Why Fiscal and Monetary Policy Coordination is Important?

1. To avoid the conflict between the goals/targets of the fiscal and monetary policy.
2. To develop private-sector confidence and boost investment in the economy.
3. To maintain price stability and external sector stability.
4. To promote growth and employment opportunities.
5. To deal with the crisis or any shocks to the economy and society.
6. For the optimum utilization of technical, financial, and other resources.
7. To set clear and complementary objectives for both policies.
8. To have inclusive development through financial inclusion.
9. To minimize the trade-off and maximize the synergy created by both policies.

How to make cooperation between fiscal and monetary policy effective?

1. Set the clear and complementary objectives of both policies.
2. Regular consultation, discussion, and interaction between the government and the central bank.
3. Conduct a joint study on the most important issues to have a common understanding.
4. Develop a fiscal-monetary coordination committee or mechanism.
5. Develop a medium-term framework in order to guide the policy decisions by the government and the central bank.
6. Respect for mutual autonomy and avoid fiscal dominance.
7. Make the policy transparent through regular publication and communication to the general public.
8. Utilize the technical, financial, and other resources jointly if possible to develop a common understanding and ownership.
9. Determine the fiscal rules as limits of deficit financing, public debt ceiling, etc., and the monetary rules to determine the interest rate.
10. Joint meeting with the major stakeholders in order to have a common understanding of the issue and develop the solution jointly.

How are fiscal and monetary policies coordinated in Nepal?

Fiscal policy is formulated and executed by the Ministry of Finance, and monetary policy is formulated by Nepal Rastra Bank. By realizing the need for fiscal-monetary co-ordination Nepal has tried to maintain such coordination through the following ways

1. NRB Board has the provision of minitry of Finance as an ex officio member. (पदेन सदस्यको व्यवस्था जस्तै अर्थमन्त्रालयको सदस्य स्वत राष्ट्र बैंकको संचालक हुन्छ ). This provision helps to have interaction between the central bank and the Ministry of finance do design and execute the policy.
2. There is a Medium-term Expenditure Framework (MTEF) developed by the government, which guides NRB to design the monetary policy. For example, in the MTEF, there is a plan of the government for expenditure and borrowing for three years, which helps NRB to formulate the monetary policy.
3. NRB Act 2058 has given autonomy to NRB, and so there is no fiscal dominance in monetary policy. The government also acknowledges the autonomy of NRB, and NRB respects the autonomy of the government. Such mutual respect for autonomy helps them to cooperate and coordinate with each other.
4. NRB generally follows the growth and inflation target of the government budget while formulating the monetary policy. This helps to avoid confusion and conflicts between the fiscal and monetary policies in setting their growth and inflation targets.
5. As an advisor to the government, NRB provides suggestions and recommendations to the government in budget formulation, and the government also provides feedback and suggestions to NRB in the formulation of monetary policy.
6. There are regular interactions, meeting and discussions with major stakeholders jointly by NRB and the government, which help them to have a common understanding of the issue and formulate the appropriate policy.
7. The governor of NRB is a member of the resource committee, and the committee develops a macro framework by projecting growth rate, expenditure, and revenue ceiling of the government for the budget. This helps to harmonize the policy and perspective of the government and the central bank.
8. NRB and the government jointly conduct the interaction program, research, and other studies, which help to harmonize the fiscal and monetary policy in Nepal.
9. During the crisis, such as the earthquake of 2072, covid pandemic of 2019 NRB and the government jointly worked to manage the crisis and post-crisis recovery.
10. There is a practice of deputation (KAAJ) of NRB officers in the offices of the government of Nepal for specific tasks related to the economy. For example, while preparing the economic survey and data for the budget, NRB officers are deputed in Ministry of Finance. Similarly, the MoD appoints NRB officers as advisors. This helps to maintain coordination between fiscal and monetary policy in Nepal.