9MONETARY POLICY OF NEPAL

A Seminar paper
By
Aaista lamichhane
Exam Roll no : 31149/21
T.U.Registration no. 7-2-48-1-2021
Bachelor of Business Administration (BBA)
Second Semester
Macroeconomics

Submitted to
Faculty of Management
Prithvi Narayan Campus
Tribhuvan University

April, 2023
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INTRODUCTION
Background

Monetary policy consist of decision and actions taken by Central Bank to ensure that
the supply of money in the economy is consistent with growth and price objective
set by the government. As per the Nepal Rastra Bank Act 2002 the major objectives
of this bank is to formulate and then implement monetary and exchange rate policy
to achieve price and balance payment stability for economic stability and sustainable
economic development. In addition the bank has started a half yearly review of
policy since 2003/04 and a quarterly review since 2016/17 to make necessary
changes in policy measures after reviewing the economic and financial situation.
Accordingly, the bank has been formulating and publicly announcing monetary
policy since 2002/03( (Acharya, 2021).

Monetary policy is designed to stabilize the economy through the management of

liquidity in the market. As the framework of nepalese monetary policy has not
changed since the introduction of Nepal Rastra Bank act in 2002 , contemporary
nepalese monetary policy. However, due to the emergence of COVID-19 in recent
times, the focus of monetary policy has changed from tweaking the economy to
pulling the economy out of the ongoing recession. For instance, and NRB raised the
mandatory credit cum deposit (CCD) ratio from 80% to 85% for banks and
Financial Institutions (BFIs) in the monetary policy for 2020.This suggest an attempt
of energy to boost the availability of credit in the market, thereby increasing
economic activity. There is need for regulatory facilitation for quick economic
recovery minimizing the pandemic effect as well as economic stability and
stabilizing the adverse effect on foreign sector. Monetary policy 2022/23 targeted on
Covid Relief and Economic Recovery, Credit Growth control, and Promotion of
Merger and Acquisition. Nepal Rastra Bank (NRB) released the monetary policy for
the FY 2022/23 keeping in mind the current macroeconomic scenario of the
economy. Keeping in mind the lockdown imposed by the pandemic, the previous
two monetary policies were expansionary in nature targeted for economic recovery
by promoting consumption and production. However, due to the liberal nature of
monetary policy and increasing price of petroleum products, inflation surged from
4.4% at the beginning of the fiscal year up to 8.6% towards to end of the previous
fiscal year (Adhikari, 2021).
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Statement of Problem

Economic activities have been affected globally due to the ongoing Russia-Ukraine
war. The prices of petroleum products and food items have been affected. To
address the problem of high inflation that has emerged at the global levels, most
Central Banks have gradually been unwinding the relief measures and regulatory
exemptions providing during pandemic and have been tightening monetary policy
stance to address the imbalance in the economy. Nepalese Economy has also been
affected directly and indirectly by recent development in the global economy. In
2021/22 the average inflation to remain within the target. Despite that, inflation has
increased recently because of the increase in the price of fuel and food items, high
inflation globally including in neighbouring countries, the disruption in the supply
chain and depreciation of Nepali rupee against the US dollar. Similarly, rising
imports and the decline in foreign exchange reserve has built pressure on external
sector management. The decline in foreign currency reserve owing to the current
account and balance of payment deficit has created pressure on the banking system
liquidity and increased the interest rate. A small and import based open economy
like Nepal can achieve sustainable economic growth by mobilizing financial
resources optimally only when external sector stability is ensured. It is important to
maintain a balance in monetary expansion for a country that has adopted an
exchange rate peg as a policy anchor and is facing external sector pressure( (Nepal
economic forum, 2022/23).

Theoretically, monetary expansion increases the domestic demand which may widen
the current account deficit and weaken the external sector further. The monetary
policy for 202/23 has been formulated considering the above theoretical basis and
the challenges to macroeconomics stability. The stance of this policy has been taken
primary focusing on the mounting pressure on the external sector due to the rising
current account and balance of payment deficit and on inflation. In addition due to
consideration has been given to the police and programs in the Government of Nepal
the goal and priorities of the government budget, the current economic and financial
situation of the economic including the possible economic Outlook and suggestion
from the stakeholders (Nepal economic forum, 2022/23).
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The central bank was also under pressure to maintain the aspiration of the investors
of the share market at a time when the secondary market’s index had already
dropped by almost 37 percent within the past few months. Moreover, it also had to
save face and enforce a policy that does not contradict with the budget which has
announced ambitious programs, including a high economic growth rate, propelling
the economy toward a recovery path in the aftermath of the pandemic. The Central
Bank of Nepal apply contradictory monetary policy which intended to reduce the
rate of monetary expansion to fight inflation (Adhikari, 2021).

Objectives of Paper
The objective of this seminar paper is to understand the rates of monetary policy
instruments and the framework of monetary policy. This also helps to understand
and analyze the economic growth, price situation, Inflation, fiscal situation, financial
sector situation, capital market. This paper helps to show the impact of monetary
policy on balance of payment . It also shows the provisions in the monetary policy
of Nepal.

Methodology

The study is to provide effective data and information for the research on “Monetary
policy of Nepal”. The study is mainly based on secondary source information. The
data used in this article are published in news paper, books, different government
websites, etc. To examine the inflation and GDP of Nepal, inflow and outflow of
money in different sectors have been calculated. The tables and figures are used to
explain the flow of money in different year.
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Description and Analysis

This part of the seminar paper contains how the monetary policy is working Nepal.
Central bank of Nepal is formulating and managing the supply of money and
determines the different interest rates which is explained below.

Objective of monetary policy

The objective of monetary policy refer to its goal such as reasonable price stability,
high employment and faster rate of economic growth. The monetary policy will be
focused on managing the interest rate corridor to help maintain the growth rate of
credit and board money supply around the growth rate of nominal GDP and
channeling credit to the productive sector to mobilized necessary financial resource
for growth. However, its goal is to achieve full employment of the resource in the
economy. It indicates that the general price level should not be allowed to fluctuate
beyond the certain minimum limit. Its goal is to increase economic growth which
can be achieved through expansionary monetary policy. Monetary policy also
attempts to get balance in external payment and stable exchange rate. Monetary
policy plays great role to reduce economic inequality which highly arise in the
developing countries like Nepal.

Instruments

Multiple instruments have been used for the implementation of monetary policy in
Nepal. A brief discussion of Nepal’s monetary policy instruments is given below:

 Cash Reserve Ratio (CRR): Banks and financial institutions are required to keep a
certain percentage of their total deposit liability in the NRB, which is called the cash
reserve ratio (CRR). Increasing the ratio by the NRB reduces the lending capacity of
BFIs, while reducing the ratio increases the lending capacity of BFIs. Currently for
the fiscal year 2020/21, the NRB has maintained CRR at 3% for BFIs (Acharya,
2021).
 Statutory Liquidity Ratio (SLR): SLR is a provision of reserve requirement set by the
NRB to its bank and financial institutions (BFIs) for maintaining some liquidity in
the form of cash, government bonds or other convertible assets. At present, NRB has
 6

provisioned 10% SLR for commercial banks, 8% for development banks and 7% for
finance companies.
 Bank Rate and Lending of Last Resort (LOLR) Facility: Bank rate used for the
purpose of lender of the last resort facility is at 5% for the fiscal year 2020/21.
 Open Market Operation: It is a conventional instrument used by central bank to
manage liquidity in the banking system by purchase and sale of government
securities with BFIs. When the NRB purchases government securities from BFIs, it
will inject money or cash flow from the system and when it sells government
securities to BFIs, it will absorb the money or cash flow from the system. Thus,
NRB manages liquidity in the system by the use of open market operation.
 Moral Suasion: Moral suasion is a qualitative method of credit control, being used
by the NRB. It includes the advice, suggestion request and persuasion with the BFIs
to co-operate with the NRB. The success of this method depends upon the co-
operation between the NRB and BFIs, and the respect the NRB commands from
other BFIs.
 Interest Rate Corridor (IRC): It is a system or framework that is designed by the
NRB to stabilize the short term interest rates by implementing on short term
monetary instruments like interbank rate, repo rate, treasury bills and others.
By setting the upper limit and lower limit of the interest rates on loans and
investments stable or to prevent such interest rates from fluctuating.
The monetary policy of FY 2077/78 has set the Standing Liquidity Facility (SLF)
rate as the upper bond of the Interest Rate Corridor (IRC) at 5%, Repo rate as the
policy rate at 3% and deposit collection rate as the lower bound of IRC at 1%. This
is also shown in figure (Acharya, 2021):
Figure 1:
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 Repo rate: Repo is the rate at which the NRB lends money to its BFIs against
securities such as Treasury Bills or Development Bonds in the event of any shortfall
of funds. Repo rate is used by the NRB to maintain liquidity, in case of normal type
of shortage of funds in banking sector. The BFIs repay the treasury bills or
Development Bonds pledged to the NRB on the due date with sum of principal and
interest. The monetary policy has taken Repo rate as the policy rate and reduced it
from 3.5% to 3% for the fiscal year 2020/21.
 Reverse repo rate: Reverse repo is just the opposite of repo where the NRB borrows
money from the banking and financial instititions (BFIs). In the case of excess
liquidity in banking system, NRB uses reverse repo as an instrumentto short term
liquidity mop-up. In this, the NRB borrows money from BFIs by pledging its own
treasury bills or development bonds with fixed interest. So the reverse repo rate is
the rate at which the NRB borrows money from its BFIs for short term purposes.
 Standing Liquidity Facility (SLF) rate: The monetary policyn has maintained the
Standing Liquidity Facility Rate at 5% for the fiscal year 2020/21.
 Refinance Facilities: The refinancing facility is the loan facility provided by the
NRB to its licensed banks and financial institutions (BFIs) for the loan disbursed as
per the prescribed conditions. Refinance facility is classified in various into different
types as specified by the Government of Nepal and the NRB. The interest rate is to
be paid by licensed BFIs in various types of refinance and the interest rate charged
by BFIs to their customers will be fixed by NRB. Refinancing period will initially
be for a period of one year and can be subsequently renewed for an additional year.
 8

The provisions made by the monetary policy for the fiscal year 20767/78 regarding
refinancing are presented below (Acharya, 2021).
Types of Refinancing for FY 2077/78 and Types of Interest Rates

Types of refinance Interest rates changed by Interest rates changed

NRB to BFIs(%) by BFIs to their
customers (%)
Special refinance 1 3
MSME refinance 2 5
General refinance 3 6

 Primary sector lending: Commercial banks have been required to invest at least 15%
of their total credit in agriculture, at least 10% of their credit in energy sector, and
have to extend at least 15% of total loans to micro, small and medium enterprises
(MSMEs) with loan limit up to Rs.10 million.

Present Monetary Policy Framework of Nepal

Nepal Rastra Bank act 2002 act and its two amendments have given the authority to
an NRB for monitory policy formulation. Monetary policy is formulated after
completing several faces including collection of suggestions from stakeholders to
final approval from an NRB Board. Research department of Nepal Rastra works as a
coordinating department to draft monetary policy. The policy goals and programs
are designed taking into account the long term development goals along with policy
and programs of government budget. The important suggestions collected from
public and key stakeholders are incorporated in the policy document. The
suggestions from different department more specifically Executive Director of
Research Department. Appropriate issues from committee are incorporated in draft
report. The Regulation and supervision, payment system, foreign exchange
management are rigorously discussed in inter departmental coordination committee,
the 10 member committee chaired by draft is presented in Management Committee
of the bank. The research department incorporates the feedback and suggestions of
Management Committee in the report and presents in the NRB Board, chaired by the
Governor. Finally Governor releases the monetary policy after approval of Board of
Directors (Adhikari, 2021).
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The NRB has legal mandates of attaining multiple goals such as price stability,
external sector stability and facilitating economic growth. In order to achieve this
goals, NRB uses the instruments such as open market operation instruments sale/
purchase of Government / NRB securities, repo and reverse repo auctions using
the assets like treasury bills, development bonds of the government of Nepal (GON),
NRB bonds in case they exists. NRB has introduced interest rate corridor in 2016.
However, it has still been in developing phase. Along with, deposit collection
auction, NRB bonds are used to mop up excess liquidity of the market.

The liquidity operation related function is guided by “Nepal Rastra Bank Khulla
Bajar niyamali, 2071 and Interest Rate Corridor Related procedure,
2076”( (Acharya, 2021). NRB also uses its conventional instruments such as CRR,
SLR, SLF and refinancing facilities. The interbank rate has been taken as an
operating target and previously it was excess reserve of counterparties. The board
money (M2) is considered as an intermediate target, given fixed exchange rate with
India as nominal anchor. The Building block from instrument to final goals of
monetary policy is monetary policy framework.

Economic Growth and Price Situation

Central Bureau of Statistics has estimated the economic growth of Nepal to be 5.84
percent in 2021/22. Economic growth is mainly supported by electricity generation,
expansion in construction activities, and revival of the tourism sector. In 2020/21,
the economic growth rate was 4.25 percent. 15. In 2021/22, the ratio of gross
domestic savings to GDP is estimated to be 9.27 percent and the ratio of gross
national savings to GDP is estimated to be 31.95 percent. In the previous year, such
ratios were 7.71 percent and 33.30 percent respectively. In 2021/22, the ratio of
gross fixed capital formation to GDP is estimated to be 29.37 percent compared to
29.85 percent in the previous year. The y-o-y consumer inflation stood at 8.56
percent in mid-June 2022. However, in the eleven months of 2021/22, the average
consumer inflation is 6.09 percent. The annual average consumer inflation seems to
remain within the target( (Adhikari, 2021).

Refinance and concessional loan

 10

Refinance facility will be continued limiting such facility to productive sectors

including agriculture, small enterprises, exports, and those sectors that are hard hit
by the COVID-19. Such a facility will be gradually reduced to the amount available
in the refinance fund by mid-July 2024. Government is planning that, a study will be
carried out regarding the use and effectiveness of the programs aimed at increasing
credit flows to productive sectors such as refinance facilities, concessional loans,
deprived sector loans, and others. Programs related to subsidized loans stated in
budget statement of 2022/23 will be implemented as per the procedures approved by
government of Nepal (Adhikari M. M., 2022).

Fiscal situation

According to the record of the Financial Comptroller General Office published on

July 17, 2022, the expenditure of the federal government in 2021/22 stood at
Rs.1296.24 billion. Out of this, recurrent expenditure is Rs.961.47 billion, capital
expenditure is Rs.216.37 billion, and financial management expenditure is
Rs.118.40 billion. In 2021/22, revenue collection stood at Rs.1067.96 billion. 19. In
2021/22, the government of Nepal (GoN) mobilized Rs.231.30 billion in domestic
debt, which is 4.8 percent of GDP. The GoN repaid the principal amount of
Rs.47.33 billion in 2021/22 as such net domestic debt mobilization of the
government stood at Rs.183.97 billion. 20. As of mid-July 2022, the outstanding
domestic debt of the GoN increased by 22.9 percent and reached Rs.984.28 billion
compared to Rs.800.32 billion in mid-July 2021 (Adhikari M. P., 2021).

Financial sector situation

Banking sector In the eleven months of 2021/22, deposits at the banks and financial
institutions (BFIs) increased 5.7 percent, while credit to the private sector increased
13.5 percent. During the period, the BFIs mobilized deposits of Rs.266 billion and
disbursed loans of Rs.553 billion. In the same period of the previous year, the BFIs
mobilized deposits of Rs.588 billion and disbursed loans of Rs.799 billion. In the
eleven months of 2021/22, the BFIs have mobilized financial resources by issuing
debenture worth Rs.23.38 billion compared to Rs. 37.10 billion during the same
period of previous year (Adhikari M. P., 2021).
As of mid-April 2022, the average non-performing loan (NPL) of commercial
banks stood at 1.32 percent, development banks at 1.49 percent, and finance
 11

companies at 7.0 percent. In mid-July 2021, these ratios were 1.41 percent, 1.30
percent, and 6.19 percent respectively. Since this bank introduced the merger and
acquisition policy to strengthen the financial sector, 245 BFIs have been involved in
the process of merger and acquisition as of mid- July 2022. Of these, the license of
178 institutions has been revoked and thereby 67 institutions have been formed. In
2021/22, one commercial bank has acquired another commercial bank and started an
integrated transaction. Four commercial banks are in the merger process and have
obtained a letter of intent to merge and become two commercial banks.

Similarly, the other two commercial banks have signed a memorandum of

understanding to enter into the merger/acquisition process. Financial access is
increasing. The number of branches of the BFIs increased from 10,683 in mid-July
2021 to 11,528 in mid-July 2022. With the expansion of branches, the population
per branch has declined from 2,844 to 2,532 during this period. As of mid-July
2022, commercial banks have opened branches at 752 local levels (Adhikari M. P.,
2021).

Capital Market
The NEPSE index, which was 2883.41 in mid-July 2021, stood at 2009.46 in mid-
July 2022. At mid-July 2022, the stock market capitalization stood Rs.2869.34
billion. At mid- July 2021, market capitalization was Rs.4010.96 billion. In the
eleven months of 2021/22, the Securities Board of Nepal has approved the issue of
debentures worth Rs.11.28 billion, mutual funds worth Rs.6.90 billion, ordinary
shares worth Rs.6.51 billion, and right shares worth Rs.3.46 billion. Altogether, the
total approval for the public issue of securities stood at Rs28.15 billion. In the eleven
months of 2021/22 the securities board of Nepal has approved the issue of debenture
worth Rs.11.28 billion, mutual funds worth Rs.6.90 billion, ordinary shares worth
Rs.6.51 billion, and right shares worth Rs.3.46 billion. Altogether, the total approval
for the public issue of securities stood at Rs.28.15 billion (Adhikari M. M., 2022).

In the eleven months of 2021/22, seven commercial banks have received approval
from the Securities Board of Nepal to issue debenture worth Rs.10.88 billion, and
one development bank for Rs.400 million. By the end of mid- June 2022, BFIs have
 12

mobilized Rs.123.76 billion through debentures. In the monetary policy, NRB has
increased the limit of share pledge loan to provide relief to capital market. The
central bank has increased the limit of share pledge loan to 70 percent. Earlier, only
65 percent loan was available by keeping share as collateral. Thus, NRB has
increased such loan limit by 5 percent to 70 percent as per the demand of investors.
For providing margin loan on share collateral, ythe average price of 120 days will be
taken for the valuation of shares. Previously, valuation of shares was done based on
the average price of last 180 days or the prevailing market price of the stock
whichever is less.

Trends on inflation
The inflation rate for consumer prices in Nepal moved over past 56 years between -
3.1% and 19.8%. For 2021, an inflation rate of 4.1% was calculated. During
observation period from 1965 to 2021, the average inflation rate was 8.0% per year.
Overall, the price was 6,849.74%. an item that cost 100 rupees in 1965 costs
6,949.74 rupees at the beginning of 2022. The historical inflation rates in Nepal are
given below (inflation rates in nepal, 2022).
Historical Inflation Rates in Nepal

Year Inflation rates

2016 8.79%

2017 3.63%

2018 4.06%

2019 5.57%

2020 5.05%

2021 4.09%

Figure 2:
 13

10.00%

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2016 2017 2018 2019 2020 2021

Source: Worlddata.info

Trends of GDP growth rate in Nepal

GDP is the sum of gross value added by all resident producers in the economy plus
any product taxes and minus any subsidies not included in the value of the products.
It is calculated without making deductions for depreciation of fabricated assets or for
depletion and degradation of natural resources. Monetary policy influences interest
rates in the economy – like interest rates for housing loans, business loans and
interest rates on savings accounts. Changes in interest rates influence people’s
decisions to invest or consume, which ultimately affects economic growth,
employment and inflation. An expansionary monetary policy is a type of
macroeconomic monetary policy that aims to increase the rate of monetary
expansion to stimulate the growth of a domestic economy. Central bureau of
statistics has estimated the economic growth of Nepal to be 5.84% in 2021/22. The
GDP growth in different year is given (Nepal GDP Growth Rate 1961-2023, 2023):

Figure 3:
 14

10.00%

8.00%

6.00%

4.00%

2.00%
GDP Growth
0.00%
annual change
2018 2019 2020 2021
-2.00%

-4.00%

-6.00%

-8.00%

-10.00%

Source: GDP growth rate of nepal

Impact of Monetary Policy on Balance of Payment

The balance of payments has been an important indicator of the growing economic
activities in all the countries. Balance of Payments problem in developing countries,
especially in Nepal has been very important and burning issue of many years and are
constrained by balance of payment deficits, more specifically on the current account.
This is concern to Nepal given that like any other country, one of the
macroeconomic objectives of the country is to maintain a stable equilibrium in the
balance of payment. Fleermuys (2005) for instance contend that organizations such
as the International Monetary Fund (IMF) have put great emphasis to stable balance
of payments. The BOP records all economic transactions carried out between the
domestic economy and the rest of the world, within a given period (IMF, 1993). The
balance of payments is a statistical statement that systematically summarizes, for a
specific time period, the economic transactions of an economy with the rest of the
world (IMF, 1993).The BOP is made up of three main accounts, namely the Current
Account, the Capital Account and the Financial Account. It is systemic records of all
 15

economic transactions, visible as well as invisible, in a period, between one country

and rest of the world.
It shows the relationship between one country’s total payments to all other countries
and its total receipts from them. Thus, balance of payment is statement of payments
and receipts on international transactions. It has two sides: credit side and debit side.
The credit side shows all payments to be received from abroad and debit side shows
all payments to be made to the foreigners. It is a vital index used in measuring the
strength of such country which reveals transaction relating to the export and import
of visible (physical goods) and non-visible items (transport services, medical
services, banking services, etc.) of a country for a specified period. Nepal
experienced current account deficit from 1974/1975 to 1999/00 and improvise later
in 2000/01 but fluctuate more frequently and shows deficit in 2018/19. This trend
was mainly due to the deteriorating trade balance because of increased outgoing
investment in the form of import. As Nepal is an open boarder country and highly
depend on its neighbouring country India and China for importing every aspect and
decline its export due to which Nepal experienced BOP deficit in most of the year so
that in Nepal foreign trade is not become an engine for economic growth.

Despite large recorded trade deficit, Nepal often maintains a surplus in its current
account and thanks to surpluses in services including tourism, official aids transfers,
and increasingly large remittances from Nepalese living abroad. In developing
country like Nepal, one of the main problem is increasing demand of assets for its
development plan and to solve this, it is necessary for the country to study the
balance of payment with various aspect of country with the international economic
position. The country will face the extreme problem when it faces the BOP deficit,
so that country needs to identify and control the influencing factor of balance of
payment. Due to the ideal geographical condition i.e. landlocked by India in its three
sides on the east, west and south and China on the north, neighbouring economics
influenced the country monetary policy and cannot obtain the desired limit of
macroeconomic variable and tend to face the balance of trade deficit. As due to the
open market between India and Nepal legally and illegally, Nepalese rupees is
pegged with Indian rupees, higher labour mobility and possibility of broken cross
rate and currency arbitrage opportunity existence between these two country are the
 16

constraint for floating exchange rate for Nepalese monetary authority that influence
country's monetary policy (Acharya, 2021).
Balance of Payment problem are monetary problems in a world monetary economic
system and should be analyzed by models that explicitly specify monetary behavior
and integrate it with the real economy, rather than by models that concentrates on
real relationships and treat monetary behavior as a residual of real behavior. Money
is a stock, not a flow, and monetary equilibrium and disequilibrium require analysis
of stock equilibrium conditions and stock adjustment processes. It is essential for
balance of payment analysis to recognize that, although money can be obtain from
two alternative sources. The two sources are expansion of domestic credit and the
exchange of goods or assets for international money and conservation of
international into domestic money via the monetary authority(Dwivedi).

Banking sectors

Today, the banking sector is more liberalized modernized, and systematically

managed. There are various types of banks working in the modern banking system
in Nepal. It includes central, development, commercial, financial, co-operative, and
Micro Credit banks.

In the eleven months of 2021/22, deposits at the banks and financial institutions
(BFIs) increased 5.7 percent, while credit to the private sector increased 13.5
percent. During the period, the BFIs mobilized deposits of Rs.266 billion and
disbursed loans of Rs.553 billion. In the same period of the previous year, the BFIs
mobilized deposits of Rs.588 billion and disbursed loans of Rs.799 billion.
Likewise, the BFIs have mobilized financial resources by issuing debenture worth
Rs.23.38 billion compared to Rs. 37.10 billion during the same period of the
previous year. Since this bank introduced the merger and acquisition policy to
strengthen the financial sector, 245 BFIs have been involved in the process of
merger and acquisition as of mid July 2022. Of these, the license of 178 institutions
has been revoked and thereby 67 institutions have been formed. In 2021/22, one
commercial bank has acquired another commercial bank and started an integrated
transaction. Similarly, the other two commercial banks have signed a memorandum
of understanding to enter into the merger/acquisition process. Financial access is
increasing. The number of branches of the BFIs increased from 10,683 in mid-July
 17

2021 to 11,528 in mid-July 2022. With the expansion of branches, the population
per branch has declined from 2,844 to 2,532 during this period. As of mid-July
2022, commercial banks have opened branches at 752 local levels (Adhikari, 2021).

Provisions in the Monetary Policy of Fiscal Year 2077/78

Provision of monetary policy management has been made to focus on containing

consumer price inflation within 7 % and foreign exchange reserves sufficient to
cover the prospective merchandise imports of goods and services for at least 7
months will be maintained. Growth of money (M2) and private sector credit have
been projected at 18 percent and 20 percent respectively. Provision for priority
sector lending has been revised, access to refinancing facilities has been
decentralized and concessional credit program has been restructured by widening the
coverage so as to revive the economy affected by COVID-19. Credit to Deposit cum
Core Capital has been increased from 80 percent to 85 percent to increase resource
availability to BFIs and thereby reviving the economy affected by COVID-19. In
fiscal year 2077/78 arrangement for equipment related to foreign trade such as LC,
TT have been made easier. The maximum service fee that can be charged by
commercial banks has been fixed at 0.75 percent, development banks 1.00 percent,
finance companies 1.25 percent and MFIs 1.50 percent (Acharya, 2021).

Conclusion

Monetary policy is related to the measures taken to regulate the supply of money,
the cost, and availability of credit in the economy. Moreover, it also deals with the
distribution of credit between uses and users and also with both lending and
borrowing rates of the interest of the banks. In developing countries like Nepal,
monetary policy has played a significant role in promoting economic growth with
price stability. The objectives or goals, targets, and instruments of monetary policy
are different matters.
 18

NRB as the central bank of Nepal or a chief financial institutions of Nepal has the
duty of conducting monetary policy and regulating the financial system and thereby
helps the government to achieve national macroeconomic goals like price stability,
full employment, exchange rate stability, and economic growth, etc. for the
implementation of the policy, cooperation from entire concerned sector is
desperately needed.

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 19

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