Economics

What do you understand by economics? What are the features of Nepalese Economy.

Economics

 Economics is a social science that concerned with the production, consumption and distribution of the
goods and services in an economy;
 It studies how general people allocate and scare resources for production, distribution, and consumption
both individually and collectively;
 Economics focus on behavior and interaction of the economic agents and how it works in an economy.
For this course of action, economics is divided into two categories i.e. Micro economics and Macro
economics;

Features of Nepalese Economy

 Low per capita income;

 Mixed economy;
 Use of outdated educational system;
 Mass poverty and unequal distribution of income;
 Lack of employment opportunities;
 Dependency on remittance and imported commodities;
 Excessive dependency on agriculture sectors;
 Weak social and human development index;
 Increasing foreign debt and grants;
 Underutilization of available natural resources;
 Effects of economic globalization and foreign trades;
 Heavily influenced by foreign products;
 Lack of financial infrastructure and financial literacy;
 Rapid population growth;
 Trade deficit;
 Backwardness of infrastructural development;
 Existence of market imperfections;
 Use of outdated technology and heisted to adopt new one;
  Traditional set up society;
 Lack of capital formation;
 Underdeveloped industrial sectors;

What is microeconomics and macroeconomic? Explain its significances.

Micro and Macro economics

 Micro economics is a branch of economics that attempt to explain the behavior of an individual or a
firm in a given economy.
 It analyze on smaller scale to understand how an individual’s economic activity impact on overall
economy of the country.
 Macro economics is also a branch of economics that clearly explain the economic health &
performance of the overall economy of the country.
 It analyze overall economy through various macro economics indicators to understand how such
variables impact on economy of the country;

Significances of Micro economics

 It is helpful in determining the price for the goods and services in an economy;
 It provides the basic framework for the proper allocation of the resources in order to get
maximum utility by avoiding wastage;
 It is helpful to understand the customers behavior regarding the available goods and services;
 It helps to find out unanswered questions’ such as how, when, and what to produce;
 It helps to explain many international trade aspects like effect of tariff, determination of
exchange rate, gain from international trade etc.
 It helps to understand various complex economic situations with its simple models;
 It has made a valuable contribution to the science of economic by developing various terms,
concepts, terminologies, tools of economic analysis etc.
 It is helpful in formulation economic policies such as taxation, public expenditure and pricing
policies;
  It has also played a normative role as it suggest policies to eradicate inefficiency from the
economic situation;

Significances of Macro economics

 For a proper knowledge and accurate knowledge of the behavior pattern of the aggregative
variables;
 For formulating economic, monetary, and fiscal policy;
 For understanding and controlling the economic fluctuations;
 For analyzing and understanding the effect of inflation and deflation;
 For promoting the steps into economic welfare of the country;
 For understanding and analyzing the health or performance of an economy;
 For studying of national income and social account;
 For formulating economic policies on macro level of an economy;

Both branches of economics analyze, evaluate the economic trends and forecast the outcome of
various economics. Even though both branches of economic study different scale of economy, they are
equally important to any policy maker as it provides information to formulate new economic policies;

Briefly explain the facets of Nepalese economy?

Nepal managed to achieve sustainable economic development after the government adopted the
economic policies and improved living standard of general public as compared to past. However, its
landlocked geographic location, persistent power shortage, and underdeveloped transportation
infrastructure became a barrier to the aspects of Nepalese economy for the sustainable development.

Aspects of Nepalese Economy

Agriculture: Population depends on agriculture sectors are declining and attracting towards the industry
and service sectors yet agriculture contributes 27.7 percent in GDP according to economic survey 2076/77.
Therefore for the development of agriculture sectors and famers, government of Nepal has determined the
minimum support price for Rice and wheat as these two are the major corps consumed by the Nepalese
people. Currently it is declining phase due the spread of covid-19.

Natural Resources: Even though Nepal is small in size as compared to its neighbors but it has filled with
natural resources. It has beautiful natural landscape, various mine, high hydro power potentiality, rich
tourist destination and high amount of medicinal herbs and so on. Herbs are developed and used within a
country and export to another country. Such kind of natural resources could have been a basis of the
country’s economy but they are not utilized properly for the development of economy and infrastructure.

Human resources: Nepal is also rich in term of human resources; almost 60 percent of Nepalese people
are active but unfortunately are not well qualified and trained. As a matter of fact, Nepalese labor forces are
attracted towards the foreign employment as qualified and educated persons are also not getting the job
opportunities;

Remittance: Due to political instability Nepalese local market collapse and that directly impact on
employment opportunities. As a result, thousands of Nepalese are forced to leave Nepal for seeking job
opportunities daily in foreign lands. Since immigrant workers are increasing day by day, it has become a
major contributing factor to increasing household income as well as the national GDP. Nepal is heavily
dependent on remittance, which amount to as much as 30 percent of GDP.

Foreign aid and loan: Nepal has been a recipient of foreign aid and loan since 1952. Nepalese economy is
highly dependent on foreign aids and loan. Each year, almost one quarter of budget comes from foreign aid
and loan. It has contributed 24 percent on current fiscal year 2077/78.

Tourism: Tourism is significant source of government revenue in Nepal due to its natural beauty. To
observe such beautiful natural beauty and diversified landscape, thousands of tourists visit Nepal every
year. Tourism has directly created thousands of jobs and contributes 8 percent of total GDP. Due to covid-
19, visit Nepal 2020 is canceled.

Nepalese economy is still far from industrial revolution, it is a future of Nepal. But above mentioned
aspects are the present possibilities for the economic development of Nepal. If the government of Nepal
could manage and formulate appropriate policies and laws, they could have significant impact on Nepalese
economy.
Which indicators depict the macro-economic situation of an economy? Explain with the calculation
methods of those indicators.

 Macro economics is a branch of economics that study of several economic activities by looking
at the economy as whole. It uses various indicators that depict macro-economic situation of an
economy, which are as follows;

Macro-economic indicators

 Gross domestic product (GDP): It is the current monetary value of all finished goods and
services produce within a country’s boundary in a specific time period. It indicates how an
economy of a particular country is performing as compared to past. It can be calculate as
through three different approaches, which are as follows;

 Income approach: GDP= Total national income + sales tax+ Depreciation+ Net foreign factor
income
 Expenditure approach: GDP=Consumption(C)+ Investment(I)+ Government expenditure(G)+
(Export-Import)
 Value added approach: GDP= Total value of output - Intermediate consumption

 Gross National Product (GNP): Gross national product measures the market value of all final
or finished goods and services produce by a country’s residents and a business firm over a
specific period of time. Unlike GDP, it is not limited within a country’s boundary. GNP can be
calculate as follow;

GNP= Consumption(C) + Investment (I) + Government expenditure (G) + (Export-Import) +Income

earned from foreign country

 Human development index (HDI): It is a index that measures the key dimensions of human
development of a particular country over a specific time period. It represents the country’s true
health as it measures education, health, income etc. HDI cab be calculated as follow;
 HDI=

 Per capita income: It measures income earned by a person of a particular country in a specific
time period. It indicates that how much a person is earning in a year to maintain his/her
standard of living. It can be calculated as follows;

Per capita income=

 Inflation: It indicates an economic crisis that refers to the rise in the price of goods and
services or decreases the purchasing power of money within an economy over a specific period
of time. It can be calculated as follows;

Inflation: *100

 Unemployment rate: It is the proportion of unemployed persons in the labor force

unemployment adversely affects the disposable income of the families, purchasing
power, dimishes employee morale and reduce economic output. It can be calculated as;

Unemployment Rate= *100

 Current Account: It represents a country’s import and export of goods and services,
payment of foreign investors, and transfer such as foreign aid. Current account of the
country can be positive or negative. Positive and negative refers to the country is in
surplus or deficit in the international trade. It can be calculate as follows;

Current account = Total import – Total export

These macro-economic indicators assist economists to examine or evaluate the economic
performance or economic health of the country. As a result, it helps to the government to
future out whether existing economic policies should be change or keep remained or
introduced new economic policy to develop economy.

What are the various methods of computing national income? What are the major difficulties
of computing national income in the context of Nepal?

Methods of national income

 Value added method: It is also called net output method, which is used to measure the
contribution of an economy’s production units to GDP. In other word, value added
method measures value added by each industry in economy.
 Income method: Economy is also viewed as a combination of individuals and households
owing different kinds of factors of production. On the basis of this contribution, income
method is used for estimating National income.
 Expenditure method: Economy is viewed as a collection of units used for consumption,
saving investment. On the basis of this collection, final expenditure method is used for
calculating national income.

Difficulties to calculate national income in Nepal

 The continued change in price of raw material, production process, and financial goods
make difficult to determine actual cost of the goods and services;
  Double counting is an issue that refers to the counting the value of goods and service
more than one time that overestimated national income;
 Since the income generated by multinational companies goes to foreign land rather in
local country that effect while determining accurate national income;
 Nonmonetary transaction that is carried out within economy which is excluded while
calculating national income as national income included only monetary transactions
only;
 It is difficult to obtain reliable data in developing countries due to the problem of
illiteracy and usually producer fabricate data to avoid to pay income tax;
 Illegal activities like gambling, smuggling, drug etc are not reported to authority for the
tax purpose and punishment that is this kind of transactions are not included;
 Producing goods and services for self consuming purpose rather than commercial selling
so that these goods do not have market price to be included in national income;
 Capital depression should be deducted to find net national but present rate cannot be
accurately measured because of having long life;
 Transfer payment like pension, unemployment allowances, disable allowances etc are
the part of government of expenditure so it creates whether it should be included in
nation al income or not;

Government measure national income to appraise economic performance of the country. Such
measure helps the government to identify strength and weakness and the government could
formulate necessary economic policies to eliminate such weakness.

What is meant by inflation? What are the causes of inflation? Explain the various controlling
measures of inflation.
 Inflation

 Inflation is an economic crisis that occurred in the market due to increase in the general
price level or increase in the value of goods and services or decreasing the purchasing
capacity of the general public of the country. In other word, when demand for the goods
and services exceed supply of goods and services, country has to face such economic
crisis. There are several elements that directly cause inflation which are mentioned
below;

Cause of inflation

 When rate of demand surpass the rate of supply of goods and services in the market
that leads to rise in the price of goods and services and this cause inflation.
 Increase in cost of production of the goods and services that raise the price of goods and
services what cause inflation.
 Shortage of goods and services in the market due to less production or manufacturing in
the country that also cause inflation.
 Printing more money unnecessarily cause inflation due to oversupply of money in the
market.
 Unexpected natural or artificial disaster such as earthquake, landslide, war etc cause
inflation.
 Increase in income or employment increases purchasing capacity of the general public
that raises the level of demand.

Controlling measure of inflation

  Central bank uses open market operation to buy and sell government bonds and other
securities from the market to maintain the flow of money.
 Central bank raises and reduces the cash reserve requirement for BFIs so that BFIs could
supply money in the market as required.
 Central bank reduces repo rate for BFIs so that they could borrow money from the
central bank at reasonable rate and provide enough liquidity in the market.
 Central bank buy back securities from the market at reverse repo rate to borrow money
that restrict over supply of money in the market.
 Central bank increase statutory liquidity ratio (SLR) to absorb money from the market.
 Central bank raises and reduces interest rate of loan that BFIs provides to general public
to maintain money supply in the market.
 Government also raises and reduces tax in fiscal policy for the same purpose.

Monetary policy is an effective economic tool to control inflation. Nepal Rastra bank has been
issuing monetary policy authorized by Nepal Rastra Bank Act, 2058 chapter 5 section 44 since
2058 to control inflation. This year 2077-78 monetary policy has target 7% inflation rate.

What is meant by public debt management? Describe about various instruments of public debt
management in Nepalese context.

Public debt management

 According to international monitory fund (IMF), public debt management refers to the
strategies employed by the country’s national authority to manage external debt.
 In other word, it is a process of managing or minimizing government expenditures and
raising required amount of funds to meet government’s objectives.
  Government of any countries borrowed funds from internal source that is within the
country and if government required more funds then they borrowed from external
source that is outside the country.

Higher national authorities issued various instruments regarding public debt management
which are as follows;

Instruments of public debt management

 Treasury bill: On the behalf of the government of Nepal, public debt department of NRB
issued short term money market for the short term financial requirements.
 Development bond: Government of Nepal issued development bonds in order to raise
fund for financing several developmental projects in several regions.
 National saving certificate: NRB issued these saving bonds which bears high interest
rate with fixed maturity period to general public and B&FIs.
 Citizens saving certificate: It is issued only for the citizens of Nepal. Citizens who hold
such certificate can receive loan by putting this certificate from the banks.
 Foreign employment bond: To raise domestic debt, NRB issued such bonds to the
immigrant workers with interest.
 B&FIS: Except these bonds, government of Nepal borrowed funds from the B&FIs. NRB
has determined the limits for B&FIs to give loan to the government.
 Individual: If necessity occurred, government borrowed funds from the general public
to raise the funds by issuing promissory notes.
 International organization: In case of emergency, government of Nepal can borrow
funds from the international organizations such as World Bank, IMF, ADB etc. on low
interest rate.
Public debt is an important instrument of mobilizing the resources for the economic growth and
development of the country. The government of Nepal has specific legal framework for the
collection of resources through the public debt.

What is money? Describe the different types of money with examples. Why paper money is
advantageous?

Money

 Money is an economic unit that has been accepted by the people as a medium of
exchange goods and services within economy. Money is the most liquid assets among
other all assets of a person or organization. It performs three major functions such as
medium of exchange, store of value, and unit of account. These three qualities qualify to
be called money that is in any forms or any types.

Different types of money

 Commodity money: Commodity money is most likely oldest type of money. It is closely
related with barter system. Where people used to exchange goods and service against the
goods and services. For example, if A needs 1 kg rice then he had to exchange with 1 kg
wheat.
 Fiat money: Fiat money gets its value from a government order. A government declared
fiat money as legal tenure, which requires people and organization within country to
accept it as a means of payment. Unlike commodity money, fiat money is not backed by
any physical commodity. It was introduced by US president Richard Nixon in 1970s after
abolishing gold standard. Example of fiat money is US dollar;
 Fiduciary money: Unlike fiat currency, fiduciary money is not a legal tenure declared by
the government. So, it is not required to everyone to accept such money as means of
 payment. The issuer of fiduciary money promises to exchange it back for a commodity or
fiat money if required by bearer. Example of fiduciary is cheque, banknotes or drafts.
 Commercial bank money: Commercial money is refers to creation of credit by the bank.
After meeting statutory liabilities like CRR & SLR, banks are free to make loan and
advances from which bank creates further credit in a cumulative manner.

Advantage of paper money

 It is economical as it has grater face value than its intrinsic value;

 It can be print more or less by Central Bank according to the demand of money supply in
the market;
 It brings more price stability in economy than other types of money;
 It carries higher liquidity as capered to all other assets;
 It is facilitates people to count a large amount in few minutes and save their time;

Except commodity money, all other types are money is used to conduct financial transactions
within economy. Among them fiat money is popular as it has higher liquidity than rest of other
types of money. Central bank and Bank and financial institution promote such money for the
growth and development of the economy.

Write down the positive and negative aspects of the current monetary policy that occurred in
the financial sectors of the Nepal?
Nepal Rastra Bank issue monetary policy subject to Nepal Rastra Bank Act, 2058, chapter 5,
section 44 annually since 2058. Here are positive and negative aspects of the current monetary
policy that occurred in financial sectors of Nepal;

Positive aspects of monetary policy

 The policy aims to promote Agriculture development Bank as a leading bank for the
development of agriculture sector.
 Bank can circulate more cash as a loan in economy since CCD ratio has been increase
from 80% to 85%.
 Extension of duration to issue at least 25% debenture of commercial banks’ paid up
capital from Ashad end 2077 B.S. to Ashad end 2079 B.S.
 From the fiscal year 2077/78, national level development bank should implement the
provision of BASEL-3.
 NRB will encourage the merger and acquisitions of micro-finance institutions to
strengthen their capital base.
 NRB will offer additional incentives to commercial banks if they start joint operation in
accordance with merger and acquisition policy by Ashad 2078.
 BFIs will be provided special refinancing facility up to 5 times of existing refinancing fund
in specified areas.
 Credit swap of agriculture loan to be simplified.
 BFIs will not be required to take approval for partial capitalization of interest of the loan
provided to completed Hydro project not operating in full capacity due to delay in
completion transmission line.
 Cash Reserve Ratio (CRR) for BFIs remains unchanged at 3%.
 Bank can mobilize 100% of amount collected from the issuances of debenture and bond.

Negative aspects of monetary policy

  Micro finance institution can charge up to a maximum of 15% interest on loan.
 NRB has made the provision for micro finance institutions not to deposit any
amount other than long term funds in the bank for the period of more than 3
months.
 NRB has canceled the license process of micro finance institutions.
 BFIs can only distribute up to 30% cash dividend of the net distributable profit of
the fiscal year 2077/78.
 Distribution of cash dividend to the bank with a net distributable profit of less
than 5% of their paid up capital will be prohibited.
 NRB has obliged to bank and financial institutions to increase investments in
priority sectors.
 Monetary policy has extended the bank’s loan repayment period by two years.
 Monetary policy has didn’t increase the size of the refinancing fund as
demanded of Rs 200 billion but remains at Rs 100 billion.

This monetary policy is issued to attempt to mitigate the economic effects of covid-19. The
monetary policy seems promising to support businesses to get back on their feet for the
sustainable economic growth and development.

Write down the role of the monetary policy in the financial sectors reform and development.
Describe the steps taken by monetary policy of 2077/78 in financial sector reform.
Monetary policy is an economic policy that controls money supply to avoid economic crisis such
as inflation in an economy with the help of financial institution as they enforced such policy.
Therefore monetary policy plays crucial role in the development of financial sectors which are
as follows;

Role of monetary policy

 Monetary policy influence the size and shape of credit with help of qualitative or
quantitative credit control instruments that bad debt for the BFIs;
 It helps BFIs to extend its size by granting subsidies and special concessions;
 It determines the process of the liquidity management for the BFIs to meets their short-
term financial liabilities;
 It helps to BFIs to reach on those sectors where financial services were less or inefficient
by determining priority sectors;
 It implements or cause to implements suitable interest rate structure for the increment
of financial investments;
 It plays crucial role regarding the merger and acquisition of banks and financial
institutions to strengthen the capital base of bank and financial institution;
 Its modernize the financial sectors through introducing various monetary framework in
its policies;
 It ensures financial stability by controlling or prevailing economic crisis such as
recession, depression , inflation etc;
 It provides various incentives to BFIs at the time of economic crisis such as open
discount window, reduces repo rate, reduces legal reserve etc.
 Steps Taken by the monetary policy of 2077/78

 BFIs could circulate more cash as a loan in an economy since CCD ratio has been
increased by 5%
 Up to now, national level development bank should implement the provision of BASEL-
3
 It has encouraged the merger and acquisitions of the micro-finance institutions to
strengthen their capital base
 BFIs will no longer required to take approval for partial capitalization of interest of the
loan provided to complete Hydro project which is not operating in full capacity due to
delay in completion of transmission line
 Cash reserve ratio for bank and financial institution remained unchanged at 3%
 Banks and financial institution can mobilize 100% cash generated from the issuance of
debenture and bond as a result bank can create more credit;
 BFIs will be provides special refinancing facility up to 5 times of existing refinance fund
in specified area;
 Bank and financial institution will be no longer needed approval of Rastra Bank to open
branchless banking on local level;

Financial sectors enforce monetary policy for the economic development. Therefore, it shall be
the duty of monetary policy to reform financial sectors. This monetary policy seems promising to
develop financial sectors that are heavily affected by the covid-19.

In the context of Nepal, how monetary policy and fiscal policy can control the inflation?
Describe

 Monetary policy and fiscal policy both are economic tools issued yearly by Nepal Rastra
Bank and government of Nepal respectively to control the supply of money to balance
with the supply of goods and services within an economy. These policies literally control
the demand side of an economy not to exceeds the supply rate of goods and services;

Role of monetary policy to control inflation

  It increases the interest rate on loan that decreases the demand of loan and encourage
saving at the time of inflation;
 It conduct open market operation i.e. selling government securities to pull out cash from
an economy;
 It increases legal reserve requirements (CRR,SLR) that lead lower amount for lending
and investment in an economy;
 It set target inflation rate to control inflation easily and to avoid hyperinflation in an
economy;
 It uses qualitative instruments for diversion of credit in productive sectors of an
economy;
 Thorough reserve repo rate, central bank borrows funds from commercial banks against
government securities to control excess supply of money;
 It increases bank rate for lending funds to commercial banks to influence lending
capacity of such banks;
 It encourages employment regarding to increase the services related to the production of
goods;

Role of fiscal policy to control in inflation

 Government of Nepal impose taxes to reduce the consumption and investment habit of
general public;
 It properly allocate financial resources to the various sectors of an economy to increase
the supply of goods and services;
 It discourage economic activities in various sector by reducing expenditure rate of
government of Nepal;
 It also can be used to control growth fueled by rapid inflation and assets bubbles;
 It controls increased wages rate as increased wage rate is responsible for increase
aggregate demand in an economy;
 It controls the process of printing new money;
 It also set a target of inflation rate to control such economic crisis more easily;

Government of Nepal and Nepal Rastra Bank issued contraction fiscal policy and monetary
policy respectively to tackle an economic crisis such as inflation by pulling out excessive money
supply from an economy for the price stability and sustainable economic development;
 Briefly describe the objectives, importance and limitation of monetary policy?

Monetary policy is an economic tool that is issued by a central bank of a particular country for
the price stability and sustainable economic development of the country. The objectives of such
policy are as follows;

Objectives of monetary policy

 Neutrality of money
 Stability of exchange rate
 Maintaining price stability
 Promoting full employment
 Sustainable economic growth
 Equilibrium in the balance of payment

Importance of monetary policy

 It encourages and discourage economic activities according to an economic condition by

manipulating interest rate;
 It uses qualitative and quantitative instruments to control money supply to avoid
economic crisis such as inflation and deflation;
 It stable exchange rate;
 It promotes full employment in an economy;
 It maintain price stability for the financial stability in an economy;
 It achieve and maintain balance of payment;
  It promotes sustainable economic development of the country;
 It provides necessary incentives to overcome economic situation like recession.
Depression, inflation etc;

Limitation of monetary policy

 It is difficult to control many economic variable with just one tool i.e. interest rate;
 It cannot influence on those sectors especially rural areas of the country where barter
system is practiced;
 Less effective due to underdeveloped money and capital market in Nepal;
 Existence of ;large number of non banking financial intermediaries who are not under the
control of such policy;
 Availability of high liquidity amount with commercial banks that is already mobilized in
an economy;
 It doesn’t produce result immediately issuance of such policy;
 Difficult to implement such policy due to lack of financial infrastructure;
 It doesn’t guaranteed economic growth and employment;

Monetary policy is an effective economic tool to maintain price stability and sustainable
economic development. It plays important role to tackle various economic crisis but it has some
limitation as such crisis doesn’t occur just by the existence of only one economic variable.

Briefly describe the objectives, importance and limitation of fiscal policy?

Fiscal policy is an economic tool that is issued by a government of a particular country for the
price stability and sustainable economic development of the country. The objectives of such
policy are as follows;

Objectives of fiscal policy

 To achieve and maintain full employment in an economy;

 To maintain price stability for financial stability;
 To optimum allocation of available resources;
 To distribute income and wealth equally;
 To promote economic growth and development;
 To promote the highest possible rate of capital formation and growth;
 To accelerate or encourage the rate of investment;

Importance of fiscal policy

 To balance the effect of modified tax rates and public spending;

 To ensure that the economy is productive and not infected by uncontrolled inflation;
 To allocate available resources on the various sectors of an economy;
 To distribute income and wealth equally to the general public;
 To control aggregate demand of goods and services by imposing taxes;
 To promote sustainable economic growth and development by maintaining price stability;
 To target the total level of spending, total level of consumption of spending or both in
economy;
 To control consumption and investment habit of general public to control a price index;

Limitation of fiscal policy

  Difficulty of observing the coming events of economic instability;
 It takes a long time to produce a result;
 Unable to determine the size, nature of composition and appropriate execution time of
fiscal policy;
 Inadequate fiscal measures for the measurements of an economy;
 It may discourage private investment;
 It may cause disincentive to work;
 Reducing government expenditure reduces public services as well;
 Fiscal policy will suffer if the government has poor information or lack of time to analyze
available information;
 Expansion fiscal policy will cause an increase in the budget deficit;
 Less effective when customers save some proportion of income;
 It may decreases the size of private sectors by increasing government expenditure;

Fiscal policy is an effective economic tool to maintain price stability and sustainable economic
development. It plays important role to tackle various economic crisis but it has some limitation
as such crisis doesn’t occur just by the existence of only one economic variable.

What is economic development? What are the challenges for the economy development in
Nepal? Elucidate

Economic Development

 Economic development is an enhancing process of the overall economy of developing or

low-income countries and standard living of general public of the same countries.
 Economic development refers to adoption of new technologies, transition from
agriculture based economy into industry based economy.
  Government set economic target and to achieve such targets they form necessary
strategies and policies and finally enforce it.

Since Nepal is developing countries, in order to achieve targets government have to face a lots
of challenges which are as follows:

Challenges of economic development in Nepal

 Existing mass poverty and inequality income distribution.

 Implementation of unorganized and out-dated education system.
 Mass production of unskilled human capital and are facing unemployment issue.
 Lack of employment opportunities for the fresh graduates.
 Implementation of traditional methods in agriculture sectors.
 Lack of development of industries.
 Unfavorable legal policies for private companies.
 Incapable to optimum use available of natural resources.
 Hesitate to adopt new technologies and innovations.
 Lack of proper infrastructure development.
 Lack of internal and external investment in productive sectors.
 Geography of the country
 Increasing rate of immigrant workers.
 Too much dependency on remittance.
 Lack of awareness or economic literacy.

Nepal government has been facing these challenges during performing economic activities to
reach the target. Unless government overcome these challenges, economic development is
impossible. In order to overcome these challenges, government of Nepal needs to form a plan
and policies.
What is economic liberalization policy? Discuss the benefit and challenges of such economic
policy in Nepal?

Economic Liberalization

 Economic liberalization is an economic policy taken by a government of a particular

country that promotes free trade or facilitates to conduct business transactions between
two different countries without restriction of the respected governments of the particular
countries.
 In short, economic liberalization is process of reducing government’s rules regulation
and restrictions in an economy by encouraging private sectors for the economic
development of the country.
 Nepal has been following the policy of economic liberalization since the mid-1980s
which was accelerated with the start of 1990s. this policy has benefited and challenges to
Nepal since its inception which are as follows;

Benefit of Economic Liberalization in Nepal

 Modernization of banks and financial institutions by enhancing competitive structure and

managerial efficiency.
 Extension of banks and financial institutions and market share of such financial
institution all over the country.
 Initiated the free flow of capital on the private sectors of Nepal.
 Entry of foreign banks to conduct financial transactions in Nepal.
 Increased the amount of deposits and credits in banks and financial institutions.
 Improve productivity and potential output by introducing modern banking skills,
techniques, and knowledge.
 Introduction of various electronic financial instruments to conduct financial activities.
Such as ATM Card, Debit & Credit Card Etc.
 Improve the regularity and supervision capacity of Nepal Rastra Bank and increase the
soundness of the local banking sectors.

 Contribution on financial stability and sustainable growth of financial institutions by

enhancing the quality of financial governance
 Access of new market for new banks or financial institutions in the country.

 Adequate supply of liquidity in an economy of Nepal.

 Lower interest rate on deposits, credits, and other financial services for the customers.

 Increased financial transactions due to increment of financial literacy and habits among
local people.

 Reduce some risks, for instance, by decreasing the correlation between investment and
savings

 Enhanced capital market structure and rise in the value of shares.

 Free flow of human capital between two or more countries.

 Optimum allocation and utilization of scare financial resources.

 Reduce unnecessary tariffs on imported goods and services.

 Increases employment opportunities in local market of Nepal.

 Reduces existing mass poverty and in equal income distribution of income.

 Mass production, supply, distribution and consumption of goods and services.

 Increments on industrial sectors and introduction of advance technology on agriculture

sectors of Nepal.

 Increases the role of market discipline for firm managers and policy makers since it raises
the costs of poor governance.

 Improve standard of living of Nepalese people and economic condition of Nepal.

Challenges of Economic Liberalization in Nepal

 Maintaining unhealthy and cut-throat competition due the existence of large number
banks and financial institutions.
 Managing financial crisis due to mismanagement of financial transactions by a particular
country.
  Adaptation of advanced technology which changes frequently.
 Inability of sate owned banks to face tough competition presented by the foreign banks.
 Attract foreign direct investment in financial sector of Nepal.
 Monitoring, supervising, regulating, and management of several banks and financial
intuitions.
 Minimizing and diversifying emerging risks incurred during a financial transactions.
 Forming various economic and regulatory policies to addressed several economic
problems or conditions.
 Addressing disappointment of local banks and financial institutions.
 Hard to regulate foreign banks and financial institutions.
 Adequate supply human capital due to the shortage of human capital in local labor
market.
 Dependency on foreign direct investment rather than government investment or
expenditure
 Dependency on imported goods and services and cause loss to domestic goods and
services.
 Recovering the lost revenue from trade liberalization by implementing various domestic
tax reforms.

Economic liberalization policy literally transfers the fate of economy of a particular country to
the private players from the government for the sustainable growth of an economy. However,
such policy brings various challenges with several benefits to developing countries like Nepal.

What is the relevance of development planning in Nepal? Describe about the major tools used
in the planning formulation in Nepal.

 Economic planning refers to the development plan which targets to promote and maintain
sustainable economic development or advancement. There are several reasons to prepare
such plan which are mentioned below;
 Relevance of development planning in Nepal

 For the proper allocation and optimum uses of resources especially natural resources;
 For the increments of standard of living of the general public of Nepal;
 For balance development of necessary infrastructure in the different region of Nepal;
 For fulfill unlimited demand in the priority basis;
 For providing a basic framework to economic growth and development;
 For maintaining harmony between Nepalese population and its environment;
 For encouraging public participation and generating employment for the youth of Nepal;
 For sustainable and successful development program;
 For achieving necessary goods and services in a short period of time;
 For minimizing future uncertainties related to the development project;
 For maintaining social justice and regional balance;
 For increasing a standard living of a general public of Nepal;
 For addressing dissatisfactions of Nepalese people regarding development issues;
 For encouraging foreign and private investment in the various sectors of an economy of
Nepal;
 For promoting and maintaining core competency of Nepal;

Development planning process in Nepal

Nepal development council (NDC) gives direction NPC (Nepal planning commission) in plan
formulation in Nepal which are as follows;

 NPC evaluates past and current plans that gives clear ideas and to projection for making
new plans;
 NPC collects projected proposals and present new project proposal;
 Representatives of NDC, NPC and ministers, expert on the concerned field and other
authorized organizations takes a part in discussion to prepare plan document according to
the conclusion;
 Determine the objectives, targets, and priorities according to the economic condition;
  After authorization of NPC and approval of the cabinate, the plan is implemented in
association with government , private sectors and general public;
 The implemented plan is monitor and evaluate whether it is going according to
objectives, strategies of plan or not, and collect feedbacks for the next plans;

Government faces several uncertainties during economic development of the country. With the
proper plan and policies, government of Nepal could avoid such uncertainties and can achieve its
goals and objectives.

What is government budget? Explain its type, importance and principles.

Government budget

 A government budget is an annual financial statement that outlines the estimated

government expenditure and expected government revenue for the forthcoming fiscal
year;
 Finance minister of the particular country present such budget. \In the context of Nepal,
government budget is prepared every jestha 15 of a year;
 In short, government budget is a documents that keep the record of government
expenditure and revenue for the upcoming fiscal year;

Types of government budget

Balance budget: When the estimation of government expenditure equals to expected revenue of
the government in a particular financial year is called balance budget. Theoretically, it is easy to
balance expected revenue and expenditure but when it’s come to practical scenario, such balance
is almost impossible to achieve. Such type of budget cannot ensure financial stability at the time
of economic crisis such as depression and deflation.
Surplus budget: When the estimation of government expenditure is less than expected revenue
of the government in a particular financial year is called surplus budget. A surplus budget
denotes the financial affluence of a country. Such type of budget is useful at time of inflation to
reduce aggregate demand of the goods and services.

Deficit budget: When the estimation of government expenditure exceeds expected revenue of the
government in a particular financial year is called deficit budget. Such kind of budget is suited
for the developing countries like Nepal. It is especially helpful in economic crisis like recession
because deficit budget helps to generate additional demands and boost the rate of economic
growth by increase the rate of government expenditure.

Importance of government budget

 It helps government to allocate resources in useful and suitable manner;

 It encourage general public to emphasize on saving and investment by providing tax and
subsidies;
 It introduced public and economic welfare policies for the underprivileged section of the
society through the budget;
 It minimize inequalities in income and wealth by imposing taxes on the elite class and
spending extra on the well being of poor class;
 It is important to avoid business fluctuation to accomplished the aim of economic
stability;
 It manage and operates public enterprises as such enterprises was incorporated for the
social welfare of the people;
 It is helpful in developing necessary infrastructure all over the country to increase the rate
of investment;
 It provides a bench mark in evaluating success or failure in achieving goals and provides
suitable improving measures;
 Principles of government budget

 A budget should be prepared every year on annual basis;

 A budget should manage within clear, credible and predictable limits for fiscal policy;
 A budget should be closely aligned with the medium-term strategic priorities of
government;
 A budget should not discriminate to allocate resources in equitable manner;
 A budget should be designed to meet national development needs in a cost effective and
coherent manner;
 A budget should be open, transparent and accessible for everyone;
 Debate on budgetary choice should be inclusive, participative and realistic;
 A budget should present comprehensive, accurate and reliable account of the public
finance;
 Budget execution should be actively planned, managed, and monitor for its effective
implementation;
 Performance, evaluation, and value for money should be integral to the budget process;
 Long-term sustainability and other fiscal risks should be identified, classified and
managed prudently;
 The integrity and qualities of budgetary forecast, fiscal plans and budgetary
implementation should be promoted through rigorous quality assurance including
independent audit;

Government budget is important for any countries as it determined the future of the particular
country. For the developing countries like Nepal, deficit budget is appropriate as it spending
much in an economy to encourage economic activities than others types of government budget.

Sate about the achievements obtained by financial sector reform project in Nepal and also
explain the pros and cons of financial sector reform project in Nepal.
 The financial sector reform project in Nepal in mid 1980s and it is still being continued.
Achievements obtained by financial sector reform project in Nepal are mentioned below;

Achievements obtained by financial sector reform project in Nepal

 Increased commercial bank helps Nepalese economy to get modern.

 Increased financial institutions and their roles of market force in financial system.
 The auction mechanism was introduced to sell Treasury bill.
 Debenture and bond were introduced as new financial instruments.
 Improve competition in deposit and credit service and capital market through listing
their shares.
 Reforming financial sector law and regulations.
 Strengthen of NRB’s monitory and supervisor function.
 Restructuring and privatization of RBBL & NBL.
 Enhancing competition in the banking sectors.
 Implementing international accounting standards.
 Establishment of bankers’ training institute.
 Restructuring of credit information bureau.
 Strengthening of the regional rural development banks and their privatization.
 Revamping research and financial monitoring system in Nepal.
 Broadening and deepening of financial system In Nepal.

Pros of financial sector reform project in Nepal

 The financial sector reforms, especially a comprehensive one, would be a turnaround approach to
cope up with the threats of global competitiveness in carrying out the financial services.

 The reform has addressed the legal shortfall; still some associated regulations have not taken off
the ground (cross border issues, and home/host country supervisory co-ordinations, and
documented prompt correction action rules for identified early warning signals).
 The reform has enabled the failed banks back to the profit,

 With the reform, the qualitative and quantitative performance levels of the NRB regulated
financial institutions are improving. The legislative regime and regulatory order have

 The internal management system, risk analysis practices, and governance levels within the banks
and financial institutions have improved. The institutional infrastructures of supporting
institutions have been established.

Cons of financial sector reform program in Nepal

 The reform failed to alter the fundamental weakness of the state-owned banks—weak
governance and management, inadequate risk management, deficient staff skills and
redundancy, and highly politicized employee unions.
 Although the international reforms are working mostly the FSRP in the context of
Government of Nepal fails to work and show its impact as it lacks a strong reform
commitments, especially when it involves a politically sensitive decision such as
privatization

 Absence of an Action Program to introduce drastic changes in the managerial culture

Financial sector reform program saves our backbone of the economy by liberalizing,
modernizing, privatizing, and by improving healthy competition between financial institutions
yet financial infrastructure are not fully developed due some challenges but financial project
will continue to work for the effective financial system of Nepal by facing such challenges;

What are the challenges of financial sector reform project in Nepal? What actions should be
taken for the better outcomes of reform?
 Challenges of financial sector reform project

 lack of commitment by the Government to change its basic mindset towards the state-
owned banks, including a much stronger emphasis on commercial orientation and on
preparation for eventual privatization;

 Absence of an Action Program to introduce drastic changes in the managerial culture to

ensure that managers were professionals with autonomy and accountability

 lack of specific fundamental reforms needed to achieve a major improvement in financial

and operational performance of the banks

 The banks’ management is basically dysfunctional

 financial accounting is primitive and not according to international standards

 management information systems and record keeping are very basic

 governance and management are highly politically driven and

 lacking a commercial focus

Actions to be taken for the better outcomes of such reforms

 Strengthening Nepal Rastra Bank is a key for successful finance sector reform and efforts
to improve its capacity and autonomy, which shall be continued.

 International development agencies are the driver of finance sector reform and their
continued engagement is necessary.

 Restructuring, if left only to external management, is ineffective. Rather, strong

coordination between the government and donors is necessary.

 To avoid the banks reverting back to pre-reform distressed conditions, it is necessary to

continue efforts to fully privatize the state-owned banks with the participation of strategic
investors.

 Enhance NRB’s autonomy and supervisory capacity, especially to exercise its

supervisory authority over the state-owned banks, should be strengthened.
  In donor-funded programs, it is also essential to place an expert who can advocate and
advise within MOF about the reform and privatization

What is the role of World Bank, ADB, AIIB, and IMF in economic development of Nepal?

World Bank and other international financial institutions were created to help developing countries to
reduce poverty and for technical assistance for their economic development. These financial
institutions are also helping Nepal for its economic development which are crucial and mentioned
below;

Role of World Bank on the economic development of Nepal

 The world Bank provided its first technical assistance to Nepal in 1964 to finance and organize
a transport survey;
 The bank assist on agriculture, irrigation and infrastructure development in telecommunication,
hydropower, highways, water supply and sanitation;
 The bank contributed its extensive development knowledge to Nepal;
 The bank invested huge amount for the development of human resources and protect Nepal’s
natural resources;
 The bank increased amount of assistance in education and health and to support forest
management;
 The bank help Nepal to develop the systems, institution, and skill required to ensure
development of Nepalese citizen;
 The bank support Nepal to overcome constraints in terms of productivity, connectivity and
delivery of public service as well as to cope with economic and social vulnerabilities;
 The bank provide millions of dollar for the reconstruction effort in Nepal after 2015 earth
quake;
 Recently, the bank has approved $29 million to help Nepal to prevent, detect and respond to
the covid-19 pandemic;

Role of Asian development bank on the economic development of Nepal

 Since 1966, ADB has committed about $6 billion in financial and technical assistance for
Nepal;
 In 2019, ADB committed $358 for four project i.e. improve highway, increase income of
farmers, development of agriculture sectors, and improve flood management;
 ADB is supporting the government’s school sector development plan to build strong human
capital;
 The bank is helping to improve remote roads and promote more extensive agriculture
development in Nepal;
 ADB is also supporting upgrades to key airports, including the Tribhuwan and Gautam
Buddha international airports;
 ADB is providing support for reforms in the energy sector including the financial restructuring
of the Nepal electricity authority;
 ADB began co financing operation for Nepal in 1975. Since then sovereign co financing
commitments for Nepal have amounted to $1.77 billion for 48 investment projects and $83.49
million for 91 technical assistance project;

Role of AIIB on the economic development of Nepal

 AIIB helps of Rs 10 billion in the power distribution improvement project for the valley’s poor
power distribution system;
 It has invested Rs $28 billion in the project relating to settlement development and systematic
urbanization in the Tarai-Madhes;
 The bank invested Rs 26 billion on the tunnel road from Samakhusi of Kathmandu to Chhahare
of Nuwakot district;
 It invested Rs 16 billion on the project of upgrading Pokhara-Josmom road;
 The bank commitment to invest Rs 20 billion on 93 MW-Sharada-Babai hydropower project.
Likewise, Rs 18 billion in the 87 MW Tamakoshi Hydropoer project;

Role of IMF on the economic development of Nepal

  International monetary fund help to stable Nepalese monetary system by keeping tracking
Nepalese economy and giving practical help;
 It highlight possible risk in Nepalese economy and advises on needed policy adjustment;
 It provided loans to Nepal to rebuild international reserve, stabilize local currency and restore
conditions for strong economic growth;
 IMF has been working with government of Nepal to modernize Nepalese economic policies,
institutions, and people of Nepal;
 IMF is helping Nepal to strengthen economy, improve growth and create jobs;
 IMF has been providing practical guidance, training, and design appropriate macroeconomic,
financial, and structural policies;
 IMF has been providing foreign currencies to government of Nepal for the requirement of
development and business transactions activities;
 Nepal has received timely help from the IMF to eliminate the deficit in its balance of payment;
 Nepal got a large amount of financial assistance from IMF to solve its economic crisis arising
due to natural disaster such as earthquake, floods, landslide etc;

These international banks have been supporting Nepal since 1960s for the improvement of Nepalese
economic growth and standard living of its people. These financial institutions are still supporting us
to push towards the economic development by increasing core competencies of Nepal.

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