The effectiveness of the monetary policy should be assessed in terms of the achievement of its policy goals and targets. In the case of Nepal, the monetary policy and its effectiveness are found to be satisfactory based on the following facts.
- The fixed exchange rate between NPR and INR is the nominal anchor of the monetary policy, and Nepal has been able to maintain the fixed rate of 160 NC = 100 IC.
- The price stability has been a major objective of Nepal’s monetary policy, and there is not examples of hyper-inflation and deflation leading to economic crisis in Nepal. The inflation target is generally maintained except in a few years, but it is not seriously deviated from the target.
- External sector stability is another objective of the monetary policy, where the monetary policy sets the target of maintaininga FOREX reserve sufficient to import goods and services for a specific period (generally 6 -9 months). Nepal has been able to maintain such a reserve over the period.
- The monetary policy has the responsibility of financial sector stability through prudent supervision and regulation. To date, there is no evidence of a crisis in the banking system leading to the economic crisis.
- The monetary policy has set the specific targets of money supply, credit supply, and interest rate. In recent years, there has been excess liquidity in the market with low interest rates and lower credit supply. This makes the monetary policy less effective in terms of controlling those variables, but the monetary policy or central bank alone cannot control them. It requires fiscal and other sectoral policies to be integrated and harmonized. The monetary policy of Nepal has also set the growth target consistent with the government budget’s target, and Nepal has not able to achieve such a growth target for years. However, economic growth is not a primary objective of monetary policy, and it requires the fiscal policy and other sectoral policies to achieve the targeted growth. So, being unable to achieve the growth target is not the failure of monetary policy alone, but also the other policies.
Limitations of Monetary Policy
Despite the satisfactory effectiveness of monetary policy, following are the limitations of the effectivity of monetary policy in the context of Nepal.
- Underdeveloped financial market
- Fiscal dominance and the issue of policy coordination
- Fixed exchange rate with India
- Excessive dependence on remittance inflow
- Credit concentration and risk aversion
- Larger informal economy
- Supply side inflation (cost push)
- Limited financial inclusion and financial literacy
- Institutional regidities and capacity limitations
- Weak transmission mechanism of monetary policy