle and institutional set-up for a monetary policy decision.
  • The monetary policy operating process has been changing in response to the embryonic needs of the time. Thus the formulation of monetary policy formally received its institutional, legal, and more transparent framework in recent decades only.
  • It has made mandatory provision of the annual announcement of monetary policy by incorporating the review of past policy, programs for the following year, and the rationale for such programs.
  • NRB started the tradition of officially announcing and publishing monetary policy opening from FY 2002/03 which was a burst through in modernizing monetary policy through a more transparent framework with public dissemination. 
  • Generally, the monetary policy of Nepal covers financial and foreign exchange policy.

The following chart shows the monetary policy formulation process in Nepal.

Monetary Policy Formulation in Nepal
Monetary Policy Formulation in Nepal/Source: https://www.nrb.org.np/

The chart shows the monetary policy formulation in Nepal. As presented in the above chart, the Research Department (RD) of NRB first prepares an initial draft of monetary policy with the collection of information from other departments of the NRB and related stakeholders. NRB also organizes pre-monetary policy consultation meetings with the stakeholders. After such a meeting the RD presents the initial draft of monetary policy in the Inter-Department Coordination Committee, which is headed by Executive Director of RD. By incorporating the changes recommended by the Committee, the RD submits the draft to the Management Committee (MC) that reviews and makes possible changes in the draft prepared by RD.

Incorporating the recommendations of the MC, the draft of the monetary policy is forwarded to the NRB Board of Directors (BOD) for approval. After the approval, the Governor formally announces the policy through a press conference and the document is published electronically and also made available in hard copy. The NRB has started the Mid-term Review and Quarterly Review of monetary policy since 2016/17 and for such the bank follows the identical procedure.   

Conclusion

Monetary policy is related to the measures taken to regulate the supply of money, the cost, and availability of credit in the economy. Moreover, it also deals with the distribution of credit between uses and users and also with both the lending and borrowing rates of the interest of the banks. In developing countries like Nepal, monetary policy has played a significant role in promoting economic growth with price stability. The objectives or goals, targets, and instruments of monetary policy are different matters. NRB as the central bank of Nepal or a chief financial institution of Nepal has the duty of conducting monetary policy and regulating the financial system and thereby helps the government to achieve national macroeconomic goals like price stability, full employment, exchange rate stability, and economic growth, etc.

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