Economic, Fiscal, and Monetary Policies in Nepal
Economic Policy
Economic policy refers to the public policy designed to manage, regulate, and influence a country's economy by targeting macroeconomic indicators such as investment, production, distribution, pricing, employment, imports, exports, and foreign exchange. Often termed macroeconomic policy, it encompasses fiscal policy, monetary policy, and sectoral policies (e.g., agriculture, tourism, trade, employment, and foreign exchange).
Features of Nepal’s Macroeconomic Policy
Nepal’s economic policy aims to strengthen the national economy through a balanced approach, as outlined in the Constitution of Nepal, 2015. Key objectives include:
- Promoting a three-pillar economy (public, private, and cooperative sectors).
- Maximizing resource mobilization for rapid economic growth and sustainable development.
- Ensuring equitable distribution of economic gains to reduce inequality.
- Fostering a self-reliant, independent, and progressive economy.
- Building a socialism-oriented, prosperous economy.
- Promoting transparency, accountability, and competitiveness in economic activities.
- Identifying and developing industries with comparative advantages.
- Promoting import substitution, export growth, and market diversification.
- Eliminating black marketing, monopolies, artificial shortages, and anti-competitive practices.
- Protecting consumer rights and national industries.
- Prioritizing domestic investment based on Nepali labor, skills, and raw materials.
- Attracting foreign capital and technology for import substitution, export promotion, and infrastructure development.
- Utilizing foreign aid based on national priorities, integrated into the national budget.
- Leveraging knowledge, skills, and capital of non-resident Nepalis for national development.
- Ensuring inter-governmental coordination for industrial corridors and special economic zones.
- Focusing investments on industrialization to increase the productive sector’s contribution.
- Creating an investment-friendly environment by streamlining business processes from entry to exit.
- Adopting growth-friendly tax systems across federal, provincial, and local levels.
- Maintaining macroeconomic stability while implementing financial federalism.
- Ensuring efficiency in public expenditure and prioritizing productive sectors.
- Controlling recurrent expenditure to increase capital expenditure.
- Deploying public debt in productive sectors and managing foreign exchange risks.
- Promoting competitive market-based pricing, except for essential goods and services.
- Strengthening financial sector regulation to minimize risks to savings and investments.
- Providing insurance premium subsidies for social security and productivity enhancement.
- Promoting capital market development through incentivizing policies.
- Developing digital economy infrastructure to reduce costs.
Theoretical Foundations of Global Economic Systems
Global economic systems are broadly categorized into three types:
| Economic System | Key Features |
|---|---|
| State-Controlled (Socialist) | Government as the primary economic driver, controlling unnatural wealth accumulation, balancing imports, growth, and development, and curbing market distortions like black marketing. |
| Open Market (Liberal) | Market-driven economy with minimal government intervention, promoting competition, demand-supply-based pricing, and individual economic freedom. |
| Mixed Economy | Combines state and private sector roles, balancing control and freedom based on national needs, population, and economic opportunities. |
Nepal adopts a mixed economy with a three-pillar approach (public, private, cooperative), aiming for a socialism-oriented yet liberal economic framework.
Factors Shaping Economic Policy
- Constitution of Nepal, including national interests (Article 5) and fundamental rights (e.g., freedom, property, employment, social security).
- State economic objectives (Article 50(3)) and policies (Article 51) covering industry, commerce, natural resources, and basic needs.
- Governance system, political structure, and state framework.
- Economic development stage, demand, and needs.
- Periodic plans, international treaties, and commitments.
- Foreign aid and economic diplomacy.
Fiscal Policy
Fiscal policy involves government adjustments to public revenue, expenditure, and debt to achieve desired economic outcomes and mitigate adverse effects. Managed by the Ministry of Finance through the annual budget, it is a key pillar of macroeconomic policy, influencing investment, production, distribution, pricing, employment, and trade.
Features of Nepal’s Fiscal Policy (FY 2080/81)
- Effective implementation of the Constitution and federalism.
- Structural economic reforms and frugality in public expenditure.
- Increasing capital expenditure and quality infrastructure development.
- Improving governance and service delivery.
- Controlling corruption and promoting green and inclusive development.
- Reducing poverty, inequality, and ensuring peace process completion.
- Protecting national interests and adopting a balanced foreign policy.
- Prioritizing marginalized communities and maintaining macroeconomic stability.
Fiscal Policy Instruments
The government uses the following tools to achieve fiscal objectives:
- Tax System: Progressive taxation increases revenue as income rises. Tax rate reductions can boost investment but risk inflation if demand outpaces production. Increasing tax rates may lead to tax evasion or reduced investment.
- Public Expenditure: Increased spending stimulates demand, production, and employment, but requires efficient allocation for optimal results.
- Public Debt: During recessions, external borrowing is preferred to avoid crowding out private investment. In inflationary periods, internal borrowing helps control liquidity.
- Budget System:
- Deficit Budget: Expenditure exceeds revenue to boost development (common in developing nations like Nepal).
- Balanced Budget: Revenue equals expenditure for economic stability.
- Surplus Budget: Revenue exceeds expenditure, rare in competitive economies.
Challenges of Nepal’s Fiscal Policy
- Identifying and controlling tax evasion.
- Bringing the agriculture sector (27% of GDP) into the tax net.
- Promoting voluntary tax compliance and expanding the tax base.
- Increasing the share of direct taxes and controlling recurrent expenditure.
- Prioritizing rural and marginalized community development.
- Enhancing the productivity of public debt and reducing foreign aid dependency.
- Controlling inflation and coordinating revenue/expenditure across government tiers.
Monetary Policy
Monetary policy, formulated by the Nepal Rastra Bank (NRB), aims to maintain macroeconomic stability through managing money supply, liquidity, balance of payments, foreign exchange, interest rates, and financial access. Introduced in Nepal in FY 2059/60 (2002/03), it regulates credit expansion during recessions and controls liquidity during inflation.
Objectives of Nepal’s Monetary Policy
- Maintaining price, exchange rate, and balance of payments stability.
- Promoting economic growth, employment, and poverty reduction.
- Ensuring equitable resource distribution and financial stability.
- Supporting fiscal policy through targeted credit flow to productive sectors.
Monetary Policy Instruments
Monetary policy tools are divided into quantitative and qualitative categories:
| Instrument Type | Examples | Purpose |
|---|---|---|
| Quantitative | Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Open Market Operations, Repo Rate | Regulate money supply and interest rates across the economy. |
| Qualitative | Credit Rationing, Credit Ceiling, Direct Action, Moral Suasion, Publicity | Target specific sectors for credit allocation or control. |
Key Provisions of FY 2080/81 Monetary Policy
Announced on July 23, 2023, key provisions include:
- Broad money supply growth target: 12.5%.
- Private sector credit growth: 11.5%.
- Maintaining CRR at 4%, SLR at 12% (commercial banks) and 10% (development banks/finance companies).
- Policy rate: 6.5%, Bank rate: 7.5%, Deposit collection rate: 4.5%.
- First residential home loan limit: NPR 20 million.
- Reducing risk weight for real estate and share loans above NPR 5 million to 125%.
- Maintaining foreign exchange reserves for 7 months of imports.
- Promoting digital currency and financial inclusion.
Quantitative Easing and Open Market Operations
Open Market Operations (OMO) involve the NRB buying/selling government securities to manage liquidity. Quantitative Easing (QE), a non-traditional tool, enhances OMO by directly purchasing securities from the private sector, increasing money supply and reducing long-term interest rates. Benefits include:
- Increasing liquidity and bank lending capacity.
- Reducing interest rates and boosting investment.
- Mitigating crowding-out effects and stabilizing prices.
However, excessive QE risks inflation and financial instability, requiring careful implementation.
Interrelation of Fiscal and Monetary Policy
Fiscal and monetary policies are interdependent tools for economic management:
| Aspect | Fiscal Policy | Monetary Policy |
|---|---|---|
| Objective | Regulates fiscal stability via revenue, expenditure, and debt. | Manages money supply, inflation, and economic growth. |
| Authority | Ministry of Finance | Nepal Rastra Bank |
| Instruments | Tax, public expenditure, debt, budget | CRR, SLR, bank rate, OMO, repo rate |
| Scope | Broader, affecting overall economy | Narrower, focusing on monetary variables |
| Timing | Issued before fiscal year | Issued after fiscal policy |
Coordination ensures effective economic management, with monetary policy supporting fiscal goals like debt management and inflation control.
Challenges of Nepal’s Economy
- Lack of policy clarity and continuity in economic development.
- Inadequate commercialization of agriculture (27% of GDP).
- Declining capital expenditure capacity and prolonged transitional governance.
- High trade deficits and insufficient productive sector investment.
- Over-reliance on imports and services rather than production.
- Natural disasters and ineffective development management.
Policy Recommendations
- Classify imports to discourage non-essential goods and reduce trade deficits.
- Coordinate fiscal and monetary policies to address economic challenges.
- Expand the tax base with realistic revenue targets.
- Enhance government capacity for capital expenditure.
- Promote internal production through industry-friendly policies.
- Modernize agriculture and prioritize hydropower investment.
- Ensure investment security and incentivize productive sectors.
- Utilize remittance income for productive investments.
- Strengthen monitoring, evaluation, and research for effective policy implementation.
Conclusion
Nepal’s economic, fiscal, and monetary policies are critical for achieving macroeconomic stability, sustainable growth, and equitable development. Through coordinated efforts, leveraging digital tools, and addressing structural challenges, Nepal can build a resilient, socialism-oriented economy.
References
- Constitution of Nepal, 2015 (Articles 5, 50, 51).
- Nepal Rastra Bank, Monetary Policy FY 2080/81.
- Ministry of Finance, Government of Nepal.
- Intergovernmental Fiscal Management Act, 2074.