TYPES OF MONETARY POLICY

The monetary policy is designed by considering the existing situation and outlook of the economy along with priorities, policies and programs of the government’s budget.

There are following two types of monetary policy:

1. Expansionary/ Cheap/ Ease monetary policy :

Expansionary monetary policy is the monetary policy that is designed to increase the aggregate demand in an economy. It is also called ‘Cheap/ Ease monetary policy’. As we know, the aggregate demand falls during the period of recession. So, this policy is implemented to overcome recession and encourages to expand credit in an economy. This is done through:

• Reducing the bank rate
• Reducing CRR
• Purchasing securities (bills and bonds) in open market and so on.

Under this kind of monetary policy, the monetary authority makes a deliberate effort to increase the money supply in the economy.


2. Contractionary/ tight/dear/ restrictive monetary policy:

Contractionary monetary policy is the monetary policy that is designed to decrease the aggregate demand in an economy. It is also called ‘tight/dear/ restrictive monetary policy’. As we know, the aggregate demand rises during the period of inflation. So, this policy is implemented to overcome inflation and discourage the expansion of credit in an economy. This is done through: 

• Raising bank rate
• Raising CRR
• Selling securities (bills and bonds) in open market and so on

Under this kind of monetary policy, the monetary authority makes a deliberate effort to decrease the money supply in the economy.















picture credit: www.slideshare.net

MONETARY POLICY

   
  Among several functions of central bank, monetary policy is regarded as one of the important function. Monetary policy is a policy that helps to maintain the price and interest rate at the desired level - through the management of supply of money in the economy. The level of money is managed by increasing or decreasing the supply of money by the monetary authority (i.e. central bank).

Definition and views:

According to Harry G. John:

“Monetary policy is the policy employing the central bank’s control on the supply of money as an instrument for achieving the objectives of general economic policy.”

According to G.K. Shaw:

“Monetary policy is any conscious action undertaken by central monetary authority.”

According to Edward Shapiro:

“Monetary policy is the central bank’s control over the money supply as an instrument for achieving the objectives of general economic policy.”

So, in order to achieve the macro-economic goals, the central bank formulates the monetary policy aligned with the fiscal policy of the government. In other words, the monetary policy is designed by considering the existing situation and outlook of the economy along with priorities, policies and programs of the government’s budget.

Objectives of monetary policy:

The basic objectives of monetary policy are as follows:

• To make Price level stable

• To achieve full employment

• To make interest rate stable

• To make the Exchange rate stable

• To achieve rapid economic growth

• To Correct the adverse BOP

• To Induce savings

• To Invest the savings

• To Create and expand Financial Institution

• To reduce economic inequality

Types of Monetary Policy:

Generally, monetary policy is divided into following two types:

1. Expansionary/ Cheap monetary policy

2. Contractionary/tight/ restrictive monetary policy

Instruments of Monetary Policy:

Instruments of monetary policy represents a tool through which the central banks controls the supply of money and regulates credit creation in the nation. The main instruments of monetary policy are as follows:

A)   Quantitative / General /indirect instruments of Monetary Policy :

• OMO (Open Market Operation)

• Reserve Requirement/ Variation of cash reserves

• Bank Rate /Discount Rate

B)   Qualitative / selective/ Direct instruments of Monetary Policy

• Regulation of Margin requirement

• Regulation of consumer credit

• Moral suasion

• Credit rationing

• Publicity

• Direct action

• Interest Rate ceiling

• Differential re-discounting rates

• Differential CRR for different deposits

• Portfolio Regulations

The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.

Nepal Rastra Bank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy.  In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.

The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed. 

In the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank frames the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

Bloggers Note: For more details keep on visiting the blog

PRODUCTION POSSIBILITY CURVE

Hi readers!

Today, Let us understand about production possibility curve.

In a very simple language,

Production possibility curve is the locus of various combination of two goods or services which an economy can produce by mobilizing its available resources in its optimum way. It is also known as “Transformation Curve” because resources are transformed from one product to produce other product.

As we know that, Professor Lionel Robbins of London school of Economics had defined economics entirely in terms of scarcity and choice in his book “An Essay on the Nature and Significance of Economic Science” published in 1932 A.D.   

As per modern economists Prof. Lionel Robbins and his followers like Karl Manger, Peter, Stigler, Scitovosky etc. :-

• Human Wants are Unlimited (If one wants gets satisfied another creeps on)

• Means have alternative uses

• Wants differs in urgency (Some wants are more urgent than other)

• Means to satisfy those unlimited wants are limited

• Therefore, Problem of choice occurs

 These problem of an economy are graphically explained by the help of production possibility curve.

Assumptions made by Economists to apply the concept of Production Possibilities Curve:

• An Economy produces only two goods and services.

• All the available resources are limited and fully utilized

• There is no change in Resources and Technology

• Factors of Production are fully mobile from one use to other

On the basis of these assumptions, following production possibility schedule is prepared:

Production Possibilities	Product X (‘000 units)	Product Y (‘000 units)
A	0	20
B	1	19
C	2	16
D	3	12
E	4	5
F	5	0

Explanation of  Production Possibility Schedule:

On the basis of above assumptions, An Economy produces only two goods and services named Product X and Product Y at fully utilized resources. There are several production possibilities shown in above table from A, B, C, D, E and F.

In an economy there can be only three cases:

1. Produce only Product Y (Use all its resources to produce Y i.e Production Possibilities A)
2. Produce only Product X  (Use all its resources to produce X i.e   Production Possibilities F )
3. Produce some Product X and some Product Y (Diversify the resources to produce both goods i.e Production Possibilities B,C,D and E )

Representing the above Production Possibilities schedule in graph we find the following curve:

In the above figure:

OX and OY represents X-axis and Y-axis that shows Product X (‘000 units) and Product Y (‘000 units) respectively.

A is the point where only product Y is produced and F   is the point where only product X is produced. Similarly, B, C,D and E  are the various production combinations whereby both of the products are produced accompanying the above assumptions. A curve obtained by combining all the points from A  to F is known as Production Possibility Curve.

It is to be noted that, an economy can’t choose a point G or point H – as it violates the assumption of Production Possibility Curve.

• At point G - there would be some unused resources.
• At point H - there would be resource constraints.

Therefore, Production Possibility Curve is also known as “Transformation Curve” because resources are transformed from one product to produce other product.

However, the Production Possibility Curve may have shift ( Rightward or Leftward ) depending upon the following two main reason:

1. Change in Resources
2. Change in Technology

If there is positive change in Resources and Technology the Production Possibility Curve will shift upward to the right and if there is negative change in Resources and Technology the Production Possibility Curve will shift downward to the left.

This can be shown by following figure:

In the above figure:

OX and OY represents X-axis and Y-axis that shows Product X (‘000 units) and Product Y (‘000 units) respectively.

AF shows initial Production Possibility Curve. Similarly, A’F’ shows unfavorable change in Resources and Technology whereas A”F” shows the favorable changes in Resources and Technology in an economy. This has resulted shift in Production Possibility Curve. 

Here, A’F’ shows downward shift in Production Possibility Curve and A”F” shows upward shift in Production Possibility Curve.

Therefore, P.A.Samuelson has rightly remarked as -

“Production possibility curve is that curve which represents the maximum amount of a pair of goods and services that can be produced with an economy’s given resources and technique, assuming that all resources are fully employed.”

PRICE LINE

Suppose the price of commodity ‘x’ is RS. 100 and price of commodity ‘y’ is Rs. 50 and a consumer has Rs. 2000 to spend per month on goods x and goods y.

a) Sketch the consumers budget constraint

b) Assume that he splits his income equally between x and y. show whether the consumer ends up on the budget constraints.

c) Suppose that the income rises from Rs. 2000 to Rs. 4000. Sketch the new budget constraint.

d) Assume that he again splits total budget equally into two goods. Show where the consumer ends up on new budget constraint.

From the above information we have:

• The total Budget of the consumer (B ) = Rs. 2000
• Price of the commodity x (Px) = Rs 100
• Price of the commodity y (Py) = Rs 50

a) Computation of consumers budget constraints:

As we know,

Under Price Line :

B = Px x Qx + Py x Qy

Or, 2000 = 100X + 50Y……….(.i)

A)Suppose that consumer spends his entire budget in order to purchase commodity X (i.e Qy = 0)

Then the equation ( I ) becomes:

2000 = 100X + 50 x 0

Or, 100x = 2000

Or, x = 20 units.

This gives the coordinate (X, Y) as (20, 0)

Similarly,

Suppose that consumer spends his entire budget in order to purchase commodity Y (i.e Qx = 0)

Then the equation (I) becomes:

2000 = 100 x 0 + 50Y

Or, 50Y = 2000

Or, Y = 40 units

This gives the coordinate (X, Y) as (0, 40)

Plotting the coordinates of above graphically, we get the following:


b) Assuming that he splits his income equally between x and y then, Computation of whether the consumer ends up on the budget constraints or not :


As we know, if the consumer equally divides or splits his budget: (i.e Rs. 1000 in goods x and Rs. 1000 in goods y )

Qx = B/ Px = 1000 / 100 = 10 units.

This gives the coordinate (X,Y ) as (10, 0)

Similarly,

Qy = B / Py = 1000 / 50 = 20 units.

This gives the coordinate (X,Y ) as (0,20)

Therefore, the new budget equation becomes:

10 Px + 20 Py = 2000

Plotting the coordinates of above graphically, we get the following:


C ) Sketching of the new budget constraint when the income rises from Rs. 2000 to Rs. 4000:

The new Budget (B ) = Rs. 4000

Suppose that consumer spends his entire budget in order to purchase commodity X (i.e Qy = 0)

We know, Qx = B/ Px = 4000 / 100 = 40 units.

This gives the coordinate (X,Y ) as (40, 0)

Suppose that consumer spends his entire budget in order to purchase commodity y (i.e Qx = 0)

We know, Qy = B/ Py = 4000 / 50 = 80 units.

This gives the coordinate (X,Y ) as (0, 80)

Therefore, the new budget equation becomes:

40 Px + 80 Py = 4000

Plotting the coordinates of above graphically, we get the following:



D ) If he again splits total budget equally into two goods, then computation of the consumer ending up on new budget constraint:


As we know, if the consumer equally divides or splits his budget: (i.e Rs. 2000 in goods x and Rs. 2000 in goods y )

Qx = B/ Px = 2000 / 100 = 20 units.

This gives the coordinate (X,Y ) as (20, 0)

Similarly,

Qy = B / Py = 2000 / 50 = 40 units.

This gives the coordinate (X, Y) as (0, 40)

Therefore, the new budget equation becomes:

20 Px + 40 Py = 4000

Plotting the coordinates of above graphically, we get the following:

PRACTICAL APPROACH TO MARKET EQUILIBRIUM AND EFFECT OF TAX

The market supply and demand function are as follows:

Qd =1200-2P

Qs = 4P

On the basis of this information, answer the following:

a) Determine the equilibrium price and quantity

b) What is the effect of tax Rs 50 per unit on production?

Solution:

In the above question, the demand function is :

Qd =1200-2P

Similarly, the supply function is :

Qs = 4P

a) Computation of equilibrium price and quantity
As we know, at equilibrium point the market demand equals market supply.

In other words,

Qd = Qs

Putting the values of Qd and Qs

1200-2P = 4P

6P = 1200

Or, P = Rs.200


Now, putting the value of P in demand function

Qd = 1200 – 2p = 1200 -2 x 200 = 800 unit.


Similarly, putting the value of P in supply function

Qs = 4P = 4 X 200 = 800 unit.


Therefore, the required equilibrium price and quantity is Rs. 200 and 800 units respectively.

b) Computation of Effect due to tax of Rs 50 per unit on production:

Since, the effect of tax do not affect the market demand function but affects the market supply function, we need to first compute the new market supply function by considering the effect of tax.

Market Demand Function:

Qd = 1200 – 2P

Market Supply Function:

Qs = 4 (P – 50 )

Or Qs = 4P – 200

Again, at Market Equilibrium Point

Qd = Qs

Putting the values of Qd and Qs

1200-2P = 4P – 200

Or, 6P = 1400

Or, P = Rs. 233.33

Now, Putting the value of P in demand function

Qd = 1200 – 2p = 1200 -2 x 233.33 = 733.33 = 733 unit


Similarly, putting the value of P in supply function

Qs = 4P – 200 = 4 X 233.33 – 200 = 733.33 = 733 unit



Therefore, the new equilibrium price and quantity is Rs. 200 and 800 units respectively.

	Effect before tax	Effect after tax
Price	Rs. 200	Rs. 233.33
Quantity	800 Unit	733 unit

The effect of tax is that, it increases the price and decreases the quantity.

Tutorial Note :

                   

If there would be subsidy in the question then, add the government subsidy in the supply function and solve the problem accordingly. Subsidy decreases price and increases quantity.

CAPITAL FLIGHT

It is simply, moving out the large sum of money from the nation. 

In other words, it is moving out large amount of capital from your home country to foreign country. 


The reasons could be :

• Political instability 

• Currency devaluation 

• Defective system of capital control

• Legal instability

• Type of exchange rate system adopted by the country for international trade.

• The rise of digital money

• Increased Money Laundering activities 

• Fear of increased Capital Gains Tax (CGT) 

• Fear of decreasing the strength resource of the Nation for which it is recognized. 

Capital flight can be legal or illegal. If the government, through its stringent rules that discourages the movement of capital from their country- then the capital flight could be said to be legal. However, if foreign investors tries to create a situation of capital blocks through restrictions of trade activities it would be called as illegal capital flight. 

Generally, illegal capital flight is increased if the governmental laws, rules and controls- are more stringent and rigid in nature. If we analyze the situation of 1970-1980 of India capital flight, we can find that, there were billions of dollar currency moving out of the country. The researchers found that, the main reason behind it was stringent rules in relation to currency controls. 

Similarly, Due to high inflation and devalued currency - Argentina has faced a huge capital flight for years. 

The deep rooted economic and political difficulties have given the birth to the situation of capital flight. The situation of civil war has encouraged the capital flight in Pakistan, Nigeria and others.

When we talk about the exchange rate system in international trade, we can find three exchange rate system.They are :

• Floating Exchange Rate System

• Fixed Exchange Rate System

• Controlled Exchange Rate System 

Nepal has adopted Pegged Exchange Rate System. This has also been one of the reason of capital flight for the country. Researchers has agreed that,  pegging with Nepalese currency has led to the appreciation of currency in line with Indian currency. On contrary, it has also increased trade deficit as well as Forex currency reserve of Nepal. 

Most of the commercial banks in Nepal provides interest from 3-5 % to their depositors whereas, India provides 8-9% interest to their savers. This has encouraged Nepalese depositors (both households and business persons) to swift their deposits to India. Similarly, textiles, automobiles, agriculture or electronics- the imports based economy has placed a burden of capital flight for Nepal.


In order to control the situation of capital flight, most of the nations has made a currency control laws as to - utmost currency amount that could be taken out of the country. Different countries has also made laws to encourage Foreign Direct Investment rather than Foreign Portfolio Investment. 

In conclusion,

Capital Flight not only decreases the purchasing power of the country but also makes imports and foreign facilities expensive.

Pic.Credit :www.canstockphoto.com

CONCEPT AND FORMS OF MONEY

This is the blog written to explore the knowledge about money.

In very simple language, 

Money is the coin and paper note that is circulated and accepted as a medium of consideration in the society.

However, the concept of money is not limited to this. In ancient years beside the use of metallic coins -cattle, tobacco and grains were also used as money. So, is it appropriate to call all of these items as money?

A ) Traditional Function-Based Views: 

Under this view, anything that performs the functions of money is considered as money. The economists had a consensus-ad-idem as to the concept of money. They believed that, any commodity that functions as money can be said to be money. 

In the words of Hartley Withers, “Money is what Money does.” 

So, this definition has made the concept bit complex …isn’t it?

To simplify it, the economist mentioned that, in order to be qualified as a money, it must have to satisfy following four important functions:

1. It must be used as a medium of exchange .

2. It must have measure of value .

3. It must be used as a standard of deferred payment .

4. It must have store of value.

The economist like: Crowther, R.P.Kent, walker and other modern economist were the supporters of this views.

However, an economist named Conlberston had argued that, money should not be defined upon its characteristics. It is a concept that is based on a function of good, on a particular use to which it is put.

B ) Generally Accepted Views: 

Under this view, whatever the society accepts as money becomes money. The economist like: Marshall, Benham, Seligman, Robertson and other neo-classical economists gave their definitions on the basis of general acceptability. This is the reason, cheques, bills, drafts, Letter of Credit are considered as money. 

According to Benham : 

“Money is defined as generally acceptable purchasing power or something which everybody is prepared to accept in exchange of goods and services. “

According to Seligman :

“Money is one thing that possesses general acceptability.”

C) Legal Views: 

Under this view, anything that is declared money by the central banks of the country is called money.

According to Hawtery :

“Money has two sides: first it is a unit of account, second it is legal tender “

According to Nepal Rastra Bank Act, 2002 :

"'Money' means all types of currency notes, postal orders, postal notes, money orders, cheques, drafts, traveler's cheques, letters of credit, bills of exchange, promissory notes and credit cards and this term also includes similar types of monetary instruments as the Bank may prescribe, as per the requirement, through the publication and transmission of public notice. "

(-as amended on 14th November 2016) 

The economist argued that, these definitions has neglected the rule of “general acceptability”. Money can’t be called as money, if the people do not accept it as money.

For eg. During the situation of hyperinflation in Germany, people adopted U.S dollar as the money, and rejected the government money.

D ) Modern functional View: 

It is an extension of traditional functional view with some degree of expansion over it. Under this view the function of money is classified as follows:

1 ) Primary Function

• Money works as a medium of exchange 
• Money serves as common measure of value 
• Money serves as a unit of account 

2 ) Secondary Function/Derived Function:

• Money serves as the basis of standard of deferred Payment.
• Money serves as a store of value .
• Money serves as the transfer of value (purchasing power) .

3 ) Contingent Function:

As discussed by prof. Kinley:

• Money serves as a basis of credit .

• Money serves as a distribution basis of social income .

• Money works as a general form of capital .

• Money is the source of deriving maximum satisfaction and maximum benefits. 

Forms of Money: 

Money can be of following forms:

A) Commodity money

If commodity is used as money, it is called commodity money. For e.g. Animal leathers, bones, grains, cattle and so on.

B) Metallic money/ Standard Money

If metals is used as money, it is called metallic money. For e.g. Coins made from iron, copper, brass, gold, silver and so on. This money were able to be used for long period of time. Therefore, metallic money were termed as standard money. The metallic money took any one of the following two forms:

1 ) Standard coins:

If the intrinsic value of money is greater or equal to the face value of money, it is called standard coins. Generally, the metals used are gold and silver (either in bimetallism form or mono-metallic form) with definite weight and purity. These money are also called “full-bodied coins”.

2 ) Token coins:

If the intrinsic value of money is less than its face value of money, it is called token coins. Generally, the metals used are made up of – aluminum, copper, brass, iron. Nobody is bound to accept more than a particular quantity of it. Therefore, they are called “subsidiary money”.

C) Paper money:

A money made up of paper is called paper money. It is generally issued by central bank. The intrinsic value of money is very less than its face value. It is legal tender money accepted by all. China is sourced to be first country to use paper money. It can be :

1 ) Representative money:

Such money that represents other form of money, it is called representative money. For eg. Golds are not circulated in large amount from one place to other. So, it is kept in reserves. One the behalf of it, a certificate of ownership is provided. Such paper do act as money that represents the quantity of gold. Therefore, it is called “representative money” and “convertible money” .

2 ) Fiat money:

If gold is not kept at its full value in the reserve, then such money is called fiat money. Its face value is very much high than its intrinsic value. It derives value only by the order of government. There is no provision to get it converted into gold or silver. It is called “in-convertible money”.

D) Plastic Money:

Money made from plastics are called plastic money. Nepal Rastra Bank had issued Nepalese ten rupee as plastic money. It is also a legal tender.

E) Bank money:

The cheques drawn on demand or current deposits of bank are called bank money. There is a strong debate, whether cheques drawn upon saving deposits (also called near money) will be called bank money or not. Bank money also includes: drafts, travelers cheque, bill of exchange, promissory cards and other banking cards. Since these money are not a legal tender, it is also termed as “optional money”. This kind of money is also called “credit money”.

F) Digital Money:
The money that is in electronic form (digitally stored) are called digital money. They are also called “cryptocurrency” or “Digital Currency”. They are not legal tender, however has more acceptability by the general public across the world. For eg. Flooz, Beenz, Bitcoins.

(For details regarding currency of nepal and its related rules in relation to money, bank notes and coins click on above link)







pic. credit :www.history.com

CURRENT SITUATION OF NEPAL (2018)

As described under article 4 of the constitution of Nepal, 2015 -

Nepal is an independent, indivisible, sovereign, secular (i.e. religious, cultural freedom including protection of religion, culture handed down from the time immemorial), inclusive, democratic, socialism-oriented, federal democratic state.

This is the blog written to explore the knowledge of current scenario of Nepal through business perspective. 

Current Overall Scenario of Nepal:

a ) The new constitution of Nepal, 2015 has changed the federal structure of Nepal. There are three level of government. They are:

• The Federal Government 
• State Government 
• Local Government

b ) Nepal is currently divided into :

• 7 provinces (as defined by schedule 4 of the Constitution of Nepal, 2015)
• 77 Districts 
• 753 Local levels 
• 6 Metro-city 
• 11 Sub-metro city 
• 276 Municipalities 
• 460 Rural municipalities

c ) Dr. Yuba Raj khatiwada, a current finance minister and a well-known economist of Nepal, had announced budget on 29 May 2018 for the year 2018/19. 

The provincial governments had presented their revenue and expenditure estimates in their respective assemblies on 15 June 2018, following the provision of the Intergovernmental Fiscal Arrangement Act, 2017.

Therefore, in the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders – Nepal Rastra Bank has framed the monetary policy ( for details Road Map of monetary policy (2018/19 ) of Nepal ) to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

d ) All the relevant laws are being amended or re-framed as per the new federal structure of Nepal Government.

e ) The frequent change in election process of Nepal has been stable.

f ) Political environment has been found stable as compared to past few years.

g ) The economic indicators were not found in positive direction. The root cause of problem were-

• Being unable to utilize the allocated budget expenditure of the government. 
• Non-budgetary expenses were increased up to high level. 

- This has resulted to a great challenge in the area of Public finance.

h) The financial discipline are broken with unhealthy and unfair way. The country has been revolved around the cyclic movement of revenue based upon imports, and remittance based consumption. The government revenue has been condensed due to following factors:

• Compactness in the volume of national economy 
• Foreign aid has not been received in full 
• Received Foreign aid has not been properly mobilized.

i ) Volume of remittance is found quantitatively high but the elasticity of remittance has been found relatively low then earlier years. 

k ) An unbearable unbalanced change in the external environment has pressurized the country’s foreign currency reserve.

l ) Capital mobilization of financial sector has not been able to align with economic growth. Infrastructure and industrial sector has not been grown as per expected. Internal capital market has not been still stable and reliable. The industrial capital has been mostly shifted towards financial and trading sectors.

m ) Creeping Activities for capital formation is found in both private and governmental sectors (majority of projects are not completed within allotted time frame.)

n ) The basic and fundamental facilities provided by the Governmental service is found to be poor. The flow of services are neither simple and consistent nor easily available. 

o ) Rather being Production and manufacture oriented, the interest of country people are inclined towards distribution oriented activities. 

p ) The governmental reserves has been reached to the minimum level. This is due to non-compliance of budgetary discipline. In the name of project implementation, assurance of source has been given- without proper planning, without proper reliable base and without proper sources. Even after allocating the funds to the local levels, the cost and benefit measurements could not be properly known. 

q ) Since, the country has marched towards new federal structure. One the one hand, the operating expenditure will tremendously get increased, while on the other hand, huge budget is required to develop all the local levels. 

This has led the challenges to all the three levels of government (central government, state government and local government) to - effectively mobilize the resources and implement development activities.

r ) Other current scenarios are mentioned as follows under following link : Current economic scenarios of Nepal.  

Picture credit :kathmandupost.ekantipur.com

Road Map of Monetary Policy (2018/19 ) of Nepal

In this blog, 


I have made my sincere effort -to explain the overall monetary policy (2018/19) of Nepal in easy and organized way. 

The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.

Nepal RastraBank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy.  In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.

The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed. The budget has been announced for 2018/19 on 29 May 2018. The provincial governments has presented their revenue and expenditure estimates in their respective assemblies on 15 June 2018, following the provision of the Intergovernmental Fiscal Arrangement Act, 2017.

Therefore, in the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank has framed the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

Current Economic Scenario of Nepal:

• National macroeconomic indicators (such as economic growth and inflation) are in expected direction.

• The domestic economy is on a positive track. This is reflected by the encouraging economic growth of past 2 years.

• Increase in Imports is posing challenge to stability in external sector.

• The global economy is on a cyclical upswing.

• Prices of several international commodities are rising creating inflationary pressure.

• The monetary policy stances remain mixed at the global level.

• The balance of payments (BOP) is in deficit.

• Imports has exceeded Exports.

Economic Projections of Nepal: 

• Economic growth rate is to be maintained around 8 %.

• Consumer price inflation within 6.5 %.

• The maximum growth of broad money is set at 18 %.

• Domestic credit is projected to grow by 22.5 % and the private sector credit is projected to grow by maximum 20.0 %.

• Mobilization of resource to create employment promotion and entrepreneurial development.

• Maintain interest rate stability.

• Ensure easy access to financial services for all citizens by prioritizing financial inclusion and financial literacy. 

• Use of technology in payment system will be encouraged.

• Ensure adequate foreign exchange reserves to cover the prospective import of goods and services ( at least for 8 months).

• The demand for bank credit has increased since past 2 years. On the one hand, demand for credit has increased, while on the other, the balance of payments situation of the country is in deficit.

• There is a need to increase the loanable fund for attaining higher growth and promote rational allocation of resources for creating an inclusive economy.

• The interest rate on institutional deposits mobilized through auction has soared mainly due to slower growth of deposits relative to credit demand. As this has exerted high pressure on lending rate.

• Make necessary amendments in Nepal Rastra Bank Act, 2002 and Bank and Financial Institution Act, 2017 will be initiated.

• Make necessary policies related to regulation, inspection and supervision for the establishment and operation of infrastructure banks.

• Make necessary arrangements for opening branches of the BFIs to make the banking services further simplified and accessible.

• Establishment of provincial office of all commercial banks in each province.

• The campaign for opening bank accounts of all Nepali citizens within a year will be implemented effectively in coordination with concerned institutions.

• Students at high school and university level will be encouraged to open bank accounts. This will be complemented by financial literacy campaigning.

• The process of establishing Real Time Gross Settlement (RTGS) system has already been initiated. Necessary steps will be taken to establish National Payment Switch/Gateway.

• Encourage merger and acquisition process.

• All commercial banks are required to arrange for institutional rating . Such a rating can be done from national or international credit rating agencies. In addition, commercial banks are required to use the credit rating of the borrower as a basis for credit disbursement and renewal for the loans exceeding Rs. 500 million.

• Development banks and finance companies will be required to prepare their financial statements as per the Nepal Financial Reporting Standard (NFRS). 

• Aggregate demand will increase. This will create inflationary pressure in the economy due to : a ) Increase in expenditure of local, state and federal governments in course of achieving the targeted growth rate. b ) Increase in petroleum prices in the international market. 

Management Policies :

The shift of economy from the current scenario to the above projections, are planned to achieve through following management techniques :

A ) Through Monetary Management Techniques :

• The central bank has been using open market operations (OMOs) as the main instrument of monetary management. OMOs will be conducted on the basis of liquidity in excess of minimum reserves to be kept by the BFIs.

• Use WAIBR (weighted average interbank rate) as the operating target of the interest rate corridor (IRC) system.

• Reduce IRC to 6.5%

• Raise two-week deposit collection rate to 3.5 %

• Trim IRC to minimize the fluctuations in the short-term market interest rate.

• The provision of taking two-week repo rate as the policy rate is unchanged i.e 5% to maintain short term stability in interest rate.

• Reduce cash reserve ratio (CRR) to 4 %.

• Lower the Base Rate.

• Reduce SLR to 10 %, 8% and 7% for A, B and C class of banks respectively.

• Fix bank rate for the purpose of lender of last resort (LOLR) facility to 7%.

• Not required to make a margin call, when the pledged value of shares as collateral for margin lending declines by less than 20 %.

• Allow BFIs to extend their margin lending against the collateral of shares upto 25 % of their core capital.

• Maintain refinance rates as follows :

a) General refinance rate to 4%, special refinance and export refinance to 1%. However, Under this provision, BFIs are allowed to charge a maximum 9 % interest rate on general refinance and 4.5 % on special as well as export refinance.

b) The special refinance is provided at 1 % to promote sick industries, cottage and small industries, small businesses run by dalits, indigenous people, differently-abled individuals and deprived communities. Likewise, the export refinance aimed at encouraging exports is also kept unchanged at the existing rate of LIBOR plus 0.25 % .

B ) Through Credit Management Techniques:

• Allow BFIs (including in Indian currency) including Microfinance institutions to mobilize external borrowing up to 25 % of their core capital.

• Commercial banks to mobilize external loans in convertible foreign currencies up to 25 % of their core capital.

• Make provision for providing hedging facility for the foreign investment in infrastructure projects, pooling the investment amount in a separate fund. The fund will help to manage the foreign exchange risk to be borne by foreign investors. This facility is expected to attract foreign investment in large hydropower projects, transmission lines, roads and other infrastructure projects. A separate provision will be made in this regard.

• The ceiling of personal overdraft loan and revolving type loans extended by the BFIs will be reduced to Rs. 5.0 million. Additional policy provision will be introduced to control personal as well as overall overdraft lending of the BFIs.

• For commercial banks - Atleast 25 % of their total credit must be kept aside for priority sector lending of funds, whereby it must include at least 10 %  in agriculture sector and at least 15 % to energy and tourism sector. 
• However, for the development banks and finance companies -  at least 15 percent and 10 percent respectively of their total credit to priority sector is to be kept aside.

• Commercial banks will be encouraged to extend credit in the priority sectors in all 7 provinces.

• BFIs will be encouraged to provide credit to small and medium enterprises (SMEs).

• The limit of the refinance fund, set up for disbursing concessional credit to the priority sectors, will be increased to Rs. 35 billion.

• Loan to get extended for purchasing public vehicles (operating from renewable energy) under the priority sector lending.

• Commercial banks, development banks and finance companies has been fixed to disburse minimum 5 % of their total credit to the deprived sector for all three types of institutions.

• Loan up to Rs. 1.5 million is extended to the projects that are run by women - against group guarantee, under deprived sector lending. For the development of women entrepreneurship, GoN has provisioned 6 % interest subsidy on such loans.

• Encourage investment in agriculture  by amending the Manual relating to Commercial Farming and Livestock Credit.

• Make institutional rating arrangements for all commercial banks from 2018/19. Such a rating can be done from national or international credit rating agencies by those commercial banks. 

• Use the credit rating of the borrower as a basis for credit disbursement and renewal for the loans exceeding Rs. 500 million. 

• Widen the scope of the deprived sector credit by providing :

a) Certificate based loan under the mortgage of educational certificates.

b) loan to deprived and marginalized sections of the society.

c) loan to students of target group for higher as well as technical and professional education.

d)loans to Dalit Communities (for operating businesses under group guarantee). 

-For this Goverment of Nepal has provisioned 5 % interest subsidy on such loans.

C ) Through Long-Term Interest Rate Management Techniques:

• Reduce the limit for BFIs to accept the fixed deposit up to 15 % of its total deposit liabilities from a single institution . The maximum limit for institutional deposits is kept at 45 % of total deposit liabilities.

• Mobilization of the auction-based institutional fixed deposit at maximum 1% points above of the published fixed tenure deposit rate.

• Encourage BFIs to mobilize financial resources through long-term bonds. Resources raised from bond issuance will be taken into account while computing credit to core capital cum deposit ratio.

• Commercial banks to maintain a spread rate of 4.5 % by mid-July 2019 and the spread rate will be reduced gradually. 

D) Through Foreign Exchange Management  Techniques:

• Extend the term of foreign currency loan up to 180 days to import industrial raw materials through commercial banks.

• Make L/C mandatory to carry out imports : a) from India – exceeding INR 50 million  b) from other countries - exceeding USD 40,000

• Provide Foreign exchange facility up to USD 1000 to travelers traveling abroad- based on travel document issued by the GoN for travelling abroad through the land route.

• Allow commercial banks to act as an agent for managing trilateral agreement, manage Escrow account and provide custodian services to foreign investors making a loan investment in various projects in Nepal. Allow commercial banks to act as an agent for recovery of loan and interest and auctioning of the collateral of defaulted borrowers.

• Allow foreign investors investing in specified industries and projects to borrow local currency against the collateral of their foreign currency deposits at Nepali commercial banks.

• Allow commercial banks to execute confirmation of the L/C for the correspondent banking and trade finance services against the collateral of the foreign currency deposits kept by these banks at domestic as well as foreign correspondent banks.

• A provision will be made whereby goods from third countries could be exported to countries other than Nepal as per international rules and norms through the letter of credit on the basis of the advance payments received from the importer abroad.

• Ease the supply of gold to bullion traders.

• Allow the commercial banks to import gold at any time or at once during the month based on quota for the month.